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.
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
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.
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.