In line with the 2013 edition of the Public Sector Debt Statistics Guide for Compilers and Users and the basis on which African countries record and report their statistics, this report adopts the residency criteria to define domestic debt (chapter 2), which is analytically useful and relevant to the study of resource
transfers between residents and non-residents (Panizza, 2008). However, it is difficult to apply in practice with respect to marketable debt instruments, as it requires periodic surveys to identify the ultimate debt holders. For the purposes of this report, residence status is determined at the time of issuance in the primary market. With regard to instruments and institutional coverage, the analysis is limited to the securitized domestic financial liabilities of the central Government in five countries, namely Ghana, Kenya, Nigeria, the United Republic of Tanzania and Zambia. Information on public domestic debt data is obtained from individual country reports, such as central bank annual reports, country debt office databases and IMF country reports.
B. THE RISE IN DOMESTIC DEBT
Domestic debt markets may have the potential to assume a more prominent role in funding the future development of some African countries.
First, as shown in figure 9a, Africa is among the world’s fastest growing regions, with average GDP growth rates exceeding 4 per cent per year since 2000. Since 2007, only developing Asia has surpassed Africa’s growth rates. However, given the contraction in commodity prices, coupled with subdued global demand, these growth rates may be difficult to maintain (World Bank and IMF, 2015). Economic growth in Africa has been accompanied by low and stable inflation, which in most countries has remained in the single digits. In addition, a growing number of countries have achieved middle-income status, with per capita annual incomes in excess of $1,000.
Second, some African countries have adopted policies aimed at developing their domestic debt markets, with the active support of international financial institutions such as the African Development Bank, IMF, the Organization for Economic Cooperation and Development (OECD) and the World Bank. IMF and the World Bank have launched a joint initiative to assist countries in building bond markets by developing effective medium-term debt management strategies consistent with the goal of maintaining debt sustainability (Adelegan and Radzewicz-Bak, 2009). The African Development Bank created an African domestic bond fund in 2010 with the objective of contributing to the development of sound domestic debt markets.
The fund is investable in local-currency-denominated sovereign and sovereign guaranteed subnational bonds. In 2012, the International Finance Corporation launched a bond issuance programme called the pan-African domestic
Figure 9. Real GDP growth rates and depth of financial markets as measured by money and quasi money to GDP, 2000–2014
-4 -2 0 2 4 6 8 10
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Percentage
(a) Real GDP growth rates
Africa Asia South America Developed economies
0 20 40 60 80 100
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Pecentage of GDP
(b) Depth of financial markets as measured by M2/GDP
Africa Algeria Côte d'Ivoire Egypt
Ghana Kenya Mauritius Nigeria
Senegal South Africa United Rep. of Tanzania Zambia
Source: UNCTAD, 2016 (accessed December 2015); World Bank, 2016c.
term note programme, initially focused on Botswana, Ghana, Kenya, Uganda, South Africa and Zambia, aimed at supporting and growing nascent capital markets in the region and increasing the availability of local currency financing for private sector development. In November 2011, the Group of 20 endorsed an action plan to support the development of local currency bond markets in emerging markets and other developing economies and called on international organizations to cooperate in data collection and analytical work on these markets, culminating in a joint diagnostic framework or toolkit designed to help country authorities analyse the state of their debt markets and identify reform priorities (IMF et al., 2013). In addition, conscious nurturing of domestic debt markets has become a major policy objective of many countries, with a number having made significant progress in broadening their investor bases, lengthening maturities and building market infrastructure.
Third, UNCTAD (2015c) shows that Africa improved in terms of financial sector development and access to banking services in 2011–2014. The depth and coverage of financial systems (as measured by the standard indicators of financial development such as ratios of broad money (money and quasi money or M2) and private sector credit to GDP have gradually improved, albeit from a low base. Nevertheless, much of this improvement is accounted for by middle-income countries, rather than low-middle-income countries, which still have limited access to financial services. Moreover, certain groups, particularly rural populations and women, remain largely excluded from formal financial services. For example, only 20 per cent of women in Africa have access to formal financial services (UNCTAD, 2015c). Figure 9b shows the depth of financial markets in Africa as measured by the M2–GDP ratio; Egypt, Mauritius and South Africa have very deep financial markets, and these markets have supported the successful and widespread issuance of domestic debt instruments, including by the private sector. Access to banking services has also improved in recent years, with account penetration having recorded a remarkable increase of 20 per cent in 2011–2014, particularly in eastern and southern Africa (IMF, 2015a). A developed and well-functioning financial sector provides opportunities for mobilizing savings and unlocks the potential of domestic debt markets to bridge Africa’s large financing gap.
Fourth, African local currency debt markets are progressively opening up to non-resident investors. While South Africa has for some time been one of the most attractive portfolio investment destinations in Africa, other markets have also managed to interest foreign investors, such as Ghana, Egypt, Morocco, Nigeria and Zambia. For example, foreign investor purchases of government securities in
Zambia re-emerged in 2004, having last taken place in 1994 (Bank of Zambia, 2015).
In 2014, non-resident investors held about 20 per cent of the total outstanding domestic debt, compared with less than 0.1 per cent in 2004. Similarly, Ghana has also attracted a rising share of non-resident investors registering, in 2012, its highest net inflow, about $2.6 billion (27 per cent of total local-currency-denominated outstanding government securities). The increase in portfolio inflows in Ghana coincided with the opening of government securities markets to foreign investors in 2006 and, in Zambia, with the introduction of longer maturities for government bonds. In Nigeria, portfolio flows followed large debt relief and/or restructuring operations and renewed confidence in the country’s economic prospects. In the United Republic of Tanzania, as non-residents are not allowed to hold government securities, resources from foreign investors were invested in treasury bills and bonds indirectly, with commercial banks serving as intermediaries.
The participation of non-residents in African debt markets widens the investor base. However, countries need to closely monitor the level of such participation as it may increase their vulnerability to external developments such as financial crises. Issues of previous concern that made mainstream international investors hesitate to invest in local-currency-denominated domestic debt, such as a lack of familiarity with local credits, standards and documentation, are being addressed by supranational borrowers such as the African Development Bank and the World Bank (through the International Finance Corporation).