First Borrow

• Author: Amadou N.R. Sy
• Position: a Deputy Division Chief in the IMF Monetary and Capital Markets Department.

Most sub-Saharan African countries long have had to rely on foreign assistance or loans from international financial institutions to supply part of their foreign currency needs. But now for the first time many of them are able to borrow in international financial markets, selling so-called Eurobonds, which are usually denominated in dollars or euros.Â

This sudden surge in borrowing by countries in a region that contains some of the world’s poorest nations is due to a variety of factors—including rapid growth and better economic policies in the region, low global interest rates, and continued economic stress in many major advanced economies, especially in Europe. In several cases, African countries have been able to sell bonds at lower interest rates than troubled European economies such as Greece and Portugal could.Â

Whether the rash of borrowing by sub-Saharan governments (as well as a handful of corporate entities in the region) is sustainable over the medium-to-long term, however, is open to question. The low interest rate environment is likely to change at some point—both raising borrowing costs for the countries and reducing investor interest—and heady economic growth may not continue, which would make it harder for countries to service their loans. Moreover, political instability in some countries could also make it more difficult for borrowers and lenders alike.Â

Joining the crowd

South Africa has issued Eurobonds for a number of years. But more recently, such countries as Angola, Côte d’Ivoire, Gabon, Ghana, Namibia, Nigeria, Rwanda, Senegal, Seychelles, and Zambia have been able to raise funds in international debt markets (see Chart 1). Kenya, Tanzania, and Uganda are expected to issue Eurobonds in the near future. In total, more than 20 percent of the 48 countries in sub-Saharan Africa have sold Eurobonds.Â

Moreover, a few corporate entities in sub-Saharan Africa have also successfully issued Eurobonds (Guarantee Trust Bank in Nigeria raised $500 million in a five-year bond offering in 2011, and Ghana Telecom issued $300 million in five-year bonds in 2007).Â

Among the factors propelling the sales are the following:

• Changes in the institutional environment: Since 2009, the IMF limit on borrowing at unsubsidized (nonconcessional) rates for low-income countries under IMF programs has become more flexible. It is based on a country’s capacity and the extent of its debt vulnerabilities. As of December 2011, there were only seven sub-Saharan African countries with limited or no room for nonconcessional borrowing.Â

• Reduced debt burdens: The IMF revised its policy after many donor countries and major multilateral financial institutions canceled debts of many less-developed countries. That reduced debt...