Financial Markets

According to the media, President Muhammadu Buhari said on June 23 that Nigeria’s treasury is “virtually empty.” In order to document this he has promised to release a report on the size of Nigeria’s revenue and debt in about four weeks. He also says that he will recover billions of dollars that have been stolen under previous administrations, and that the United States and other countries will assist Nigeria in the recovery of the stolen money. The president also noted that some federal civil servants are going unpaid and said that his government would look at the possibility of drawing on the Excess Crude Account (essentially a sinking fund for oil revenue) to pay civil servants. That account has a balance of $2.078 billion as of June 23, according to the finance ministry. Governors are saying that some civil servants in the states have gone for as long as ten months without being paid. Vice President Yemi Osinbanjo says that two-thirds of state employees are owed back salaries. The problem is not entirely due to waste, fraud, and mismanagement. Most of the state governments are dependent on oil revenue distributed by the federal government to the states according to a set formula. With the fall in oil prices there is less government revenue to distribute. Federal, state, and local revenue were at a five-year low due to depressed oil prices and shutdowns of export oil pipelines and terminals. The national currency, the naira, continues to fall. The size of Nigeria’s federal and state debt is contentious. Vice President Yemi Osinbanjo is telling the media that the country’s local and foreign debt is about $60 billion. He also said that debt service for 2015 is about 21 percent of the budget. The chairman of Buhari’s transition committee, the highly respected Ahmed Joda, is reported by the media as saying that Buhari inherited a deficit of at least $35.2 billion from the Jonathan administration. On the other hand, former finance minister Ngozi Okonjo-Iweala says that the vice president’s figures include state and federal debts that largely predate the Jonathan presidency. According to the media, the country’s financial situation is prompting some members of the National Assembly to suggest a voluntary pay cut, though few observers think that will happen. Shortage of revenue will constrain what the Buhari administration can do to address the chronic issues in the northeast that feed the Boko Haram Islamist terrorist insurrection, as well as in the oil-rich Niger delta, where the current amnesty, which includes payments to “community leaders,” ends in December. Buhari has promised those payments will be replaced by government investment in the region. Right now, it is hard to see where the money will come from.

Emerging Voices features contributions from scholars and practitioners highlighting new research, thinking, and approaches to development challenges. This article is from Gary Ford, chief executive officer of MCE Social Capital, and Benjamin D. Stone, director of strategy and general counsel of MCE Social Capital and a CFR term member. Here they discuss how loan guarantees can help unlock economic opportunities for people in the developing world. According to the World Bank’s 2015 Global Financial Inclusion Database, more than 2 billion people lack access to formal financial services, including savings accounts, insurance, and loans. Over the last two decades, microfinance has helped fill this gap by delivering credit and other financial services to low-income people, particularly entrepreneurs, around the world. As studies show, microfinance helps people build assets, manage risks and unpredictable income, and gain the freedom to decide how to make money. International NGOs, large financial institutions, government agencies, and individuals have all supported microfinance institutions with millions of dollars in grants, equity, and technical assistance. Notable in this context is the use of loan guarantees. Loan guarantees—where a third-party pledges to assume the debt obligation of a borrower—have helped people access otherwise unobtainable capital since at least early roman times. Today, many organizations like Accion International, Grameen Foundation, Shared Interest, and the United States Agency for International Development (USAID) similarly use loan guarantees to help microfinance institutions (MFIs) secure capital and prove their creditworthiness. Here is how it sometimes works: organizations like the ones listed above receive grants (or loans) from individuals or foundations in the United States. Then, working through an international bank, they use the money to back loans MFIs borrow from local banks in the developing world. The MFIs then use this money to finance microloans and other services for people living in poverty. Ultimately, the MFIs are responsible for paying back the local banks, but if they don’t, the organization, through its international bank partner, repays the local bank using the donated or loaned capital. In this way, loan guarantees can help poor communities in developing countries access money and financial services. MCE Social Capital (MCE), a U.S.-based nonprofit impact investing firm that lends directly to MFIs, innovates on this approach. Instead of upfront contributions, MCE collects pledges from foundations and individuals (its “guarantors”) to make tax-deductible contributions to MCE if (and only if) a MFI fails to repay the MCE loan. MCE pools these pledges—now over $100 million from 85 guarantors—and uses them as collateral to borrow from U.S. financial institutions, including First Republic Bank, the Overseas Private Investment Corporation (OPIC), and New Resource Bank. After a thorough due diligence process, MCE then lends to MFIs serving rural women in more than thirty developing countries. MCE’s loan guarantee model diversifies the funding of MFIs by unlocking capital from U.S. financial institutions that do not typically lend MFIs money. And by soliciting pledges rather than actual upfront contributions, MCE’s guarantors retain and continue to earn returns on their capital. With loan default rates at 0.03 percent and the risk distributed across the pool of pledges, a guarantor can facilitate millions of dollars of lending at a relatively small cost. For example, a guarantor who signed MCE’s pledge in 2006 has enabled nearly $3 million in loans into the developing world, all while making only $12,000 in tax-deductible donations to MCE. To date, MCE has funded more than 400,000 microloans and other services (health programs, insurance, savings accounts, and business training) worth more than $160 million, reaching hundreds of thousands of people. MCE is now exploring opportunities to use its loan guarantee model to tackle other market gaps, including the lack of small and medium-sized enterprises (SMEs) financing in sub-Saharan Africa, where nearly half of SMEs report lack of money as the biggest constraint on operations and growth. For thousands of years, loan guarantees have given hesitant lenders comfort to invest in potentially risky borrowers. MCE and other organizations are now adapting this mechanism to help more people and businesses across the developing world access capital and financial services.

