World Bank cautions Ghana

She has warned that not long ago, over 30 African countries benefited from a major international debt relief program, but now a handful of countries are building up debt again, at a fast pace, often at risky terms and to unsustainable levels.

“Their debt could reach pre-relief times within a decade,” she has said.

In an article titled ‘Spending Like There is a Tomorrow’, Sri Mulyani Indrawati, the Managing Director and COO of the World Bank, who previously served as the Finance Minister of Indonesia, said that in June, Kenya set a new African record.

At $2 billion, the country’s sovereign bond debut was four times oversubscribed. Only one month later, Senegal broke this high. Zambia and Cote d I’viore have been similarly successful in what some call an African bond bonanza.

She explained that Interest rates in traditional markets are so low that debt for its high return rates averaging between 5.5 and 7.5 percent. But they are also attracted by the continents promising growth rates, its economic stability, rising exports; and growing private investment.

“This is a good thing,” she said.
She said that to sustain growth and fight poverty, Africa needs to ramp up investment, particularly to generate more electricity given that 600 million Africans have no access to power. The infrastructure investment gap, estimated to be around $75 billion per year, can be narrowed by, among other measures, raising debt.

“This is why bond markets, but also bilateral lending, have become so popular. To be clear, raising debt on the international markets and increasing spending are standard tools for any finance minister. But this should not be a race for issuing more and bigger bonds and shouldn’t result in out-of-control spending,” Sri Mulyani Indrawati said. She said that it matters a lot how these resources are being used. Some countries have started increasing their borrowing and spending with an eye on long-term gains by addressing their infrastructure gap and deploying a mix of economic incentives and investments into Africa’s vast human potential.

“But in others spending remains shortsighted and too few dividends are used to fight poverty,” she stated.

She stated that there are three things for leaders to keep in mind if they want their borrowing and fiscal management to pay off.

“First, be patient. Ti is rarely the quick fix that goes the farthest. So don’t get tempted by political cycles and the lure of electoral wins. Development is an endurance exercise with incremental improvements. When done well, they are more likely to stay, benefiting today’s and tomorrow’s generation. But populist measures like bumping up civil service salaries or subsidizing fuel can quickly become unsustainable. Fuel subsidies help the rich more than the poor, and some African countries spend up to 5% of their GDP on them, leaving little for smarter investments.

“Related to this is a second moral of spending. Do what is best for most people, not just a few. Prevent your elites and growing middle class, those who often benefit most from growth and development, from turning into a special interests group that blocks reforms. They will always be eager to protect their privileges, and you will have to spend time and effort to build a climate that promotes broad buy-in for difficult reforms. If you wait too long, resistance to more competitiveness, open markets, and revenue collection will grow while opportunities go untapped.
“Third, act multi-dimensionally, investing in new power generation without reforming your ineffective power company will bring little change. Similarly, building schools without improving the quality of teaching can be wasteful. In other words, go for the development package, the broad approach.

Infrastructure alone won’t end poverty. The World Bank had to learn this lesson too. While we believed too much in bricks and mortar in our early days, we now understand that bringing together funding, technical expertise, and tested knowledge, go much further,” she said.

She said that at the World Bank, together with their clients, they now focus on finding investment solutions that benefit multiple countries in multiple sectors. Just a few months ago, we pooled our own and private funding sources, for which we provided an investment guarantee, to support Mauritania to develop its off-shore gas deposits the gas will be converted into electricity and then in part be sold to Senegal and Mali, providing both cheaper and cleaner sources of electricity for those countries. Millions of people will benefit.

“The outlook is good. Africa has better institutions today than ever, is more resilient to shocks, and in many place guided by prudent macroeconomic and fiscal policies. Twenty-five years ago 60 percent of Africans were extremely poor. Now its 48 percent. But the decline has been slower than in other regions and inequality is rising in many countries.

“This is why leaders need to finance the next stage of their countries development. And they can do so without endangering hard-won development gains. But fiscal discipline remains critical to secure long-term growth and finance successful pro-poor policies. It is the virtue that can help protecting today’s successes for the next generation. If Africa spends smartly and designs the right development package it can continue the continents path of success,” she said.