IMF's Lipton Warns Africa Against Infrastructure Debt Traps

  • Mistakes can leave countries with more debt than benefits
  • IMF `very supportive' of Mozambique after debt disclosure

African nations need to find the right balance when pursuing infrastructure projects to avoid falling into deeper debt traps, according to David Lipton, First Deputy Managing Director of the International Monetary Fund.

“Infrastructure projects can be very successful in supporting growth if countries pick the right projects and carry them out in an efficient fashion,” Lipton said in a interview in the Kenyan capital, Nairobi on Tuesday. “Mistakes or inefficiencies can leave a country with more debt than benefits, so it’s important to strike that balance.”

The Washington-based lender warned last week that sub-Saharan African nations need to contain their fiscal deficits otherwise they may be vulnerable if external financing becomes more expensive. African countries from Ghana to Mozambique have approached the IMF for assistance since the start of last year as high borrowing costs shut them out of international capital markets. Budget and current-account shortfalls have widened after the global slump in commodity prices led to a plunge in government revenue among raw-material exporters.

“Many countries have recently overcome problems with debt and it’s important that they don’t develop new debt problems,” Lipton said. “I don’t see countries right now that are worrisome, but it is a risk that countries have to be careful to avoid.”

Lipton visited Kenya on Monday and Tuesday and said the East African nation has to balance efforts to quicken economic growth with the need to narrow its budget shortfall. Kenya’s fiscal gap will probably widen to 8.7 percent of gross domestic product in the year through June, from 7.8 percent in the previous fiscal year, according to government forecasts. Economic growth will probably accelerate to 6 percent this year from 5.6 percent in 2015.

“The budget deficit recently has been at a level that would lead Kenya to have rising debt all the time,” Lipton said. By narrowing the shortfall “it would then be able to avoid rising public debt and that would help give Kenya an important margin of safety in its debt levels in case it ever suffered a difficult period where it needed to borrow.”

Mozambique Support

The IMF last month canceled a mission to Mozambique after it discovered authorities had failed to disclose around $1 billion of debt and said it changes the fund’s assessment of the coal-producing nation’s macroeconomic outlook. Fitch Ratings Ltd. downgraded Mozambique’s credit rating to CCC from B and said the country’s public debt profile has deteriorated sharply.

After a meeting with Prime Minister Carlos Agostinho do Rosario with IMF Managing Director Christine Lagarde in Washington in April, Mozambican authorities provided information to the lender, which its staff are analyzing, Lipton said.

“We are very supportive of Mozambique,” he said. “It is important that we all together find a way out of the situation.”

Nigeria should find a way to promote competition and diversification, Lipton said. The nation relied on crude for about 70 percent of government revenue and 90 percent of export earnings in 2014 and has been hammered by oil prices plunging by more than half in the last two years. Economic growth will probably slow to 2.3 percent this year from 2.8 percent in 2015, which was the lowest rate in 16 years, according to IMF forecasts.

The Nigerian central bank has pegged the naira at 197-199 per dollar since March last year and restricted trading in foreign currencies, making imports more costly for a nation that’s a net importer of refined fuel and food. Importers struggle to access foreign exchange at the official rate, with the naira falling to around 319 on the black market. Authorities must introduce “greater flexibility in the exchange system,” Lipton said.

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