November 29, 2023

Ongoing global financial architecture reforms can help ensure a better fit-for-purpose system for African economies. However, more efforts are needed to engage African financial institutions, which have often been innovation leaders and can more readily adapt to the diverse contexts of Africa.

As noted at the World Bank/IMF Annual Meetings in Marrakech, some progress has been made in aligning Africa’s leadership on the issues of debt, concessional flows, balance sheet optimization, and reform of multilateral development banks (MDBs). However, the discourse among African technocrats, think tanks, regional organizations, CSOs, and development actors remains limited – particularly on the role of African financial institutions in this process.

On November 13, the Amplifying Africa’s Voice (AAV) dialogue discussed the opportunities and challenges for African financial institutions in the global financial architecture reforms. Along with representatives from a dozen think tanks, the dialogue featured three multilateral African financing organizations. They shared their views on aligning with the World Bank and IMF reforms, increasing African voices in the reform debate, and addressing the reforms’ impact on the continent. Urgent actions needed for Africa are rechannelling Special Drawing Rights (SDR) to the African Development Bank, tackling liquidity issues in many countries, and deepening the role of the private sector and institutional investors.

Leveraging African financial innovation

African financial institutions have a history of innovation that can inform the global financial architecture reforms. For instance, the AfDB has introduced innovative instruments since 2015 that have boosted its lending capacity. One of these instruments is the sovereign exposure exchange agreement, which allows the AfDB to swap its exposure to certain countries with other multilateral development banks. The AfDB has entered into such agreements with the Inter-American Development Bank and the World Bank in 2015, and with the Asian Development Bank in July 2023. Another innovative instrument is the synthetic securitization, which the AfDB pioneered in 2018. This instrument transfers the risk of a portion of loans to investors, who act as insurers, and frees up capital for more lending without requiring additional contributions from shareholders.

The Islamic Development Bank has a long track record of using guarantees and blended finance to incentivize the private sector and mobilize sizeable amounts of capital. But the IsDB also provides political risk insurance, which can address currency inconvertibility and transfer restrictions, expropriation, the effects of war or civil disturbance, and breaches of contract.

The African Finance Corporation also uses its AAA rating to provide guarantees. A recent example is support to Egypt, where the AFC was the re-guarantor on a private placement offering of 75 billion Japanese Yen Samurai bonds. This type of guarantee allows countries to access international capital markets at a time when borrowing costs are high and market access is closed to many emerging markets.

Challenges for African financial institutions in a new global architecture

Guarantees and insurance are promising areas to explore to enhance the role of African financial institutions in global financial architecture reforms. However, some key challenges remain. One is the need for more support from shareholders of international financial institutions, especially on the rechanneling Special Drawing Rights (SDRs) through MDBs. This would enable more lending to countries in need and leverage the AfDB’s triple-A rating and track record. The AfDB could use $25 billion of reallocated SDRs to generate $100 billion of additional financing. African Ministers of Finance have also stressed SDR reallocation as a priority in the Marrakech Declaration, which outlines the Marrakech Action Framework for Global Finance Reforms. The SDR rechanneling would benefit not only the AfDB, but also other African DFIs, as the AfDB has committed to support them through equity investments, co-financing and lines of credit.

Another key challenge is creating appropriate instruments to address liquidity challenges in African countries. One proposal to address the liquidity crunch that could include African financial institutions is for MDBs to increase their financing to illiquid but solvent countries if bilateral and private creditors agree to reschedule their debts in ways that reduce debt service to reasonable levels. Rodrik and Diwan explore this further in the Project Syndicate article Bridging the Climate-Development Gap. Countries could enter into an adjustment program that postpones their debt obligations in exchange for a commitment to reforms. The goal would be to create value through coordination, allowing a country to grow out of debt if it is provided with liquidity.

Africa’s low credit ratings, which deter the private sector and increase costs, are a third challenge that needs to be addressed. The World Bank and regional MDBs have been in dialogue with the three credit rating agencies to raise concerns about their methodologies and alignment. However, there is also a need for African governments to better understand how the rating agencies work and to demand more transparency. This would help to reflect the risks more accurately and to attract more private sector finance for development and climate finance needs.

A final challenge is the slow progress on climate and SDG finance agendas. The lack of fulfillment of the pledges on climate finance by rich countries is hampering investment and putting pressure on African countries to divert scarce resources from development needs. Moreover, the ongoing debate on a just energy transition distracts from the urgent need for infrastructure investment and the reform of the global manufacturing architecture alongside the global financial architecture. In this regard, African financial institutions have a crucial role in developing local manufacturing capacity, investing in renewables and critical minerals, and developing effective carbon markets. An example of such a role is the AFC’s leadership in the recent agreement to develop the Lobito Corridor, which connects northwest Zambia to the Benguela rail line in Angola and the port of Lobito. This project will enhance regional connectivity and unlock the critical minerals supply chain that can support Africa’s climate positive industrialization.

All of these challenges require strong coordination and collaboration among African financial institutions. They also require strong alignment with the reforms undertaken by the World Bank and IMF to ensure synergies and innovative cooperative instruments. Ultimately, the global financial architecture reforms must be suitable for African economies, and this will require African financial institutions to remain thought leaders in this space.

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