The International Finance Corporation (www.ifc.org), a member of the World Bank Group, and the African Development Bank (www.afdb.org) are to work together to facilitate local currency lending and bond issuance in Africa. They agreed to collaborate and benefit from each other’s local currency bond issues. This will enhance their local currency funding capacity to support their clients’ development projects.
On 1 June they signed an ISDA Master Agreement to enter into cross-currency swap transactions and for each it is the first with another multilateral financial institution. A “master agreement” is agreed between 2 parties and it sets out standard terms that apply to all the transactions entered into between them so that each time that a transaction is entered into, the terms of the master agreement do not need to be re-negotiated and apply automatically. The ISDA master agreement is published by the International Swaps and Derivatives Association (www.isda.org) and the early ones were used to snce 1985 to develop a Swaps Code but they can also be used for Over-The-Counter derivatives trading.
There is a concerted drive to strengthen debt markets in Africa. Local-currency bond markets provide long-term, local currency finance for projects and this protecting them from foreign exchange risks, although interest rates are often higher. Debt markets should be developed to be a key source of risk finance, particularly as foreign capital inflows became less because of the ongoing global financial crises. This agreement is the first step in an initiative for greater collaboration among multilateral institutions to accelerate local capital market development and increase local currency financing options.
In 2011, the Group of 20 called for a concerted effort to develop and strengthen local currency bond markets in emerging markets.
IFC Vice President and Treasurer, Jingdong Hua, said in a press release: ”Expanding long-term currency initiatives is a cornerstone of IFC’s strategy to strengthen capital markets in developing countries. Helping to establish and strengthen such markets allows us to work with regulators and local institutions to ensure that capital market regulations are effective and entrepreneurs are able to grow and create jobs.”
AfDB Vice President for Finance Charles Boamah said: “Promoting the development of local capital markets in Africa is paramount to successful, sustainable economic development. This agreement supports our African Financial Markets Initiative, which aims to further the development of domestic African capital markets, enlarge the investor base, and reduce African countries’ dependence on foreign currency denominated debt.”
Local currency debt issued in Africa
Since 2007, IFC has committed more than $650 million in 17 different local African currencies through a combination of swaps, bonds, and structured finance products.
IFC has issued local currency bonds in Morocco, the West Africa CFA zone (XOF) and the Central African CFA zone (XAF). It has been approved to issue local currency bonds in Kenya and Nigeria and is working with regulators in Botswana, Ghana, Kenya, South Africa, Uganda, and Zambia to obtain consent to issue local currency bonds under a Pan-African Domestic Medium-Term Note Programme and with 8 countries in the West African Economic and Monetary Union to establish local currency bond programmes.
The AfDB has issued bonds denominated in or linked to the Botswana pula, Ghanaian cedi, Kenya shilling, Nigeria naira, Tanzania shilling, Uganda shilling, and Zambian kwacha, since 2005. The AfDB is also a regular issuer in South African rand (ZAR), its third largest lending currency. Since 2005, the AfDB has issued more than ZAR 25 billion in the ZAR domestic and Euro markets.
The AfDB has been authorized to issue bonds denominated in over 15 African currencies including Cameroon, Egypt, Gabon, Mauritius and Senegal. It is requesting more authorizations. In Uganda it plans its first issue under a Global Debt Medium Term Note Programme, which will provide local currency financing and it is to facilitate an inward listing in Uganda.
About the organizations
IFC is the largest global development institution focused exclusively on the private sector. Its investments have reached an all-time high of nearly $19 bn.
The mission of AfDB is to help reduce poverty and improve living conditions in its regional member countries, focusing on inclusive growth, infrastructure, regional integration and private sector development. It approved more than $7 bn in operations in 2011 alone.
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