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Africa, debt relief, international financial institutions, private investment, aid selectivity
Ben Leo is a visiting fellow at the Center for Global Development (CGD) and a member of the Center’s Advisory Group. He currently serves as the Chief Executive Officer of Copernicus.io, an Africa data analytics firm. Copernicus is a proprietary geospatial platform that provides reliable and representative data on almost any customizable geographic area across the African continent.
Until October 2016, Leo served as a CGD senior fellow. His research focused on the rapidly changing development finance environment, with a particular emphasis on private capital flows, infrastructure, and debt dynamics. In addition, he tested a range of new technological methods for collecting high-frequency information about citizens’ development priorities. His research has been cited in leading international and regional media outlets, including the New York Times, Wall Street Journal, Washington Post, Financial Times, Forbes, USA Today, Mail and Guardian, CNBC Africa, This Day, and Daily Nation.
Prior to CGD, Leo held a number of senior roles at the White House, US Treasury Department, the ONE Campaign, African Union, and Cisco Systems.
The Supporting Business Climate Reforms Working Group
Africa remains extremely difficult for entrepreneurs. Donors are increasingly targeting assistance to address the investment-climate constraints that hinder private-sector growth. This report lays out the case for promoting investment climate reforms more strategically, various options for implementing a system to do so, and possible institutional homes for the proposed facility.
A special new lending facility was announced in July 2009 with the objective of providing up to $17 billion in new loans through 2014 and, to entice cash-strapped borrowers, the lender is waiving interest payments for the first two years. This may sound like dangerous new short-term teaser offers for sub-prime borrowers. But this isn’t coming from Countrywide Financial. It actually is a new IMF facility for low-income countries, including some of heavily indebted poor countries (HIPCs) who are just barely coming out of the last debt crisis.
The stated objectives of the new IMF facility are laudable: to offset the effects of the global economic crisis by boosting international reserves and supporting adjustment policies. And yes, the overall terms are more concessional than past IMF loans. Nonetheless, the net impact on national debt levels may be significant. And it was just four years ago that the IMF committed to cancel roughly $6 billion in bad loans to many of these very same countries.
Despite a tumultuous track record, new lending to HIPCs is, of course, not always a bad thing. Some of these countries have regained solid fiscal footing and are delivering robust growth results. In other cases, the loan volumes involved may be reasonable relative to GDP and export levels. For others, however, IMF and other international lending can be disproportionately large in relation to their fragile economies and debt carrying capacity. Take the example of Zambia. This year, the IMF approved new lending of $330 million, equivalent to roughly 3 percent of its GDP. When compared to skyrocketing U.S. deficits, this may seem modest. But, remember that this is 3 percent from only one lender and in only one year. The World Bank, African Development Bank, China, and other lenders are providing substantial sums as well. And they will probably do the same next year, and the year after…
Worse yet, IMF and World Bank growth projections used partly to justify new lending remain extremely rosy compared to actual and historical performance. Our new dataset of IMF growth projections for HIPCs suggests a structural optimism of at least one percentage point per year . Lending volumes to the HIPCs have also remained unchanged (total lending to HIPCs pre-MDRI was about $4 billion per year; post-MDRI it is virtually the same and likely will be even higher given the new stimulus lending).
In some ways, this is not dissimilar from Countrywide using aggressive assumptions to justify aggressive lending to vulnerable borrowers. The difference is that Countrywide no longer exists and that its new parent corporation appears uninterested in continuing these failed practices and is not actively targeting the same old recently-defaulted sub-prime borrowers.
As suggested in the new CGD working paper by one of us, Ben Leo (Will World Bank and IMF Lending Lead to HIPC IV? Debt Deja-Vu All Over Again) now is a good time to take a step back from the frenzy of stimulus-inspired lending and re-examine the issue of debt sustainability in low-income countries. The upcoming IDA and AfDF replenishment negotiations present a good opportunity for this self-reflection. Absent corrective action, the international community may be faced with yet another HIPC bailout in the not too distant future.
Benjamin Leo, formerly of the U.S. Treasury and National Security Council and a key behind-the-scenes player in the inception and implementation of Multilateral Debt Relief Initiatives, examines the potential risk of renewed debt re-accumulation by countries that have only recently completed the HIPC/MDRI process that was to prevent a repeat of excessive debt accumulation.
Zimbabwe faces a daunting array of obstacles to full economic recovery, including a crippling external debt burden. Todd Moss and Benjamin Leo urge that the current government must address the legacy of debt arrears and manage external debt in order to generate opportunities for reconstruction and growth.
No surprises on the G-20 front. Deficits and financial sector reform dominated the headlines coming out of last weekend’s Toronto Summit. Development appeared largely as an afterthought. Even though my heart and head are hopelessly hitched to development policy, I think the focus was about right. Ensuring robust recoveries in G-20 nations will do more to support growth in poor countries than endlessly rehashed debates about global aid flows. Leave that for the UN MDG Summit this September. That said, the G-20 did do something small worth highlighting. Tucked away unobtrusively in the communiqué, the G-20 formally launched an initiative that will identify new ways of catalyzing finance for small and medium enterprises (SMEs) in developing countries.
