Can international sovereign bonds change the way African governments manage public funds and stem or end corruption?

The answer is yes and no. Yes, because Eurobond issues are predicated on disclosure and transparency.

The prospectus or offering memorandum of a bond issue requires disclosure of a substantial amount of data, allowing investors a better assessment of the country’s prospects for successfully meeting its debt service payments.

Although there may be asymmetry in information, it is in the interest of African countries to fully co-operate in the disclosure and acknowledge weaknesses and risks, including corruption. This disclosure ought to come with commitments on risk mitigation, with clear strategies on how to address them.

It is possible that Eurobond issues have forced African governments to put clear structures in place to assure investors that corruption will not compromise management of the bond.

Scrutiny

Accessing international markets through a sovereign bond can strengthen macro-economic discipline and promote transparency and structural reforms as a result of increased scrutiny by international market participants.

For instance, Nigeria’s fiscal and monetary discipline has continued to strengthen to date following its increased presence in international markets. The world is watching African sovereign issuers: They had better be corruption free.

International reputation

The manner in which African governments manage debut issues informs access to future issues. If bonds are shrouded in corruption, African governments will soon find themselves unable to access international financial markets.

Therefore, developing a reputation for transparency, competence and efficiency is in the interest of African governments if future issues are to be successful.
Debt will not be forgiven

African governments know that if money “disappears” they will still have to pay the debt. Governments forgive debt, private investors do not. As one commentator said in reference to African Eurobonds, “Investors are cold blooded, rational people. They want to be assured they will be paid back.”

This fact becomes particularly potent if the issuing government also has to service the debt. If the government responsible for the issue fails to pay up, due to issues such as corruption, it will meet hostility from both the investors and citizens.

A government in power over the period of both the issue and the servicing will face hard questions and perhaps legal action if it cannot pay because funds were mismanaged.

Therefore, it is in the interest of African governments to tame corruption as a failure to do so will lead to a world of trouble with which no government would like to contend.

On the “No” side, here are the points to consider:

Change in government means a change in accountability. If the government that issued the bond is not the one responsible for paying up, this creates serious problems.

A change in government can easily lead to a blame game, with the incoming leaders accusing the former regime of mismanaging the funds. Nightmare.
No guaranteed trickle effect

All the factors mentioned in the “Yes” section provide an impetus to end corruption in managing the Eurobond alone. But there is no guarantee that the discipline in this area will spread to the management of public funds in general.

There are more reasons to smile than frown because there are solid reasons for African governments to pursue Eurobonds and now we see that these bonds open the doors for African issuers to better manage public funds, and for African citizens and the international community to use them as vehicles to better monitor public financial management and push for better management of public funds.

Eurobonding may be dangerous, but even roses have thorns. All that African citizens and interested parties need do is increase the likelihood that this shopping spree will be used to the continent’s advantage.

Anzetse Were is a is a political economist