Research by the Overseas Development Institute – the UK’s leading development think tank - shows that sub-Saharan nations have rapidly stepped up their use of sovereign bonds in recent years to fund economic growth.
The value of sovereign bonds issued to sub-Saharan Africa (excluding South Africa) was $4.6 billion dollars in 2013 – up from zero in 2010.
The amount raised by bonds in countries like Zambia, Ghana and Rwanda are a higher percentage of gross national income than is usual for countries at a similar level of development.
This could lead to major problems covering risks like: not having enough buyers and sellers in the loan market – which would make it difficult to extend the payment term for sovereign bonds; and fluctuating currency rates – which make the bond repayments more expensive.
The money is used for infrastructure projects designed to stimulate growth. But money is not always used immediately for the intended projects – which means they may not create enough wealth to pay for themselves during the life of the bond.
Other countries have stated they will use the cash to build airports and hotels – which traditional aid donors have so far been reluctant to fund.
Dirk Willem te Velde, head of international economics, at the Overseas Development Institute, said: “Sovereign bonds are a new and promising way for African governments to raise money – but they need to make sure they use the cash to pay for sensible development projects that will sustain economic growth. And they must manage their economies carefully to avoid the risk from volatility in the markets.
“If they don’t do these things they could be forced to make spending cuts to pay back the bonds when they are due – like the debt crisis of the 1980s and more recent sovereign defaults in Argentina and Turkey.
“The international community could help by slowing down quantitative easing in a way that protects money supply to developing countries; and by ensuring that there are always enough buyers and sellers in the bond market to enable debts to be extended.”
Read the paper “Sovereign bonds in sub-Saharan Africa: good for growth or ahead of time” on the Overseas Development Institute website.