This post marks the launch of a new feature on the Development Channel, "This Week in Markets and Democracy." Each Friday, CFR’s Civil Society, Markets, and Democracy Program, will highlight the week’s noteworthy events and articles. 1. Rampant Corruption at FIFA On Wednesday, Swiss police raided a Zurich hotel and arrested several top officials of the global soccer governing body FIFA with plans to extradite them to the United States. The U.S. Department of Justice is charging them, along with former FIFA officials and top sports marketing executives, with corruption, money laundering, conspiracy, and racketeering. “These individuals and organizations engaged in bribery to decide who would televise games, where the games would be held, and who would run the organization overseeing organized soccer worldwide,” said U.S. Attorney General Loretta E. Lynch. The Department of Justice estimates that officials received$150 million in bribes and kickbacks since the early 1990s. FIFA has long been mired in inconclusive corruption scandals. Now the United States and the Swiss government—which is investigating bribery allegations in Russia and Qatar’s bids for the 2018 and 2022 World Cups—are unveiling the rampant, systematic corruption plaguing the international organization. The arrests have received overwhelming support from the global soccer fandom. Even senior soccer officials have expressed support. In a statement, the European soccer federation (UEFA) said, “These events show, once again, that corruption is deeply rooted in FIFA’s culture. There is a need for the whole of FIFA to be ‘rebooted’ and for a real reform to be carried out.” These investigations not only offer an opportunity to clean up soccer’s international governing body, but they are also a boon for anti-corruption organizations and activists—illustrating how domestic laws and courts can help change even the most opaque and powerful international organizations. 2. FAO 2015 Report shows chronic hunger reaches record lows This week, the Food and Agriculture Organization of the United Nations (FAO) released its annual hunger report, which monitors global food deprivation and security. According to FAO estimates, chronic hunger worldwide fell below 800 million for the first time since FAO began tracking it. The FAO also reports that the majority of the 129 monitored countries achieved the 2015 Millennium Development Goal of halving domestic undernourishment. Developing regions, however, missed the MDG target, though narrowly (by less than one percentage point). FAO Director General José Graziano da Silva optimistically stated, “The near-achievement of the MDG hunger targets shows us that we can indeed eliminate the scourge of hunger in our lifetime. We must be the Zero Hunger generation. That goal should be mainstreamed into all policy interventions and at the heart of the new sustainable development agenda to be established this year." These gains are particularly impressive given they occurred in the face of economic recessions, volatile commodity and food prices, extreme weather and natural disasters, and political instability—all of which aggravate food insecurity. Yet, progress has been uneven across world regions. Over the past few decades, East and Southeast Asia as well as Latin America and the Caribbean significantly reduced hunger within their borders. Sub-Saharan Africa and South Asia, on the other hand, lag behind, and the two regions are now home to over half of the chronically hungry. Breaking with the global trend, the undernourished population in Sub-Saharan Africa actually increased by 25 percent since 1990-92. For these laggards, the FAO calls for inclusive economic growth, agricultural investments, and expanded social protection as the ways to reduce hunger. 3. It’s possible to lift people out of poverty Poverty eradication is the first goal of the sustainable development framework, the proposed successor of the Millennium Development Goals. World leaders have committed to ending extreme poverty by 2030. The problem donors, multilaterals, nonprofits, and private sector partners confront is that poverty is a complex, multidimensional issue—which encompasses lack of access to health, education, financial services, capital, and markets. Programs often suffer from shoddy implementation, prove difficult to replicate across countries, achieve results in one aspect of individuals’ lives but not the others, or fail to deliver benefits that last. Against this backdrop, a new study published in the May 2015 issue of Science offers if not a panacea, certainly hope. Authored by several development economists, including MIT’s Abhijit Banerjee and Esther Duflo and Yale’s Dean Karlan, the paper presents findings from six randomized control trials (RCTs) implemented in Ethiopia, Ghana, Honduras, India, Pakistan, and Peru. In five of the six countries, it finds that multipronged poverty reduction programs—which they call graduation programs—can deliver sustainable benefits. By providing a productive asset, training, access to savings, health care, regular home visits, and food or cash for a few months to a year, they find that household income and consumption not only increased during the intervention, but continued after. This suggests that a concentrated approach can raise people out of poverty in the long term, good news indeed.

