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Strong dollar threatens debt crisis in sub-Saharan Africa

Jan 28, 2015

ODI thinktank warns of risk of debt defaults as countries face $10.8bn in extra currency costs

The strong dollar is threatening an Asian-style debt crisis in sub-Saharan Africa, a thinktank has warned.

The rising value of the US currency is increasing the risk of sovereign debt defaults in the region, according to the Overseas Development Institute (ODI), by handing countries an additional $10.8bn (£7.1bn) of currency costs – equivalent to 1.1% of the region’s gross domestic product. 

Judith Tyson, author of the research, said the region’s ability to make debt repayments hinged on strong economic growth, itself threatened by weak export markets and plunging oil prices. “Today’s economic environment in sub-Saharan Africa is similar to the boom that preceded the bust in the debt crises in Africa and Asia in the 1990s, when western governments and banks wrote off billions of pounds of debt. Today billions of dollars are again at stake, not to mention the financial stability of the region,” she said.

Tyson said currencies in Nigeria and Ghana had suffered particularly sharp falls against the dollar over the past year, increasing their dollar-denominated sovereign bond liabilities. The ODI said investors have been buying up bonds in the region in search of better returns and the promise of strong growth rates. The sub-Saharan economy grew by 4.5% in 2014 according to the World Bank, following growth of 4.2% in 2013.

There was a surge in lending through sovereign bonds in sub-Saharan Africa in 2013 and 2014, with bonds a popular way of financing development in emerging economies, partly because investors lend with few conditions attached compared with loans from institutions such as the International Monetary Fund.

Tyson said that investment in the area by private equity and hedge funds was broadening out to more mainstream investment such as pension funds. “Private investors are piling into the region. The bigger the boom, the bigger the bust,” Tyson warned. “There has been a lot of bullishness about the growth story in Africa. We want investors to be more choosy about the countries they’re investing in,” she said.

The ODI said the irresponsible use of funds by some countries was contributing to the problem, with Ghana frittering away money on public sector pay increases, and Mozambique borrowing $850m for its fishing industry, but instead spending the money on military boats and equipment. It claimed that other countries, such as the Seychelles, Senegal, Mozambique and Gabon, were simply over-borrowing in relation to their gross domestic product.

Tyson said the IMF could do more to highlight the risks posed by sub-Saharan African nations taking on excessive debts. “The IMF has rung some alarm bells, but not loudly enough,” she said. The thinktank said governments must be held more accountable by national institutions, development agencies and investors for how they use their funds.


Source: Angela Monaghan (The Guardian Online)



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