The African Development Bank (AfDB) plans to launch a new bond programme, targeted at infrastructure development, which will raise up to USD40 billion. Approximately half of this amount will be drawn from the considerable reserves now held by central banks around the continent. The programme, if it comes to fruition, will make AfDB Africa's largest multilateral financer. However, it would close the continent's huge infrastructure gap only partially.
IHS Global Insight Perspective | |
Significance | A planned new African Development Bank infrastructure bond programme aims to raise USD40 billion, with about half this amount drawn from reserves now held in African central banks. |
Implications | Sound execution of the infrastructure bond programme would provide a significant direct and indirect economic boost to sub-Saharan Africa. |
Outlook | Economic momentum is increasing but is vulnerable to political crises and external shocks. |
The central banks of African countries hold about USD450 billion in aggregate reserves, with much of this money in safe but low-yielding investments in the financial systems of the world's traditional industrial powers. Therefore, the African Development Bank (AfDB) programme, in part, represents a repatriation drive. The announced initiative heralds a significant augmentation of multilateral infrastructure financing, but it will not be enough to displace China from its position as the dominant funder of infrastructure projects on the continent. As the AfDB estimates the full cost of adequate infrastructure provision for Africa at USD93 billion annually for a considerable period, even a favourable outcome will leave many needs unmet.
Aim to Leverage Central Bank Reserves to Boost Development Funding
On 7 August, AfDB president Donald Kaberuka announced plans for a massive new bond programme targeted at expediting basic infrastructure improvements across the continent. The principal focus will be road and rail transportation and energy generation. AfDB, an AAA-rated institution, is particularly eager to tap reserves held in African nations' central banks. These total an estimated USD450 billion, with much of this wealth parked in safe but extremely low-yield instruments in the Northern Hemisphere. Kaberuka pointed out that shifting just 5% of these national reserves into the new AfDB bond programme would raise an impressive USD22 billion. Projected subscriptions from non-African sources, largely institutional investors, bulk up the anticipated size of the bond programme to about USD40 billion. This sum far surpasses the USD19 billion per year currently committed to Africa by the AfDB and the World Bank combined.
AfDB officials intend to outline their proposal at the International Monetary Fund (IMF) meeting this October, so the launch of the programme is not quite imminent. Another recent initiative under way is a swap arrangement under which the AfDB and the World Bank-affiliated International Finance Corporation can each issue paper in any local African currency for which either entity has transaction authorisation. Activity under this scheme has bolstered a trend of rising investment in Africa. For instance, the first tranche in a series of medium-term debt issues denominated in Ugandan shillings, designed to raise an eventual total equivalent to USD500 million, was oversubscribed. Cultivation of African financial markets and making a greater range of options available for African investors must count as side benefits of the initiatives described here. The continent lacks the capital to bootstrap development on its own, and this constraint will persist far into the future. However, among all continents, Africa now boasts the world's second-fastest rate of economic expansion behind Asia. Sounder macroeconomic management, the emergence of functional financial markets, although most are still rather rudimentary, and nascent regional economic integration put a promising spotlight on Africa for investors. While seemingly intractable stutters in the economic performance of industrial nations dampen the global investment climate as a whole, Africa's relative competitiveness as an investment destination is on the rise.
Closing Africa's Infrastructure Gap
Africa will not realise its considerable human and economic potential until it progresses much further in closing its enormous infrastructure gap. A 2011 study by the AfDB, Flagship Report of the Africa Infrastructure Knowledge Program, estimated the cost of bringing the continent's physical infrastructure up to acceptable modern standards at USD93 billion annually on a sustained basis. This is more than double the value of infrastructure projects that have come on-stream in Africa during the recent past. China is the paramount developer of infrastructure in Africa, and this will almost surely remain the case even if the financing initiatives discussed here reach their projected magnitude. Observers from all corners of the continent report positively on the outcomes of Chinese-funded projects, particularly in transportation sector upgrades. One extraordinary example is the Kigali-Kibuye road in Rwanda, which has cut travel time on this 75-mile route from up to eight hours to less than two hours. Chinese-built roads link Angola's provincial capitals, and an upcoming project in Cameroon will link the national capital Yaoundé and commercial centre Douala with a new six-lane highway. However, Chinese investment in Africa often fails to deliver associated employment opportunities for Africans?most deals stipulate lucrative contracts for Chinese construction companies and Chinese nationals commonly fill even ordinary labourer positions. Moreover, China's involvement in Africa revolves around establishment of resource extraction projects and thereby gaining access to African resources, especially oil and metal ores. The accompanying infrastructure development is considerable, and of great benefit to local communities. Yet, in the long run, African countries can only prosper if they broaden their economic base to rely less on primary commodities and more on expanding and interlocking secondary and tertiary sectors.
UN Posits 7% Growth
On the same day that the AfDB unveiled its prospective bond programme, Tegegnework Gettu, Africa section chief for the UN Development Programme (UNDP), speaking at a conference in Kenya, pointed to 7% aggregate GDP growth for the continent as soon as 2015 as an ambitious but viable possibility. The nominal increment of a stepped-up pace of infrastructure emplacement would be part of this upsurge, but gains from efficiency, widened business opportunity, and the classic multiplier effect of rising incomes would be even more instrumental. Intra-African development, benefiting from improving institutional competence and transparency and proactive moves toward regional integration, is the key to keeping more of Africa's wealth inside Africa. Realisation of this scenario would also go far in better insulating African economies from the vicissitudes of international financial crises and commodity price shocks. However, numerous factors reduce the likelihood of a best-case outcome. Political crises or potential crises affect more than a few African countries. Commodity dependence will characterise most African economies well beyond 2015. Furthermore, the possibility of a serious spike in food prices overhangs Africa's prospects in the near term. Perhaps, one should interpret the UNDP mention of potential 7% growth as an exhortation to good leadership, combined with a wish for unusually good luck, rather than as a calculated forecast. The IMF is in the process of marking down Africa's expected growth?it now estimates it at 5.4% for this year. IHS Global Insight forecasts 2012 real economic growth averaging 5% and 4.7% respectively for sub-Saharan Africa and the African continent as a whole.
Outlook and Implications
If its proposed bond programme, largely predicated on leveraging some of the USD450 billion in reserves now held in African central banks, takes shape as envisioned, the African Development Bank will emerge as the leading multilateral financer of infrastructure projects on the continent. The plan is to make up to USD40 billion available, compared with USD19 billion disbursed this year through the AfDB and World Bank combined. Provided the projects financed are well chosen and executed capably and honestly, the continent will receive a tremendous direct and indirect economic boost. China's position as the top investor in African infrastructure projects is not likely to be challenged. The numbers in play at this time will not close Africa's infrastructure gap, and poverty eradication will progress slowly in the near term. Nevertheless, Africa has established itself as the continent with the world's second-fastest economic growth behind Asia, and its momentum seems positive.