Emerging Voices features contributions from scholars and practitioners highlighting new research, thinking, and approaches to development challenges. This article is by Deirdre White, chief executive officer of PYXERA Global. In January, the United Nations put forward the Open Working Group proposal for the Sustainable Development Goals (SDGs): a set of seventeen goals, along with 169 associated indicators. This proposal will be voted on by the United Nations General Assembly this September. While it has many merits, it doesn’t, in the end, help practitioners make the most progress in bettering people’s lives. First, the SDG proposal is overwhelming. Not only are there too many goals, but each one is also quite expansive. For example, the first goal to “end poverty in all its forms everywhere” is both broad and ambiguous. Many of the other SDGs such as “ensure healthy lives and promote well-being for all at all ages,” and “provide access to justice for all… at all levels” are similarly far-reaching. Because of their breadth, these goals will be difficult for development organizations to operationalize. For example, the first SDG—“end poverty”—does not translate easily into a specific set of interventions on the ground. Additionally, the SDGs approach human development in a piece-meal fashion, addressing poverty, food security, education, health, employment, and sanitation as stand-alone challenges. This isolationist approach is detrimental because it discounts the systemic nature of development challenges and thus makes the task of tackling them larger. Effective and efficient sustainable development requires coordinated rather than independent campaigns on all fronts. While it may be too late to reconceptualize the SDGs, framing them differently would help development organizations overcome their shortcomings. We at PYXERA Global have examined the seventeen SDGs and distilled them, as shown in the below graphic, into four lead focus areas: health, human rights, natural/human environment, and economic opportunity/employment. Click to enlarge: PYXERA Global four lead focus areas. Reframing the SDGs makes them more accessible and digestible for practitioners. By consolidating the overwhelming volume of goals, PYXERA’s framework enables organizations to concentrate on a specific focus area that they are well-suited to address. Additionally, the framework allows practitioners to recognize areas of overlap among different development objectives and to design programs that address their systemic nature. By taking into consideration the interrelatedness of the goals, practitioners will be able to address societal challenges more quickly and sustainably. For example, when addressing community health, one must consider not just health alone, but also issues of water and sanitation (goal six), food security (goal two), and the promotion of healthy lives at all ages (goal three) to ensure long-lasting change. Yet, it’s not enough to create an actionable development framework. It is critical that the United Nations and proponents of the SDGs also emphasize a tri-sector approach. While goal seventeen encourages global partnerships, a cross-sector approach explicitly brings together different sectors. Public, private, and social sectors all contribute unique strengths and tools. Each has a role to play in creating the systemic change needed to make sustainable and real progress on human development. Social sector organizations build legitimacy and trusted relationships at a local level. They also ensure that efforts deliver meaningful impact to the most vulnerable communities. Government, on the other hand, creates the enabling environment necessary for social change to be effective, providing infrastructure, educational facilities, and social services. And whereas the public sector rarely has a tolerance for failure, the private sector experiments with solutions to weed out inefficiencies, provide financial resources, and drive critical technological innovations. In my own work at PYXERA Global, I have seen how tri-sector partnerships align the strengths of different sectors to achieve better results. The Joint Initiative for Village Advancement (JIVA), for example, is a community development program aimed at enhancing livelihoods in three rural villages in Rajasthan, India. The program is a partnership between the residents of the three villages, the John Deere Foundation, PYXERA Global, and the community-based NGO Jatan Sansthan. Each partner brings complementary competencies and specific expertise in agriculture, community development, and gender. These contributions have translated into integrated interventions in agriculture, income security, education, and infrastructure. After two and a half years, JIVA has contributed much to these three villages: over half of households adopted at least one new agriculture practice, leading 50 percent of farmers to substantially increase their profits. JIVA’s after-school program enrolled 100 percent of primary school drop-outs across all of the villages, helping 84 percent of them reintegrate into formal schooling. At the same time, JIVA’s educational intervention helped students across the villages improve test scores. While the SDGs articulate our highest hopes for human progress, our efforts must be grounded in an integrated, tri-sector approach to truly ensure realistic, sustainable progress against today’s development challenges.

