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New Ways to Finance Development in Sub-Saharan Africa

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March 10, 2008— While official aid flows to Sub-Saharan Africa rose in recent years, additional external financing mechanisms are needed to reduce poverty and improve lives in the region.

Official development assistance (ODA) for the region totaled over $30bn in 2005. This aid is Africa’s largest outside funding source. Foreign direct investment (FDI) in the region is the second-largest source of external financing.

Ultimately, it is the private sector which must act as the engine of growth and employment in the poor countries. Official aid efforts must catalyze innovative financial solutions for increasing private-to-private flows,” said Uri Dadush, Director of the World Bank’s Development Prospects Group.

In a new paper, Senior Economist Dilip Ratha and fellow World Bank economists Sanket Mohapatra and Sonia Plaza estimate that Sub-Saharan Africa can raise up to $30bn a year by exploring previously overlooked sources of financing such as remittances and diaspora bonds, and strengthening public-private partnerships.

Preliminary estimates suggest that Sub-Saharan African countries can potentially raise $1 to $3 billion by reducing the cost of international migrant remittances, $5 to $10 billion by issuing diaspora bonds, and $17 billion by securitizing future remittances and other future receivables,” said Ratha.

In a meeting in Nairobi last year, client governments asked the Bank to explore funding sources beyond the current limited IDA funds, such as diaspora funds, securitization and guarantees.

Graph of resource flows to Sub-Saharan Africa

Official Development Assistance

Assistance to the region in the form of debt relief exceeds direct aid flows. Indeed, recent increases in ODA have been associated with IMF-World Bank debt relief programs such as the Heavily Indebted Poor Countries Initiative (HIPC) and the Multilateral Debt Relief Initiative (MDRI). Paris Club creditors, for example, provided $18bn in debt relief to Nigeria in 2005. Although this reduces the debt burden, there is still a real need for additional resources for social and economic development.

Assistance from new donors could fill some of the funding gap. China, Cyprus, Egypt, Estonia, Latvia and Lithuania joined the list of donors that contributed to the replenishment of IDA15 last December.

Migration and remittances

Woman at ATM in Mozambique Personal and institutional remittances to Sub-Saharan Africa outside South Africa have increased from $7.2bn in 2000 to $13.9bn in 2005. But the region lags behind other developing regions.

Sending remittances to Africa is costly. In 2006, sending $200 from London to Lagos cost $29, and sending the same amount from Benin to Lagos cost over $34. This often leads to the use of informal channels to send money home.

Reducing these costs by half – a not so difficult target – could result in additional $2.5 billion in remittance flows to Sub-Saharan Africa,” predicted Ratha. “But it is important to remember these flows are private and should remain beyond state control.”

Many countries in the region can tap the wealth of their diaspora by issuing diaspora bonds (see box). For Sub-Saharan Africa, issuing these bonds and overcoming any weaknesses in the legal and regulatory systems in the region could help investors tap $5bn to $10bn annually.

Diaspora bonds

A diaspora bond is a debt instrument issued by a country—or even by a sub-sovereign body or a private corporation—to raise financing from its overseas diaspora. This relatively unexploited instrument can raise investments from international migrants for economic development in the home country.

Members of the diaspora are more likely to invest in their country of origin not only for patriotic reasons, but also because their country risk perception is likely to be weaker than that of international investors.

The diaspora from India and Israel have raised $11bn and $25bn respectively in recent decades. The Philippines has announced that it will sell a diaspora bond to overseas Filipino workers this year to raise funds for development projects. Ghana has begun marketing the Golden Jubilee Savings Bond to the Ghanaian diaspora in Europe and the United States.

Securitizing future flows such as remittances, tourism receipts, and export receivables could help Sub-Saharan countries access international capital markets. Future foreign-currency receivables are pledged as collateral to a special purpose entity which issues debt to an offshore collection account that the borrowing country can access.

These securities have a higher investment grade rating than the generally unfavorable sovereign credit ratings given to Sub-Saharan countries. Higher ratings make market transactions to the region attractive to a wide range of investors. For Sub-Saharan Africa, future flows of exports such as fuel, raw materials, ores and metals, travel services, and remittances could yield $17bn annually.

Innovative financing by the World Bank

Guarantees reduce investor risks for public and private sector projects by covering partial risk, political risk, and trade credits. World Bank and IDA guarantees totaling $3bn over the past decade have catalyzed $12bn in private financing for 28 projects in developing countries. In 1999, the Azito power project in Cote d’Ivoire was the first IDA partial risk guarantee in Sub-Saharan Africa, catalyzing private financing of $200 million while keeping IDA support to $30 million.

The World Bank’s Regional Trade Facilitation Program has partnered with the African Trade Insurance Agency to increase competitiveness and trade efficiencies in southern and eastern Africa. They plan to develop a more credible credit risk instrument to support firm operations in the region.

Woman receiving immunization shotThe World Bank is also part of the Global Alliance for Vaccines and Immunization (GAVI), a unique public-private partnership with the Gates Foundation, UNICEF, WHO, and other groups in both industrial and developing countries. GAVI aims to increase access to immunizations, save lives, and increase self-sufficiency among poor people.

GAVI utilizes a funding mechanism developed by the International Finance Facility for Immunisation, or IFFim, which securitizes future aid commitments from donor countries by issuing bonds to international markets after the countries sign legally binding agreements to provide future grant funding.

In October 2007, the World Bank announced another public-private partnership known as the Global Emerging Markets Local Currency (Gemloc) Bond Fund intending to raise $5bn from international markets and placing a portion of those funds in the local-currency bond markets in Kenya, Nigeria and parts of West Africa.

The Stolen Assets Recovery (StAR) initiative, a joint World Bank and United Nations Office of Drugs and Crime program, helps countries recover flight capital and stolen assets by supporting countries’ efforts to return funds to development causes. In developing and transition countries, bribes received by public officials are estimated at $20bn to $40bn a year.

Related Reading

Dilip Ratha, Sanket Mohapatra, and Sonia Plaza, "Beyond Aid: New Sources and Innovative Mechanisms for Financing Development in Sub-Saharan Africa." Forthcoming as a Policy Research Working Paper and a chapter in “Africa at a Turning Point,” edited by John Page and Delfin Go.

Dilip Ratha, Prabal De, and Sanket Mohapatra, “Shadow Sovereign Ratings for Unrated Developing Countries.”

Suhas Ketkar and Dilip Ratha, “Development Finance via Diaspora Bonds: Track Record and Potential.”

More on migration and remittances

Migration and Remittances Research

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