Development and Debt: Finding the Right Balance
December 2, 2019
Your Excellency President Macky Sall. Thank you for hosting this important conference;
Excellencies, the Heads of State of WAEMU countries;
Members of Parliament;
Members of the diplomatic community;
Mesdames et messieurs, bonjour.
I would like to thank the Government of Senegal for jointly organizing this event with the IMF, in partnership with the United Nations and the Cercle des Économistes.
I am honored to speak before such a distinguished audience. And I want to thank the people of Senegal for welcoming all of us in the spirit of Teranga.
As you know, Teranga is more than just hospitality; it is an expression of warmth and community that allows visitors to connect with Senegal at a deeper level. That is what I hope to do today.
To my mind, Dakar is a fitting venue for our discussion on sustainable development and debt. Why? Because Senegal is using a powerful recipe for sustainable growth.
By implementing the Emerging Senegal Plan[i], this nation is seeking to transform its economy, create jobs, and boost living standards. We have seen similar development strategies in a number of countries in sub-Saharan Africa.
These strategies are critical to achieve the Sustainable Development Goals, our common aspiration for a better world for all. How can we meet the SDGs?
I believe that policymakers can draw inspiration from the Lions of Teranga—Senegal’s national team, which impressed everyone at last year’s Africa Cup of Nations.
Their success is based on a balanced approach—between the urge to attack and the need to defend, between individual efforts and team performance.
This approach is more important than ever, because countries are 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.
Finding the right balance—that is the focus of my remarks today.
1. Economic scoreboard: where are we now?
Let me start by taking a look at the “economic scoreboard”—where are we now?
By improving policies and by strengthening institutions, countries in sub-Saharan Africa have made fundamental progress.
Over the past two decades, 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.[ii]
These achievements show just how powerful development efforts can be. But there is so much more to be done.
Think of the farmers who are facing the devastating effects of climate change. Think of the young women who are struggling to acquire the right skills for the digital economy. And think of the millions of new jobs that will need to be created to ensure that sub-Saharan Africa can enjoy a demographic dividend—a prolonged period of high and inclusive growth.
That is why countries are scaling up investment and social spending to meet the SDGs.
This is not an easy task: in key areas such as health, education, and priority infrastructure, we estimate that countries in the region will require additional spending every year—reaching about 20 percent of their combined GDP in 2030.[iii]
Right now, sub-Saharan Africa is only half-way to meeting the SDGs. In order to get there, all stakeholders will need to raise their game.
Of course, there are many ways to mobilize financing—and debt is one of them. Borrowing makes sense if it is done wisely, if it finances projects that can help boost productivity and living standards—such as roads, schools, and hospitals.
But room for borrowing has become more limited in this region. Why? Because public debt levels increased rapidly between 2011 and 2016—they have since stabilized at around 55 percent of GDP on average.[iv]
A major driver of this buildup is commercial borrowing—both domestic and foreign—which currently makes up two-thirds of the region’s public debt stock.[v]
It means that countries rely more heavily on bond investors, domestic commercial banks, and other non-traditional lenders.
This shift to non-concessional financing means more spending on debt service, and less on social public investment.
It is therefore clear to all of us that countries will not be able to “borrow their way” to the SDGs—which brings me to the balanced approach.
2. Finding the right balance of policies
Let me stress that development goals are achievable, if we find the right balance of policies, if we maximize individual efforts and work together as a team.
So, how can we move the ball forward? There are three powerful tactics countries can pursue:
(a) Three powerful tactics
One 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.[vi]
This is a major opportunity for all countries. A good example is Uganda, where the IMF has supported efforts to streamline the value-added tax and harmonize administrative procedures. These reforms helped raise the revenue-to-GDP ratio from 11 percent in 2012 to almost 15 percent last year.
Boosting revenue also means better capturing returns on public investment—think of user-fees that are implemented in a fair and growth-friendly way. And when it comes to fairness, all countries need to help close the tax loopholes that hurt development—which means stepping up the reform of international corporate taxation.
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.[vii] For every dollar spent, you are getting only about 60 cents worth of assets.
Again, this is an opportunity for significant development gains. For most countries, this means building greater capacity to asses, select, and implement projects. Here the IMF provides diagnostic tools and technical assistance, most recently in Mali, Niger, and Burkina Faso.[viii]
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.
For this region, effective debt management is more critical than ever, because of the increased complexity of the debt profile—including more complicated debt instruments and the more prominent role of non-traditional lenders, both public and private.
That is why the IMF is working closely with the World Bank to help our members strengthen the institutions that record, monitor, and report debt. We also provide free online courses that strengthen the ability of officials in the region to undertake debt sustainability analysis and work in many other areas.
Of course, capacity development is only one example of how we can support the balanced approach. We are also deeply engaged through policy advice and financial support to countries, including at zero interest.
And yet, even as countries pursue the three tactics, we all need to do more. Think about it: boosting domestic resources is critical, but not enough. Even strong domestic efforts are likely to cover just a quarter of the estimated SDG needs.[ix]
(b) A more balanced global team
Now is the time to move the ball forward, to further balance the efforts of the global team. What do I mean?
For one, 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.
There are so many opportunities in sub-Saharan Africa, and there is so much room for a global team effort.
Consider the potential benefits of new joint platforms, where development partners work together to support countries in the region on critical issues, such as international taxation and infrastructure investment.
And consider the enormous benefits of sharing knowledge more effectively among all development partners and with governments—from cost-benefit analysis, to cross-country databases on pricing. What is the cost of road construction per kilometer?
In other words, responsibility for achieving the SDGs must begin with efforts by the public sector, but it cannot end there. We also need to bring in more private-sector players—more foreign direct investment—to help close the significant financing gap.
For many countries, this means strengthening macroeconomic management and creating a more welcoming business environment. This would include further efforts to modernize legal frameworks, to reduce red tape and fight corruption.
We certainly need a strong global team to support these economic transformations. Think of the Compact with Africa, which has started to show positive effects in several countries. To unlock the full potential of this initiative, we need go further.
In some cases, greater international efforts are needed to help address the security challenges that are holding back much-needed investments. And across the region, we need to mobilize more private investment in energy infrastructure.
We know that more reliable access to electricity will be critical to improve people’s lives and build digital economies—and we hope that more investors will recognize these opportunities.
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 this type of risk-sharing? How can we scale up development finance for the benefit of all?
I certainly look forward to our discussion on how we can raise our game on these critical issues.
As the Senegalese proverb puts it: “Whatever one person can do, two people can do it even better.”[x]
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 here in Dakar and across sub-Saharan Africa.
Our joint responsibility is to find the right balance between development and debt, between the wellbeing of this generation and the prospects of future generations.
A notre tour de jouer![xi]
Thank you very much—Merci pour votre attention.
[i] Plan Sénégal Emergent
[iv] Conference Paper:Sustainable Development, Sustainable Debt”. Desruelle et al., 2019 ibid
[viii] The IMF supports countries through its Expenditure Assessment Tool and Public Investment Management Assessments.
[x] “Lu kenn mën, ñaar a ko ko dàq”
[xi] Reference to a song by Youssou N’Dour & Axelle Red, played at the opening of the 1998 World Cup in France: “La Cour Des Grands.”
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