Emerging Voices features contributions from scholars and practitioners highlighting new research, thinking, and approaches to development challenges. This article is by Leora Klapper, lead economist for the World Bank’s development research group. On a recent visit to Dhaka, Bangladesh, I toured garment factories and spoke with factory workers about the financial challenges they face. In my conversations with female employees, I learned that although they own bank accounts, many don’t use them for an important transaction: paying their children’s school fees. Instead, these women pay in cash, costing them time and money. They take two long, expensive bus rides across town to the school. They take the day off from work, meaning a day without pay. Even the women’s employer isn’t happy with the situation; he’d rather they were able to work. Owning a bank account is a vital first step toward financial inclusion—a step these women have taken. But the real benefits come from frequent account use, meaning they have not reaped the full reward of account ownership. In this, these factory workers are not alone. Across Bangladesh, 10 million adults with bank accounts pay their children’s school fees in cash. And in developing economies globally, more than 500 million adults with an account do the same. The 2014 Global Findex database, an update of the world’s only comprehensive gauge of global progress on financial inclusion, tracks these figures. The World Bank—with funding from the Bill & Melinda Gates Foundation and in partnership with Gallup Inc.—launched the Global Findex in 2011. Like the first edition, the data for the 2014 update was collected from interviews with nationally representative and randomly selected adults aged fifteen and older. Nearly 148,000 people were surveyed in 143 economies during the 2014 calendar year. The 2014 data show that in East Asia and the Pacific, Latin America and the Caribbean, and the Middle East more than 60 percent of adults with an account pay utility bills or school fees in cash. In South Asia, 42 percent of adults with an account have left it unused for a year or more. In developing economies globally, almost 90 percent of adults who pay utility bills and 85 percent of those who make payments for school fees do so in cash. Yet the same cannot be said for high-income, OECD economies: among adults in those countries who pay utility bills, the majority makes such payments digitally, either directly from an account at a financial institution or via mobile phone. Why the discrepancy? Perhaps individuals in developing economies are not aware of an existing electronic payment option. Maybe those schools do not have electronic payment systems in place. If so, it is up to banks, mobile money service providers, and others to make the technology available to end users, like schools and utilities. Yet there is more that governments and the private sector can do to boost account use among adults worldwide. For example, both the private and public sectors can pay wages and other transfers, such as unemployment benefits, digitally instead of in cash—which could add over 400 million new account holders. Governments and the private sector can also encourage account holders to use digital services, such as remittance payments. Currently, 355 million adults with an account send or receive domestic remittances in cash or through a money transfer operator. But digital transfers could be even easier and cheaper for workers and their families. Governments and financial institutions can work together to support the transition to digital payments—governments through regulations permitting correspondent bank agents, and financial institutions by developing networks of mom and pop shops that make sending and receiving digital payments more convenient. For example, in China, over 800,000 small merchants disburse government payments made to accounts. However, digitizing payments and shifting cash payments into accounts is not without challenges. For account use to increase, governments and the private sector must make upfront investments in payments infrastructure and guarantee a reliable and consistent digital payment experience. New account owners need to be educated on the basic interactions involved in a digital payment system – using and remembering PINs, understanding how to deposit and withdraw money, and knowing what to do when something goes wrong. By presenting data on how adults globally save, borrow, make payments, and manage risk, the Global Findex quantifies the gaps in financial inclusion—and the market opportunities—and  reveals how governments and the private sector can help underserved populations benefit from financial services.

Central bank currency swaps are becoming the new cross-border tool of choice in financial crisis management.  This interactive explores the rapid growth of currency swaps since 2007 and its implications for the global financial system.

The three major credit rating agencies have been accused of contributing to the global financial crisis, drawing increased oversight from regulators in the United States and Europe. Nonetheless, investors continue to rely on the largely unchanged ratings services.