By David Mugabe
The African Development Bank (ADB) has cautioned African countries against high borrowing rates on the international market saying it could push them back to the 'debt disgrace.'
“These monies are not cheap; they get a coupon rate of 8%, it is good because they provide discipline but at that rate, this is not the way countries will develop,” noted Dr Kayizzi Mugerwa, acting vice president and chief economist at ADB. he made the remarks at the launch of the 2014 African Economic Outlook in Kampala.
The latest country to issue a sovereign bond is Kenya. In 2013, six African states issued international bonds among them Tanzania ($600m), Rwanda ($400m), Nigeria ($500m), Ghana ($1b) and Mozambique ($500m) all attracting interest rates in the range of between 6-8%.
“There must be other ways of cheaper money,” cautioned Mugerwa.
East African Development Bank (EADB) boss, Vivian Apopo also weighed in on the high cost of borrowing from the international markets which translates into higher interest spreads for financial institutions and thus the final borrower getting money at a very high cost.
“This is not sustainable, we want local businesses to participate in their economies,” said Apopo.
Apopo observed that overall in the region, investments seems not to be going to the productive sectors.
Deputy Bank of Uganda governor, Louis Kasekende, observed that in the short term, funding government infrastructure needs like roads means borrowing including on the domestic market is inevitable.
The 2014 African Economic Outlook indicates that majority of the fastest growing economies in Africa are post conflict meaning the continent is reaping peace dividends and every effort must be made to maintain peace.
Over ten countries will experience growth of over 7%.
Generally growth is on the rise with almost no negative growth except in Equatorial Guinea (-5.2%) because of suppressed investments.
Sustained growth across the continent is driven by remittances, portfolio investments foreign direct investments as well as overall rise in economic activity (GDP).
Remittances have played a major role in Africa’s resource basket but ADB believes they could be made higher if the cost of transferring money was made cheaper.
Apopo noted that remittances that have been a bedrock for capital inflows can dry up, while FDI pursues certain sectors and once they are exhausted they dry up.
But the report also paints a picture of a continent that has failed to translate growth into reduced poverty like Asia and specifically China did in the past few decades.
“Sadly, inequality in Africa seems to be rising,” noted Mugerwa.
The continent also faces risks like political fragility that is flaring up in Central African Republic, Sudan and Somalia which hurt growth and the potential for investments.
For Uganda, after two years of high inflation and lukewarm growth, 2013 saw the consolidation of macroeconomic stability and the recovery of economic activity in Uganda.
The bank also cautioned the continent to take seriously the issue of environmental disintegration.
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ADB cautions African states against international borrowing