Africa's itch to borrow: Can the risks be limited?

Africa's itch to borrow to hasten development is producing a flurry of ideas to limit the risk that the world's poorest continent could once more drown in a sea of unserviceable debt.

After debt write-offs by international financial institutions and Western governments of nearly $50 billion, some African states have the headroom to start borrowing anew. Others do not.

Charting a way for both groups to tap the funds they need without repeating the mistake of over-borrowing was a key theme of this week's African Development Bank (AfDB) annual meeting in Shanghai.

"It is true that there are a few low-income countries who are not able at this point to carry too much debt on their books in a sustainable way. We all agree that we have to be extremely careful with that category of countries," Donald Kaberuka, the bank's president, said.

"But for countries able to carry debt on their books because of their potential, because of their growth, if they can access capital markets or Chinese outward investment, it's a good thing so they can build railways, roads, dams and so on," he said.

Ghana plans to tap the eurobond market in July and bankers say Nigeria could well follow before the end of the year.

While recognising that Africa is in dire need of more infrastructure, some Western donors are uneasy about the prospect that too much of the tide of cheap global money could wash up in Africa.

"Now we must avoid a new debt crisis, and a common understanding of what constitutes sustainable debt must be reached and respected," Anne Margareth Fagertun, who headed Norway's delegation, said.

The eagerness of global investors to diversify their portfolios in exotic markets and of some governments, including China's, to lend with few strings attached compounds the unease.

"There is serious concern over recent developments in which some donors, both bilateral and multilateral, undertake lending activities which do not take the debt sustainability of the borrowing countries into account," Shigeyuki Tomita, Japan's senior vice minister of finance, said.

Pierre Jacquet, chief economist at the French development agency, suggested that the Debt Sustainability Framework (DSF) could become a coordinating mechanism to prevent a new round of over-borrowing. The DSF, set up by the World Bank and International Monetary Fund in 2005, provides guidance on new lending to poor countries whose main source of financing is official loans.

Mr Jacquet said creditors should stop lending if jointly agreed thresholds were breached, a discipline that he said borrowing countries should be willing to accept.

"A debt sustainability framework is vital, but it poses a collective action problem for lenders, so there's a need to coordinate," he said.

He also proposed a new counter-cyclical lending instrument linking a country's principal repayments to its export revenues.

Instead of the conventional 10-year grace period on a 30-year concessional loan, Mr Jacquet advocates a five-year fixed period and another five years of a "floating grace period".

In the case of an export shock - defined as a drop in export earnings to 95 percent of the average of the past five years - the borrower could suspend principal repayments for that year.

The AfDB, which has already developed a loan linked to the prices of commodities, is working with the African Union to set up an African Petroleum Fund to absorb the debt impact on oil importers in the event of an oil shock, according to the AfDB's chief economist, Louis Kasekende.

The bank is also spearheading the development of local bond markets and has issued debt in the currencies of Botswana, Ghana, Kenya, Nigeria and Tanzania. But Kasekende said the main obstacle is the lack of swap markets for most African currencies.

Brad Koen, director of global markets at Standard Chartered Bank, proposed an Africa bond fund similar to one in Asia, which invests $2 billion of currency reserves in local debt markets.

Another proposal to mitigate poor countries' risk was that they should issue bonds backed by aid money promised by donors. AfDB Treasurer Thierry de Longuemar was sceptical. "How can we guarantee that donors will pay over 30 years?" he asked.

And how can donors, a new generation of bond buyers and keen government lenders like China be sure that Africa, despite improving economic fundamentals, will use fresh money wisely?

"The difference is a better understanding of the dynamics of the world. The leaders are much more attuned to the prerequisites for success in the world," said Ghana-based Ebenezer Essoka, who heads Standard Chartered in Central and West Africa.

"Given the reforms we have in place and the systems and processes we have in place today, I don't foresee African countries repeating the experiences we've had in the past."