The Economic Commission for Africa (ECA) has set up a Liquidity and Sustainability Facility (LSF), a facility that will lower governments’ borrowing costs by increasing the demand for their sovereign bonds.
The facility launched on Tuesday, March 23 at the end of the 53rd session of the Committee of African Ministers of Finance, will strengthen countries' liquidity in the short term and restart growth in the longer term.
It will now be possible for existing sovereign bondholders to post such instruments as collateral for low-interest loans financed in part by a new issuance of Special Drawing Rights (SDRs).
The resources mobilized through such repurchase agreements will then be used to finance investments in emerging market sovereigns.
African Ministers on Tuesday stressed the need for a swift, bold and positive response on SDRs in the range of 500 billion to 650 billion to arrest the devastating impact of the Covid-19 pandemic on the continent.
Thomas Venon, a partner at Eighteen East Capital, a company dedicated to the development of innovative finance solutions for businesses, said the LSF was designed to support emerging markets sovereigns in advancing sustainable development initiatives and, more immediately, facilitate access to liquidity, lending, and investment into these countries.
In a bid to meet their growing development financing needs African countries have borrowed from private creditors. As a result, it is noted, their debt landscape has changed in the last decade, with private debt assuming a little over 40 percent of its total debt stock.
The interest rates on Africa’s private debt is prohibitive hence, the need for a facility such as the LSF.
"Developed countries have long enjoyed the existence of large ‘repo’ markets for their government bonds, facilitating the creation of stable and additional funding sources,” Venon said.
"The LSF will replicate this dynamic for emerging market sovereign bonds, providing investors with competitive funding through repurchase agreements.”
Venon said the LSF’s governance will be aligned with public good mission and its adherence to the highest standards of transparency.
"It is estimated that the LSF could save African issuers US$11 billion in interest costs over a five-year period.”
The facility would pave the way for the global community to assist African policymakers in restarting and reimagining sustainable growth, for example, by introducing innovative financing tools such as bonds linked to the pursuit of the sustainable development goals.
As a proportion of gross domestic product and of export earnings, Africa's debt of about $544 billion is the highest of any developing region. High debt levels impede public investment in infrastructure and human development and in turn deter private investment.
According to the ECA, the continent’s output losses because of Covid-19 will be just under $100 billion and would result in the significant reversal of gains made to fight poverty in the past few years and push close to 30 million people into poverty.
While developing countries have injected trillions of dollars into social safety nets, healthcare support and economic stimulus responses, Africa has lacked the fiscal space to respond similarly.
The continent faces challenges including heightened debt levels, currently estimated to be about 69% of GDP; high fiscal deficit of an average of 8.7% of GDP; the high cost of borrowing; and currency depreciation against major currencies.
As noted, African governments are also under pressure to keep up payments on debt service and avoid stigmatization in financial markets associated with debt relief.
For African nations, healthcare expenditure is rising as revenues are shrinking, exerting strong budgetary pressures on government financing, with the total fiscal deficit for Africa almost doubling from 4.7% of GDP in 2019, to 8.7% in 2020, ECA estimates indicate.
The LSF is meant to help African countries access new liquidity and entice private sector investors to re-enter or enter the market for the first time.
Aia-Eza DaSilva, Secretary of State for Budgets and Public Investments for Angola, said the LSF initiative could bring some liquidity to sovereign debt.
"Liquidity is very important at this time as we are lacking fiscal space. The debt service is so huge, and it absorbs most of our budgets, so we need fiscal space to provide for our population and to keep us growing and be able to repay these debts,” DaSilva said.
"We need additional space to breath so that we keep on the path of growth, and the LSF can provide that.”