Striking The Right Balance Between Sustainable Development and Sustainable Debt


Thursday, December 19, 2019   /07:46 PM  / By Kristalina Georgieva, IMFBlog / Header Image Credit: GODONG/NEWSCOM


Over the past two decades, sub-Saharan Africa has made considerable economic progress: extreme poverty levels have declined by one third; life expectancy has increased by a fifth; and real per capita income has grown by about 50 percent on average. Yet, sub-Saharan Africa is still only half-way to meeting the Sustainable Development Goals.

To achieve these goals, sub-Saharan Africa will need financing. One of the ways to access financing is through borrowing. It makes sense for governments to incur debt if done wisely. If debt is used to finance projects that boost productivity and living standards, such as investing in roads, schools, and hospitals-and if governments can recoup enough of the benefits of these investments to repay the incurred debt-then borrowing is worthwhile.

But room for borrowing has become more limited in this region as public debt levels increased rapidly between 2011 and 2016-they have since stabilized at around 55 percent of GDP on average. Countries in the region have also relied more heavily on commercial borrowing on domestic and international financial markets-such borrowing accounted for more than 70 percent of the increase in debt stock this decade. This shift to non-concessional financing means more spending on debt service, and less on social and infrastructure investment. 

It is clear that sub-Saharan African countries will not be able to simply "borrow their way" to the SDGs.

So, what is needed? This was the topic of a conference organized by the IMF together with the Government of Senegal on December 2, in partnership with the United Nations and the Cercle des economistes. Dakar was a fitting venue as Senegal has launched its Plan Senegal Emergent aimed at transforming its economy, creating jobs, and boosting living standards. It was also apt because, as I told the conference attendees, policymakers can draw inspiration from the Lions of Teranga-Senegal's national soccer team, which impressed everyone at last year's Africa Cup of Nations.

Balanced Approach

The Lions of Teranga's success is based on a balanced approach-between the urge to attack and the need to defend, between individual efforts and team performance. Similarly, Africa is seeking to find the right balance between financing development and safeguarding debt sustainability, between investing in people and upgrading infrastructure, between long-term development objectives and pressing immediate needs. In short, a balanced approach is needed; and, in order to get there, all stakeholders will need to raise their game. 

There are five powerful tactics that we can all pursue to find the right balance between development and debt, three directed at sub-Saharan policymakers and two at the international community and the private sector. 

The first tactic is to generate higher public revenue. This is an area where sub-Saharan Africa lags other regions. We estimate that revenue collection is 3-5 percentage points of GDP below revenue potential. Closing that gap can be done, as shown by the good example of Uganda, where, with technical support from the IMF, reforms helped raise the revenue-to-GDP ratio from 11 percent in 2012 to almost 15 percent last year.

The second tactic is to make investment spending more efficient. The reality is that only about 60 percent of the region's infrastructure spending translates into public capital stock. For every dollar spent, you are getting only about 60 cents worth of assets.

The third tactic is to strengthen public debt management. A key objective is to boost debt transparency by providing accurate, comprehensive, and timely data. This in turn can help build trust with investors, support domestic capital markets, and reduce debt service costs.

The Global Team

And yet, even as countries pursue the three tactics, we all need to do more. Boosting domestic resources is critical, but not enough. Even strong domestic efforts are likely to cover just a quarter of the estimated SDG needs. So, the global team also needs to do more.

So, fourth tactic: Advanced economies can do more, especially when it comes to aid. The goal is to raise official development assistance to 0.7 percent of donors' national income. Donors could also focus more on infrastructure by providing grants and concessional financing for projects with credibly high rates of return.

Fifth tactic: We also need to bring in more private-sector players-including more foreign direct investment-to help close the significant financing gap. Responsibility for achieving the SDGs must begin with efforts by the public sector, but it cannot end there. Above all, we need to ensure that private and public players can both end up on the winning side. A good example can be "blended finance," which brings together grants, concessional financing, and commercial funding.

How can we encourage risk-sharing? How can we scale up development finance for the benefit of all? These are just some of the issues that Africa is now grappling with. But it is clear that we all benefit if we act jointly to promote the good of Africa. As the Senegalese proverb puts it: "Whatever one person can do, two people can do it even better." That is the spirit of the Lions of Teranga. It is the same spirit that lies at the heart of what we are trying to achieve across sub-Saharan Africa.

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