Africa’s domestic capital markets should get a boost from a deal signed by the World Bank’s International Finance Corporation and the African Development Bank to enter into African local currency swap transactions, said the lenders.
The deal, which will enable the lenders to make loans to their clients in more local currencies than they do now, was signed at the AfDB’s annual meeting in Arusha, Tanzania, and is part of efforts by the two institutions to cut countries’ dependence on foreign currency denominated debt.
Improving Africa’s capital markets is vital if the continent is to maximise its growth potential, Reuters reports.
Under the deal, the IFC could obtain local currency in a country where it doesn’t have a funding source or an upcoming bond issue but where the AfDB does.
“The agreement opens up the possibility for both institutions to share our local currency resources,” IFC treasurer Jingdong Hua told Reuters in a phone interview from Arusha.
“Let’s say AfDB is issuing in a currency where we haven’t started a capital market exploration but we happen to have a programme, we can borrow from the AfDB and on-lend to our clients and vice versa.”
Hua said the deal had no fixed size and the transactions would depend on project demand. It is the first such deal between two multilateral financial institutions and has no time limit.
IFC, the World Bank’s private sector arm, said it expects to invest $2.6 billion in sub-Saharan Africa this fiscal year and to mobilise an additional $1.1 billion from other investors.
The agreement follows the launch of its pan-African bond issuance programme in May. IFC is working with authorities in Botswana, Ghana, Kenya, South Africa, Uganda and Zambia to obtain consent to issue regular local currency bonds.
Funds raised from the bond sales will be invested in IFC-backed businesses that contribute to social objectives such as job creation and infrastructure development, Hua said.
Foreign investors who buy the bonds would gain exposure to African local currency debt from triple-A rated issuers.
Since 2005, the AfDB has issued bonds denominated in or linked to seven African currencies. It is also a regular issuer in South African rand, its third largest lending currency.
IFC wants to strengthen its presence in Ethiopia and in post-conflict or fragile states such as South Sudan, Thierry Tanoh, vice president for sub-Saharan Africa, said this week.