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A Big Bond for Africa

LAGOS – The countries of Sub-Saharan Africa have reached a critical juncture. Strained by a collapse in commodity prices and China’s economic slowdown, the region’s growths lipped to 3.4%in 2015 –nearly 50% lower than the average rate over the previous 15 years. The estimated growth rate for 2016 is lower than the population growth rate of about 2%, implying aper capitacontraction in GDP.

Sustained economic growth is essential to maintain progress on reducing poverty, infant mortality, disease, and malnutrition. It is also the only way to create sufficient good jobs for Africa’s burgeoning youth population – the fastestgrowing in the world. AsGerd Müller, Germany’s development minister,note data recent press conference, “If the youth of Africa can’t find work or a future in their own countries, it won’t be hundreds of thousands, but millions that make their way to Europe.”

One way to sustain growth and create jobs would be to collaborate on planning and implementinga massive increase in infrastructure investmentacross Africa. Public infrastructureis particularly important. This includes highways, bridges, and railways linking rural producersin landlocked countries to Africa’s urban consumers and external markets; mass transit and Internet infrastructure to accommodate greatercommercial activity; and electricity transmission linesintegratingprivately financed power plants and grids.

Major regional projects are also neededto knit together Sub-Saharan Africa’s many tiny economies. This is the only way to createthe economies of scale needed to increase theexport potentialofAfrican agriculture and industry, as well as to reducedomestic prices of food and manufactured goods.

While governments in Africa are spending more on public infrastructure themselves,outside finance is still required, especially for regional projects, which are rarely a top priority for national governments. Yet aid from Africa’s traditionally generousforeign donors,including the United States and Europe, is nowset to shrink, owing to political and economic constraints.

But there may be a solution that helps Africarecoverits growth in a way that Western leaders and their constituents find acceptable.We call it the “Big Bond” – a strategyfor leveraging foreign aid funds in international capital markets to generate financingfor massive infrastructure investment.

Specifically, donors would borrowagainst future aid flows in capitalmarkets. That way, they could exploit current low interest rates at home, as they generate new resources.With 30-year US Treasury rates of about 3%, donors would have to securitize only about $5 billion to raise $100 billion. That money could come from the $35 billion in annual official development assistance (ODA) to Africa (which totals about $50 billion)thattakes the form ofpure grants.

Donors would pass on the interest cost to African countries, reducing their own fiscal costs. For African countries, the terms would be better than those provided by Eurobonds. In fact, as audacious as it may sound, passing on the interest coststo recipient countries could actually bolstertheir debt sustainability.

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According to a study of eightcountries by the African Development Bank’s Policy Innovation Lab,a 3% interest rate in US dollar terms would be lower than the marginal cost of commercial borrowings undertaken by several African countries over the last five years. Moreover, far longer maturities and grace periods,compared to market finance,would ease growing pressure on foreign-exchange reserves.

Frontloading aid in this way is not new. Doing so in the early 2000s to finance vaccines saved millions of lives in the developing world. Big Bond resources, managed by the African Development Bank, could be used to help guarantee financing for major regional infrastructure projects that have long been stuck on the back burner, such as the East Africa Railwayconnecting Tanzania,Rwanda, and Burundi, and a highway stretching fromNigeria to Côte d’Ivoire. Such projects could also be co-financed by private investors.

Moreover, the Big Bond could help to reinvigorate the relationship between donors and African countries.And, as it supports investments with importantcountry-level benefits, itcouldserve as an incentive for African countries to pursue reforms that increase their absorptive capacity, in terms of choosing and executing public infrastructure investments.

The Big Bond approach represents a much-needed update to the ODA framework – one thatsupports higher and more sustainable growth in recipient countries,while lowering the burden on donor countries.At a time when aid is under political pressure, perhaps such a bold approach tomaximizing the efficiency of donor resources is exactly what the world needs.

Nancy Birdsall is President Emeritus and a senior fellow at the Center for Global Development. Ngozi Okonjo-Iweala, a former finance minister of Nigeria and managing director of the World Bank, is a distinguished visiting fellow at the Center for Global Development.

By Nancy Birdsalland NgoziOkonjo-Iweala

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