The basic concept is simple. Through the SME Finance Challenge, the G-20 is inviting investors, foundations, and NGOs to propose concrete ways of increasing companies’ access to growth and operating capital. The G-20 has teamed up with the Rockefeller Foundation and Ashoka Changemakers, who know how to run global prize competitions. A panel of five independent judges and three G-20 representatives will select the most promising proposals. The winners will attend the next G-20 Summit in Seoul to formally solicit funding, which is being mobilized now from the multilateral development banks and G-20 member governments. Canadian Prime Minister Harper kicked things off this weekend with a $20 million pledge. While the SME Finance Challenge may be modest in terms of ambition and funding, the G-20 deserves credit for pursuing a novel approach—letting the private sector lead on private sector issues.
If successful, this new G-20 Challenge may help to establish potent public-private partnerships. All the ingredients are there. In recent years, a number of private foundations and organizations have launched ambitious SME initiatives. One example is Goldman Sachs’s 10,000 Women initiative, which provides technical assistance and training to women entrepreneurs. At the same time, donors already have an exhaustive list of facilities focusing on regulatory systems, SME capacity, and access to capital. Despite this, partnerships between the two groups have been limited—especially on a strategic or globalized basis. In a forthcoming CGD working paper (draft here, PDF), I provide an overview of existing donor programs and offer a few ways that private foundations could establish partnerships with donor agencies in support of their organizational goals. The new G-20 SME Finance Challenge is another intriguing way to get that ball rolling. I’ll be very interested to see how it comes off when the G-20 gathers again this November in Seoul.
Today, the Global Fund to Fight AIDS, Tuberculosis and Malaria announced an intriguing new partnership with the Dow Jones Indexes – a new line of stock market indices. These new indices – led by the flagship Dow Jones Global Fund 50 Index – will measure the performance of the largest companies worldwide that support the Global Fund’s mission. They have already concluded licensing arrangements with Deutsche Bank and the National Bank of Abu Dhabi to market the indices with investors. And a portion of the indices’ royalties will help fund the Global Fund’s ongoing programs. This won’t generate huge sums of money, but what an interesting win-win idea for generating interest in the Global Fund’s programs while enhancing the brand quality of the listed companies’. And who knows, maybe the Global Fund 50 Index will take off and pave the way for other development-friendly stock market indices.
According to the World Bank, the global economic crisis may force donor governments to slash their aid budgets by up to 25 percent. If true, that would translate into a draconian cut of $30 billion. Red ink as far as the eye can see, long unemployment lines, and continued uneasiness in Europe could force donors to unsheathe the budget axe. Even if the World Bank is wrong, the years of historic aid increases are long gone. This couldn’t come at a worse time for developing countries and multilateral aid agencies.
This year, nearly every multilateral development bank is simultaneously requesting billions of dollars of new donor money. Institutions that typically provide market-based loans to middle-income countries, such as the World Bank’s IBRD, need capital after record amounts of emergency lending. Other institutions that provide cheap loans and grants to the world poorest countries, such as the World Bank’s IDA, are looking to replenish their coffers to fund health, education, and infrastructure projects over the next few years. Taken together, these requests could break the back of strapped aid budgets.
Against this bleak budgetary backdrop, I have an idea that would free up to $7.5 billion over three years for the world’s poorest countries. Of this amount, African countries could receive about $5.5 billion – or 30 percent more than current levels. I’ve written and spoken about this idea extensively. See my working paper, policy memo, and podcast for more details.
Looking back at these materials, I realized that my description may seem a little complicated. So, here’s a simplified example of how the proposal would work. Let’s say that Cheap Money Bank (IDA) has two clients, Mr. Gupta (India) and Mrs. Diop (poorest countries). Cheap Money provides $100 in subsidized loans to Mr. Gupta every year and $100 to Mrs. Diop. Mr. Gupta has a pretty good credit score, so he also borrows regularly from Cheap Money Bank’s affiliate, the Commercial Credit Union (IBRD). Under my new proposal, the Commercial Credit Union would finance the $100 that Mr. Gupta currently receives from the Cheap Money Bank. To ensure that Mr. Gupta keeps his credit rating, Cheap Money Bank would pay $25 to cover his interest payments. This means that Cheap Money now has an extra $75 ($100 minus $25) that it can give to Mrs. Diop. With this change, Mr. Gupta still receives $100 and Mrs. Diop now receives $175.
Granted, the additional money must come from somewhere. The IBRD would have to issue more loans, which means they need more capital. As it happens, the World Bank shareholders just agreed to an $86 billion capital increase for the IBRD in April. So, it has the capacity to take over IDA’s share of loans.
One of the World Bank’s sister organizations – the Inter-American Development Bank – already utilizes a similar approach for its lower-income clients. It’s time for World Bank shareholders to seriously consider the same resource-maximizing model. And they have a brief window of opportunity to take action. This week IDA’s donors will meet in Bamako, Mali to negotiate a new three-year funding framework. This will be the last IDA framework before the Millennium Development Goals deadline in 2015. By taking innovative action, donors may be able to put down their budget axes – or at least dull their destructive impact on the world’s poorest countries.