In a move aimed at easing constraints on infrastructure financing, as well as developing debt markets in Africa, the Association of African Securities Exchange has endorsed plans to support the issuing of local currency bonds on the continent.

Local currency bond markets are becoming a popular alternative funding source for several emerging and developing as a way to rid themselves of the challenges of using aid for development purposes. Regulators and industry players in the capital market reached the agreement of supporting the issuing of fixed income securities during their 13th annual ASEA conference held in Abuja Nigeria early this month.

"The meeting discussed the criticality of issuing Fixed Income Securities on the capital markets to support the infrastructure deficits in Africa. Stock Exchanges will work with all concerned parties to support the development of infrastructure for example electricity, water, telecommunications, energy and transportations," ASEA officials said in a joint press statement issued after the conference.

The development is a welcome initiative as African countries work towards riding themselves of over dependence on donor funds to finance development projects on the continent. Over the last half century, more than $1 trillion has been given as aid to developing countries.

Raising such financing locally saves the country from overreliance on foreign aid which is very expensive when it comes to servicing it, allows local capital markets to grow from within and avoid economic shocks from exchange rate fluctuations.

In 2005, a $40 billion debt owed by the world's poorest countries many of which are African countries was cancelled under the Multilateral Debt Relief Initiative by the G8. Since then, the International Monetary Fund and World Bank have been actively advising countries to guard against falling back into unsustainable debt levels.

Global lenders have been arguing that the domestic debt market is the best tool for long- term fiscal policy and overall debt sustainability. The analysis argues that from a macroeconomic policy perspective, the lack of bond market places constraints financing of fiscal deficits, while bond markets provide useful market signals for macroeconomic policy. In the recent past, it has become necessary that a well developed domestic debt is also needed for monetary policy purposes, including for sterilising inflows of foreign exchange.

"The greater the degree of foreign indebtedness, the more vulnerable a country is to cessation of loans or foreign exchange crises," the capital market players said in their communiqué. Bond markets also help to provide interest rates across the maturity spectrum and a more efficient pricing of risk. By providing an alternative source of financing, they reduce concentration of intermediation in banks. Because lending can be hedged in the bond market, banks have the ability to lend longer.

The usefulness of domestic debt markets (currency) can also be seen in the context of countries that are dependent on aid flows. International aid is often linked to project financing and can therefore not finance capital projects not supported by the donors.

African countries are increasingly becoming very conscious about the inflows of foreign debt; the supply of foreign financing is uncertain, and dependent on the aid agencies' budgets and assessment of economic performance in the recipient country.

The ASEA noted that in many instances, domestic debt has increased because of a need to fill the shortfall caused by the decline in the supply of foreign aid. Players in the capital market industry also argue that even if foreign debt is significantly cheaper than domestic debt, the latter is easier to roll over than foreign debt, and there is no foreign exchange requirement.

Recently, the Preferential Trade (PTA) bank issued the first tranche note of Shs8.5 billion of the total Shs40 billion bonds for infrastructure development in Uganda. The PTA bank also issued bonds in Kenya and Tanzania

The ASEA move comes hardly a month after the joint study by World Bank and NEPAD titled Africa's Infrastructure - a Time for Transformation revealed worrisome results that indicated poor infrastructure cuts national GDP growth by 2 per cent yet better infrastructure could increase productivity of business by as much as 40 per cent.

Governments current spending on infrastructure in Sub-Saharan Africa approaches $48 billion a year, two-thirds of which is domestically resourced and financed by taxpayers and infrastructure users. The balance comes from a variety of external sources.

In 2006, the International Finance Corporation, the World Bank and the Swedish International Development Agency (SIDA) launched a programme known as Efficient Securities Markets Institutional Development, known as ESMID in South Africa.

Under the Efficient Securities Markets Institutional Development, ESMID Africa, experts committed themselves to work with government regulators and market participants to design new products that provide this funding and that build or strengthen the marketplaces and institutions (such as stock exchanges, rating agencies, and securities firms) that are the core of the securities industry. The collaboration will help bring to market new types of securities products that will attract investors and further develop the securities markets in Africa.

The ESMID initiative is expected to make long-term financing in local currencies more widely available in the emerging markets. In East Africa ESMID was launched on March 2007 to provide investment and advisory services for capital markets.

The meeting elected the Chief Executive Officer of the Nigeria Stock exchange, Ms professor Ndi Okereke-Onyiuke, as the new president of ASEA and Mr Simone Rutega, chief executive officer of Uganda Securities Exchange, as the new vice president of ASEA.