MEFMI Creates Awareness on Implications of Emerging Financing Options

Until the last decade, foreign grants and highly concessional loans were the main sources of financing development in most developing countries. However, these flows have been declining in the last decade, particularly after the global economic and financial crisis of 2008-2009. This is happening at a time when the scope for expanding domestic revenues is still limited in most developing countries. Consequently, governments are increasingly taking recourse to other sources of financing such as semi-concessional and commercial borrowing, including issuing international sovereign bonds.

Diaspora bonds, Public-Private Partnerships (PPPs) and domestic infrastructure bonds have also emerged as alternative sources of funding development priorities. Recognising the need to create awareness among the debt managers on these alternative financing options and their cost-risk implications, the MEFMI Secretariat organized a Debt Managers’ Seminar from 12th to 14th September 2016 in Maputo, Mozambique.

The Seminar was officially opened, on behalf of the Permanent Secretary, by the Deputy Director of the National Treasury responsible for Public Debt Management in the Ministry of Economy and Finance in Mozambique, Mrs. Ester dos Santos José. In her remarks, the Deputy Director said that while the alternative sources of financing contribute significantly in bridging the resource shortfalls in developing countries, they can also be a source of high costs and risks for governments, including those arising from higher interest rates, exchange rate depreciation and poorly negotiated contracts. In this regard, Ms. José urged debt managers in the MEFMI region be to proactive by critically analyzing the potential financing options available to governments and provide professional advice to policy makers. She added that such analytical work is critical for governments to derive maximum benefits from such financing while ensuring long term debt sustainability.

Speaking on behalf of the MEFMI Secretariat, the Director of the Debt Management Programme, Mr. Raphael Otieno, said that this year’s Seminar was designed deliberately to cover a wide range of topics to allow the debt managers to deliberate on the diverse new financing options relevant to Member States. In this regard, Mr. Otieno urged the participants to share their experiences and lessons of dealing with the challenges associated with these financing options.

The Seminar covered the following topics: current trends and key issues in public debt management; traditional sources of development financing such as multilateral and bilateral loans, and domestic borrowing; emerging financing sources including official creditors, and export credit agreements; international sovereign bonds; Public Private Partnerships; diaspora bonds; Islamic Financing Instruments, and, domestic infrastructure bonds.

Participants also shared experiences on the relevance, challenges, costs and risks associated with the emerging financing options as well as the proposed solutions. Some of the views that emerged from the seminar were:

a) Islamic Financing: Participants indicated that most countries have not embraced Islamic financing due to legal constraints, misconceptions about this type of funding as well as lack of capacity. In this regard, participants recommended that MEFMI and other partners should create awareness and build capacity among member states on Islamic financing. Capacity should be built on analyzing financing proposals or agreements as well as preparing projects that are eligible for Islamic financing. 

b) International sovereign bonds: Participants indicated that the main challenges with international sovereign bonds are the high debt service costs particularly if local currencies depreciate, failure to access foreign markets because of high country risks, and diverting the proceeds of bonds to other activities. In this regard, participants recommended that governments in the MEFMI region should ensure they achieve and maintain macroeconomic stability and negotiate for amortizing sovereign bonds to reduce exchange rate and refinancing risk. In addition, countries should prepare thoroughly before accessing international capital markets.

c) Domestic infrastructure bonds: Participants observed that local currency bond markets are underdeveloped in most countries. In some cases, this is due to unfavorable macroeconomic conditions, which create uncertainties among investors about long term financing. In other cases, governments are not able to mobilize long term financing because investors perceive that proposed infrastructure projects are poorly designed by governments. In this regard, participants recommended that governments should be fully prepared before issuing infrastructure bonds. In addition, there is need for capacity building institutions such as MEFMI to provide technical assistance to member states on developing local currency bond markets.

d) Diaspora bonds: Participants noted that the diaspora community can play a critical role in financing development through participation in diaspora bonds. Countries that have successfully tapped on this financing include Ethiopia, Ghana, India and Israel. However, participants indicated that subscriptions have been poor for some African countries that have issued diaspora bonds. In addition, diaspora bonds can be a source of foreign exchange rate risk if they are not properly structured. In this regard, participants proposed that countries that are planning to issue diaspora bonds should prepare thoroughly prior to issuance, including creating the necessary incentives that promote participation, while emphasizing that infrastructure projects should be properly designed. 

e) Public-Private Partnerships: Participants highlighted the lack of skills to design PPPs and weak legal and institutional frameworks for PPPs as some of the challenges. These challenges often lead to cost overruns, sub-standard PPP projects and corruption.

Participants recommended that governments should develop comprehensive policy and legal frameworks as well as strengthen the human resource capacities in order to derive maximum benefits from PPPs. Participants in the Seminar were drawn from relevant departments in the Ministries of Finance and Economic Development as well as from Central Banks of Angola, Lesotho, Mozambique, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe. The Seminar targeted the heads and deputies of debt management offices, PPP Units and other relevant officials. A total of thirty two (32) participants attended the Seminar, of which fourteen (14) were female, representing forty four (44) percent of the total. MEFMI partnered with Barclays Bank, South Africa, to facilitate the seminar.

There were five (5) resource persons, namely: namely Messrs Dev Useree (international consultant), Raphael Otieno and Stanislas Nkhata of the MEFMI Secretariat and George Asante and Theuns Ehlers of Barclays Bank of South Africa. The Bank’s participation was necessitated by the need to provide participants with diverse perspectives and experiences of financing development projects in developing countries. The main outcome of the Seminar was that it raised awareness among debt managers on the alternative options for financing development projects as well as their cost and risk implications. It also accorded participants the opportunity to share experiences on debt management practices regarding the emerging sources of financing development.