New Ways to Finance Development in Sub-Saharan Africa
WASHINGTON, 12 March: While official aid flows to Sub-Saharan Africa rose in recent years, additional external financing mechanisms are needed to reduce poverty and improve lives in the region.
Official development assistance (ODA) for the region totaled over 30 billion US dollar in 2005. This aid is Africas largest outside funding source. Foreign direct investment (FDI) in the region is the second-largest source of external financing.
– Ultimately, it is the private sector which must act as the engine of growth and employment in the poor countries. Official aid efforts must catalyze innovative financial solutions for increasing private-to-private flows, said Uri Dadush, Director of the World Banks Development Prospects Group.
In a new paper, Senior Economist Dilip Ratha and fellow World Bank economists Sanket Mohapatra and Sonia Plaza estimate that Sub-Saharan Africa can raise up to 30 billion dollar a year by exploring previously overlooked sources of financing such as remittances and diaspora bonds, and strengthening public-private partnerships.
– Preliminary estimates suggest that Sub-Saharan African countries can potentially raise 1 to 3 billion dollar by reducing the cost of international migrant remittances, 5 to 10 billion by issuing diaspora bonds, and 17 billion by securitizing future remittances and other future receivables, said Ratha.
In a meeting in Nairobi last year, client governments asked the Bank to explore funding sources beyond the current limited IDA funds, such as diaspora funds, securitization and guarantees.
Official Development Assistance
Assistance to the region in the form of debt relief exceeds direct aid flows. Indeed, recent increases in ODA have been associated with IMF-World Bank debt relief programs such as the Heavily Indebted Poor Countries Initiative (HIPC) and the Multilateral Debt Relief Initiative (MDRI).
Paris Club creditors, for example, provided 18 billion dollar in debt relief to Nigeria in 2005. Although this reduces the debt burden, there is still a real need for additional resources for social and economic development.
Assistance from new donors could fill some of the funding gap. China, Cyprus, Egypt, Estonia, Latvia and Lithuania joined the list of donors that contributed to the replenishment of IDA15 last December.
Migration and remittances
Personal and institutional remittances to Sub-Saharan Africa outside South Africa have increased from 7,2 billion dollar in 2000 to 13,9 billion in 2005. But the region lags behind other developing regions.
Sending remittances to Africa is costly. In 2006, sending 200 dollar from London to Lagos cost 29 dollar, and sending the same amount from Benin to Lagos cost over 34 dollar. This often leads to the use of informal channels to send money home.
– Reducing these costs by half – a not so difficult target – could result in additional 2,5 billion dollar in remittance flows to Sub-Saharan Africa. But it is important to remember these flows are private and should remain beyond state control, noted Ratha.
Many countries in the region can tap the wealth of their diaspora by issuing diaspora bonds. For Sub-Saharan Africa, issuing these bonds and overcoming any weaknesses in the legal and regulatory systems in the region could help investors tap 5 billion dollar to 10 billion annually.
Diaspora bonds
A diaspora bond is a debt instrument issued by a country – or even by a sub-sovereign body or a private corporation – to raise financing from its overseas diaspora. This relatively unexploited instrument can raise investments from international migrants for economic development in the home country.
Members of the diaspora are more likely to invest in their country of origin not only for patriotic reasons, but also because their country risk perception is likely to be weaker than that of international investors.
The diaspora from India and Israel have raised 11billion dollar and 25 billion respectively in recent decades. The Philippines has announced that it will sell a diaspora bond to overseas Filipino workers this year to raise funds for development projects. Ghana has begun marketing the Golden Jubilee Savings Bond to the Ghanaian diaspora in Europe and the United States.
Securitizing future flows such as remittances, tourism receipts, and export receivables could help Sub-Saharan countries access international capital markets. Future foreign-currency receivables are pledged as collateral to a special purpose entity which issues debt to an offshore collection account that the borrowing country can access.
These securities have a higher investment grade rating than the generally unfavorable sovereign credit ratings given to Sub-Saharan countries. Higher ratings make market transactions to the region attractive to a wide range of investors.
For Sub-Saharan Africa, future flows of exports such as fuel, raw materials, ores and metals, travel services, and remittances could yield 17 billion dollar annually.
Innovative financing by the World Bank
Guarantees reduce investor risks for public and private sector projects by covering partial risk, political risk, and trade credits. World Bank and IDA guarantees totaling 3 billion dollar over the past decade have catalyzed 12 billion in private financing for 28 projects in developing countries.
In 1999, the Azito power project in Ivory Coast was the first IDA partial risk guarantee in Sub-Saharan Africa, catalyzing private financing of 200 million dollar while keeping IDA support to 30 million.
The World Banks Regional Trade Facilitation Program has partnered with the African Trade Insurance Agency to increase competitiveness and trade efficiencies in southern and eastern Africa. They plan to develop a more credible credit risk instrument to support firm operations in the region.
The World Bank is also part of the Global Alliance for Vaccines and Immunization (GAVI), a unique public-private partnership with the Gates Foundation, UNICEF, WHO, and other groups in both industrial and developing countries. GAVI aims to increase access to immunizations, save lives, and increase self-sufficiency among poor people.
GAVI utilizes a funding mechanism developed by the International Finance Facility for Immunisation, or IFFim, which securitizes future aid commitments from donor countries by issuing bonds to international markets after the countries sign legally binding agreements to provide future grant funding.
In October 2007, the World Bank announced another public-private partnership known as the Global Emerging Markets Local Currency (Gemloc) Bond Fund intending to raise 5 billion dollar from international markets and placing a portion of those funds in the local-currency bond markets in Kenya, Nigeria and parts of West Africa.
The Stolen Assets Recovery (StAR) initiative, a joint World Bank and United Nations Office of Drugs and Crime program, helps countries recover flight capital and stolen assets by supporting countries’ efforts to return funds to development causes.
In developing and transition countries, bribes received by public officials are estimated at 20 billion to 40 billion dollar a year.
Kilde: www.worldbank.org
