Leveling the financial playing field for Africa

Mark Malloch-Brown

Africa bears virtually no responsibility for the greenhouse-gas emissions that are driving the climate crisis. It does not account for the conflicts or supply-chain disruptions that are driving global inflation. Nor did it trigger the spread of COVID-19, let alone the economic fallout of the pandemic. And yet the long-term effects of this trio of crises are perhaps more acute in Africa than anywhere else.

The International Monetary Fund has estimated that Africa’s additional financing needs arising from the pandemic will be $285 billion over the four years ending in 2025. But inflation, exchange-rate pressures and unsustainable debt levels complicate matters. These factors have eroded the already limited space for governments to make short and long term investments. Africa’s actual needs are likely to be much higher.

The continent has shown remarkable resilience. However, bloodless economic growth is fueling economic conflicts. Sub-Saharan Africa faced recession in 2020 for the first time in 25 years. And, according to the African Development Bank (AfDB), the sector’s annual growth rate is set to drop from 4.5 in 2021 to 3.5 percent in 2022. This year it is expected to be only 3.8%.

Behind these figures are hidden countless ruined lives. According to the United Nations Economic Commission for Africa, more than 18 million Africans slipped into poverty last year. It reversed hard-earned progress towards the United Nations Sustainable Development Goals. Conflict and climate-related disasters—such as prolonged droughts, extreme rains and floods—contribute to East Africa’s worst hunger crisis in decades. The human cost is terrible. One person is predicted to die of hunger every 28 seconds from this crisis alone.

This should concern the international community – and not just for humanitarian reasons. The world needs Africa. There is no way to a green, just and prosperous shared future that does not have Africa at its core. Therefore, it is in the self-interest of the rest of the world to support the continent, not through donations or handouts, but by supporting African-led solutions, especially those that focus on leveling the playing field. Which is currently tilted towards the loss of the continent. ,

The allocation of special drawing rights (SDRs, reserve assets of the IMF) exemplifies the problem. The IMF created SDRs to supplement the currency reserves of governments. But, because SDRs are issued in proportion to countries’ IMF quotas, poorer countries receive the smallest allocations despite having the greatest need. Wealthy countries—those with little (or no) need—get the largest share.

In 2021, the G20 countries pledged to channel at least 20% of their SDRs towards Africa. But his promises have not yet been fully realized. Rapid progress on this front will go a long way towards helping African governments in the near term, especially if the recycled SDRs are channeled through multilateral development banks such as the AfDB. These institutions then went on to increase the capital raised by a factor of three to four, converting $20 billion into $60-80 billion in SDR-financed projects, with terms much better than those offered in commercial markets. Take advantage of your AAA rating.

Development Finance for Green Initiatives

Of course, a more dynamic and expanding private sector would provide a long-term solution. But, as it stands, African governments are at a serious disadvantage in private markets, where they face higher capital costs due to subjective, discriminatory considerations. Comparing the risk premiums of African and non-African states with similar credit ratings, differences range from 150 basis points to more than 650 bps, sometimes reflecting a lack of on-the-ground knowledge and subjective judgment .

A conference of credit-rating agencies, investors and African governments is urgently needed to address this intolerable discrimination – which amounts to a mighty brake on progress once and for all. Again, this would not amount to a donation or special treatment; Rather, it will be a step towards leveling the playing field so that African-led solutions can succeed. Removing the “Africa risk premium” would unlock much-needed capital for green growth, including the clean-energy transition.

The Alliance for Green Infrastructure in Africa is an African-led initiative that will advance this goal. Unveiled by the AfDB, the African Union, Africa50, and other partners at the United Nations Climate Change Conference (COP27) in Egypt last November, AGIA seeks to provide the initial phase grants, concessional resources and mobilize $500 million in blended and commercial finance makes an effort Project preparation and development capital for green initiatives. Lowering high interest rates and a lack of risk appetite for Africa will result in the rapid creation of a strong pipeline of bankable green projects. AGIA aims to unlock at least $10 billion in green infrastructure investments.

Similar efforts are underway elsewhere. A notable example lies in the ambitious Bridgetown Initiative launched by Barbadian Prime Minister Mia Amor Motley to create additional financial space for development, climate mitigation, adaptation, and loss and damage. Another example is the V20 grouping of climate-vulnerable developing countries, which is currently chaired by Ghana’s finance minister, Ken Ofori-Atta.

The coming months offer many opportunities for breakthroughs. Last week, the just-concluded AfDB meetings in Sharm el-Sheikh were an important starting point. Next month comes the summit for a new global financing pact. It represents a major international conference on financing for development and green investment. And September will bring the G20 Leaders’ Summit in New Delhi. This is an event for which Africa is still dependent on invitations. However, its economic and demographic weight entitles it to permanent membership (represented by the Chairs of the African Union and the African Union Commission, as with the European Union today). Copyright: Project Syndicate, 2023