Increasingly innovative ways to manage debt are being deployed by African states to finance energy and environmental projects. Faced with volatile international capital markets and the need for more power, governments are using multilateral credit facilities, risk guarantees and bespoke debt swaps to restructure debt into investment. Although very varied, these strategies are not without controversy.
Some African governments are now buying their own expensive, high-yield commercial debt on the secondary market. Purchases may be funded by issuing new debt backed by a multilateral development bank's credit guarantee or a concessional loan, which means that the new debt carries a significantly lower interest rate and often a longer repayment timeline.
The difference in interest payments is often designed to create immediate fiscal savings, which are legally deposited into a dedicated domestic project fund. An independent trustee monitors this fund to ensure it wholly and solely finances the pre-agreed energy, climate or nature infrastructure.
At the forefront of these strategies is a growing reliance on the African Development Bank (AfDB) and other development finance institutions. African countries in a position to turn to the debt markets have tended to be vulnerable to high coupon rates on international bonds, which drain scarce foreign exchange reserves. By utilising the superior credit ratings of multilateral lenders - and their ability to secure concessional terms - governments are finding ways to systematically buy back this expensive commercial debt.
Originally published by African Business.