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Sierra Leone News: Salone ranked amongst the low potential eligibility for MCLs

The proceeds of the Big Bond would be on‑lent to eligible African Development Fund (ADF) countries through Moderately Concessional Loans (MCLs). An interest rate of about 3 percent with 40 years’ maturity and 10 years’ grace are illustrative MCL terms.
Such terms naturally raise concerns about debt sustainability. The ADF Policy Innovation Lab reviewed public debt sustainability in 33 of the 38 ADF countries based on data availability. Nigeria was excluded because it is expected to graduate in 2019.
In its 2017 Report of the High Level Panel on Transforming Trust in the African Development Bank Group (AfDB) into Influence titled ‘Reinvigorating African Concessional Finance’, it ranked Sierra Leone amongst the 10 countries that exhbit similar characteristics of low potential eligibility.
Low potential eligibility for MCLs it says is likely to exacerbate debt sustainability problems in six of this group of 16 countries: Burundi, Central African Republic, Liberia, Madagascar, Mali, and Zimbabwe. The other 10 countries exhibit similar characteristics but are somewhat better off: Chad, Democratic Republic of Congo, The Gambia, Guinea, Guinea-Bissau, Malawi, São Tomé and Príncipe, Sierra Leone, Sudan, and Togo.
The reasons include fragility from regional insecurity; political instability; poor governance; epidemics such as Ebola; weak ability to use natural resource wealth to promote development; or some combination.
“Yet even countries with low potential eligibility today can, over the next 10–15 years, transform themselves with the right incentives and political will. Guinea and Togo, for instance, both have a high share of local currency debt in total public debt, which is typically at short maturities and at commercial terms” it says.
Both countries also have ambitious public investment programs. Guinea it says is planning a 550 megawatt hydroelectric dam at Souapati, costing around 20 percent of GDP. Its financing will not be feasible using current instruments.
Access to MCLs at some point could help because of the very long maturities involved, assuming the project has been adequately vetted. Such potential access could serve as a powerful incentive for reform.
The report says there is an urgent need for increased investment and related development expenditures throughout Africa. Immediate action on a Big Bond issue of USD 100 billion would make an important contribution to reducing poverty in ADF countries.
Equally important is the signal transmitted by the Big Bond: that Africa is open for business, that donors recognize Africa’s need for a big push on infrastructure and human capital even as the donor fiscal burden is lowered, and that African leaders must take primary responsibility for the continent’s future.
Two questions were posed in gauging the impact of MCLs. First, is there any evidence of deterioration in public debt dynamics over 2013–15, and if yes, what are the main factors? Second, what is the prime determinant of the marginal cost of government borrowing, the market or official creditors?
This focus on public debt and market borrowings is consistent with the issues being considered in the 2016 Review of the IMF–World Bank Debt Sustainability framework, which emphasizes the importance of these variables as well as international liquidity.
It also discusses the concessionality embedded in MCLs where it main findings were that public debt dynamics have become more challenging and need to be addressed. While this is most obvious for commodity exporters, it also applies to the bulk of the other ADF countries. In general, external financing dependence is large, reflected in high current account deficits. Except for fragile countries, MCLs are unlikely to trigger public debt sustainability, the market is unlikely to be a reliable substitute for frontloaded ODA, since it is myopic and unforgiving, and costs can quickly rise with successive bond issues. At the other extreme, concessionality in the post HIPC–MDRI world has not prevented debt sustainability problems from reemerging. And weaknesses in the foundation for sustained growth and development need urgent remediation.
High potential eligibility group includes 17 countries. Cameroon, Côte d’Ivoire, Ethiopia, Ghana, Kenya, Mozambique, Rwanda, Senegal, Tanzania, and Zambia have issued Eurobonds in the last five years. Benin, Burkina Faso, Djibouti, Lesotho, Mauritania, Niger, and Uganda have never issued a Eurobond but borrow on commercial terms in the domestic market or on semiconcessional terms from China.
By Zainab Iyamide Joaque
Tuesday September 04, 2018.

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