2018 - 2019 Edition of Citi Perspectives for the Public Sector

54 Africa Debt: Distress Déjà vu or Development Driver? Deepening local currency liquidity — Enhancing local currency liquidity is a long-term solution to reducing reliance on foreign currency borrowing and contributing to foreign exchange stability, fostering a sovereign’s overall capacity to service both domestic and external debts. For local bonds, which offshore investors may not be able to access, sovereigns can incorporate global depositary notes (GDNs) to gain access to an expanded pool of investors or to enhance structured transactions and asset mobilization. GDNs are the fixed income version of the equity-based depositary receipt structure, emulating the terms of a particular local currency-denominated bond. Issuers are able to service the debt in local currency and the depositary bank converts it into dollars using a pre-determined exchange methodology. GDNs are treated as domestic debt by rating agencies and increase liquidity in the local market. Dynamic liability management — African sovereigns are accessing the debt capital markets with an incorporated element of liability management in their transactions. Ghana and Senegal incorporated either tender or exchange offers in their 2018 issues. This discipline focuses on managing the outstanding bond liabilities of issuers using all available funding and risk management techniques. It can be executed in three different categories: bond buy-back, exchange or modification. Often for sovereign issuers, the key driver for liability management is to reduce refinancing risk and re-distribute maturities. Mobilization: Fiscal revenue mobilization in the region has improved in recent decades with the median revenue-to-GDP rising by 2 percentage points to 21.2% in 2016. 18 However this ratio still stands short of the world’s median of 24.8%. 19 With a large infrastructure gap to be filled and significant public sector wage bills, much work is needed to increase governments’ income in Africa. New technologies such as block chain could become a transformational enabler for governments and will allow them to scale in a cost-effective and transparent manner. These technologies will make it easier to register and transfer assets to capture income such as property tax and record transfer and transactional flows (such as in Kenya, which levies fees on financial transfers). They can also be used to capture the use of new services such as social media, which is taxed in Uganda. The appropriate deployment of technology will allow governments to expand the formal sector while reducing the informal sector. This will not only increase the volume of domestic resources but also the value of these resources through more efficient and transparent means. Digitalize tax collection — Africa has the second longest average time to comply with tax payments globally (after South America). 20 This is largely due to the prevalence of manual processes for tax filing, payment and reconciliation in the region. As tax revenue mobilization and efficiency become increasingly important, effective tax collection and reconciliation are coming to the fore. By integrating with various tax authorities across Sub-Saharan Africa, Citi’s tax platform provides an automated solution to facilitate timely payment of tax liabilities and instant notification to tax authorities. Leveraging CitiDirect ® as a single online platform to facilitate electronic tax collections and administration, Citi has significantly improved taxpayers’ experience in Africa, increasing compliance rates and reducing revenue leakages while enhancing transparency and efficiency in the collection process. 18 AfDB data, World Bank data 19 World Bank data 20 PwC: Paying Taxes 2018 report (https://www.pwc.com/gx/en/paying-taxes/pdf/pwc_paying_taxes_2018_full_report.pdf ) Often for sovereign issuers, the key driver for liability management is to reduce refinancing risk and re-distribute maturities.