The Financial System Africa Needs

Vera Songwe,

ADDIS ABABA — For African economies that have yet to recover from the COVID-19 pandemic, Russia’s war in Ukraine could not have come at a worse time.

The economic wounds of the previous crisis had been stitched up, but it took longer for them to heal, let alone for the scars to fade.

Today, commodity price spikes and supply chain disruptions are adding to inflationary pressures, leading to currency depreciation and soaring food and fuel prices.

Since the start of the war, oil prices have risen to their highest levels since 2008, wheat prices have soared to 14-year highs, and fertilizer prices have jumped nearly 30%.

These macro-trends have high human costs. No less than 25 African countries depend on wheat imports from Russia and Ukraine. Rwanda and Tanzania import more than 60% of their wheat from the two countries.

This figure is almost 70% in the Democratic Republic of the Congo and exceeds 80% in Egypt. Russia alone supplies 45% of Namibia’s wheat and 100% of Benin’s.

With grain products often representing a significant portion of the local diet, the risk of hunger and undernourishment is increasing rapidly – ​​and not just for low-income households.

But many African governments have little room to maneuver to respond to this deepening crisis. Pandemic-related uncertainty has led to massive capital flight from the continent, output has declined and countries’ debt burdens have increased.

More than $40 billion in debt repayments were due in 2021, and debt service is expected to top 7% of Africa’s GDP in 2022 even before the Ukraine crisis and Reserve interest rate hikes US Federal.

As the crisis has intensified, access to international capital markets has tightened. Ghana and Tunisia are virtually excluded, and countries with better access, such as South Africa, face onerous tariffs. Nigeria recently sold $1.25 billion worth of dollar bonds, due 2029, yielding 8.375%.

Africa’s current fate reflects a fundamental international failure. The continent’s integration into the global economy in recent decades has not been accompanied by changes to the global financial system aimed at ensuring that its needs – both for growth and for support in times of global crisis – are met. .

These changes include accelerating efforts to reform the G20 Common Framework for Debt Treatment and extending it beyond the Debt Service Suspension Initiative.

It also means improving market access for African countries. While more than 23 African economies have entered the Eurobond market in the past four years – and emerging African economies do so regularly – they remain weighed down by low credit ratings, wide interest rate spreads and negative perceptions of investment risk.

Although this may take some time to correct, markets have tools to address the illiquidity of African bonds, thereby reducing costs for African borrowers and attracting more funding.

Secondary markets for trading African bonds generally lack depth. With the support of the G20, however, a repo market can be created, with bonds used as collateral to access affordable loans.

G20 economies – and the international community more broadly – ​​have pledged to help ease the debt burden of African countries.

They must keep that promise. But they must also start laying the foundations for a real sector recovery, backed by investments in energy, infrastructure and services to support trade and job creation.

African countries also need large-scale foreign exchange markets. In financing Africa, the international community cannot depend on instruments designed for low-income countries.

After all, almost 78% of Africa’s GDP and 75% of its population (including a large proportion of its poor) are concentrated in middle-income countries.

The International Monetary Fund’s quick-disbursing non-programme instruments are another possible solution.

The Resilience and Sustainability Trust Fund proposed by the IMF is a step in the right direction. But the RST, as currently designed, has some flaws, including overly restrictive access conditions and a focus on long-term rather than emergency support. Without immediate help, the long term will be precarious for many.

As it stands, countries acceding to the RST would be required to have a regular IMF program in place. To ensure that RST helps all countries in need, this requirement should be removed.

In addition, to avoid excessive funding delays, RST disbursements should be split into two categories: smaller loans with fewer conditionalities that can be disbursed quickly to allow countries to respond to balance of payments shocks, and larger loans that force countries into standby mode. provisions.

As a long-term facility, the RST would fund investments in sustainable infrastructure – projects that would deliver reliable returns, advance the transition to net zero, and support economic diversification.

The Economic Commission for Africa estimates that investing in green projects can lead to the creation of 2.5 times more jobs than equivalent investment in coal or fossil fuel alternatives. With Africa accounting for less than 1% of global green bond issuance, the upside potential is enormous.

Finally, the world must make the most of special drawing rights. SDRs (the IMF’s reserve assets) can be a real game-changer by easing debt pressures, boosting investment, and spurring progress toward inclusive prosperity.

But, as economic conditions tighten, a new allocation should be considered to help countries meet pressing needs.

Going forward, automatic triggers for new versions of DTS, as well as a new allocation system, are needed to address the current inequity in allocation.

Of the $650 billion in SDRs the IMF allocated last year, only $33.6 billion went to African economies. Developed economies received $420 billion, even though the median high-income country only uses 6% of its SDRs, compared to 53% for Africa.

Africa’s vast economic potential is no secret. But harnessing it will only be possible if major developed countries and emerging economies work together to design a global financial system that meets Africa’s liquidity and debt sustainability needs.

Vera Songwe, United Nations Under-Secretary-General, is Executive Secretary of the Economic Commission for Africa.

Copyright: Project Syndicate, 2022.

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Don F. Davis