Playing catch-up quickly.


The IMF and the World Bank have launched a joint initiative to assist low-income countries (including some in sub-Saharan Africa) to develop and implement financial instruments for their medium-term debt strategy. The Efficient Securities Markets Institutional Development programme, funded by the Swedish International Development Co-operation Agency, will also help build bond markets in selected SSA countries, with a focus on improving bond financing for housing and pan-African infrastructure projects.

The scarcity of capital for the private sector has long been a major development obstacle in Africa. The banking sector, the continent's principal source of finance, has mainly focused on trade credit and short-term loans to mitigate risk exposure.

Thus developing Africa's bond markets would reduce overreliance on bank loans, broaden investment channels and the availability of local finance will provide an alternative to the vagaries of the global capital markets.

As the IMF notes: "The emergence of effective bond markets in Africa could be an important step in overcoming private sector financing constraints. Tapping domestic markets would provide incentives for long-term savings, while avoiding possible exchange rate risk associated with issuing bonds in international markets."

Domestic pensions, mutual funds and foreign investors would be the key to fostering broader, more liquid bond markets in Africa. The total assets of pension funds in Africa are estimated at $300bn.

Benefits of fixed-income markets

Indigenous bond markets help both governments and businesses to diversify their sources of funding and reduce exposure to foreign currency-denominated debt.

They underpin fiscal stability by reducing currency mismatches and by lengthening the duration of a debt. Such markets support economic efficiency by making available a wider variety of long-term investment and hedging instruments, as well as sustaining market-determined interest rates that reflect the opportunity costs of funds at different maturities.

The danger of the current situation, in the absence of bond markets, is that it can induce borrowers to take risky financing decisions that create balance sheet vulnerabilities and increase their reliance on the banking sector.

Germany's deputy finance minister, Thomas Mirow, has argued: "Promoting national bond markets in Africa is a way to ensure that these countries do not suddenly find themselves in a new situation of dependence vis-a-vis a lender."

Government debt--generally the safest asset in any economy--provides a benchmark return for the issuance of other securitised debt such as corporate bonds.

Local currency denominated securities are important for fiscal and monetary policy as they help in cash/liquidity management, finance budget deficits in a non-inflationary manner (unlike chronic government funding over previous decades) and implement monetary policy through open market operations.

Experience in other developing countries shows that efficient bond markets are useful tools for inflation targeting and fostering fiscal discipline.


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