Public Debt Management and Bond Market Unit, OECD

(preliminary draft; please do not quote) This paper studies the current state and drivers of government local currency bond markets (LCBMs) in Sub-Saharan Africa, a region whose progress in developing such markets has only recently received attention in the literature. We argue that well-developed LCBMs could reduce countries ’ exposure to external shocks; help wash away ‘original sin’; facilitate the mobilisation of domestic savings; and may have important financial, macroeconomic and institutional spill-over effects. With information collected from various sources the paper first shows that quite a number of African countries have made significant strides in this area. Increasingly, governments in the region issue fixed-rate local currency bonds with tenors of ten years and more on a regular basis. This does not imply all is well; African LCBMs often lack liquidity, feature few corporate securities and generally have narrow investor bases dominated by commercial banks. Second, an econometric analysis of new OECD panel data on government LCBM capitalisation in selected African countries suggests it is positively related with higher past fiscal deficits, lower inflation, better institutional quality and democracy