Calls for an international finance architecture which is fair grew on Monday, May 16, in Dakar, Senegal.
The call was led by President Macky Sall at the annual Conference of African Ministers of Finance, Planning and Economic Development, ECA’s largest annual event where participants debate key issues concerning the continent’s development. It also discusses the think tank’s performance in delivering on its mandate.
The Senegalese leader who is also Chairperson of the African Union minced no words.
He highlighted the injustice that Africa continues to suffer due to, among others, the existing unfair international finance architecture.
The hybrid event jointly hosted by ECA and the government of Senegal runs on the theme “Financing Africa’s Recovery: Breaking New Ground.”
Sall noted that given prevailing conditions, the parameters that allow global economic governance are outdated and unsuited to reality.
Besides the devastating impact of the Covid-19 pandemic, Africa is confronting a new food, fuel and fertilizer crisis reverberating across the world as the Russia-Ukraine war creates global trade and commodity disruptions. Food prices are reported to be 34 per cent higher than this time last year. Crude oil prices increased by around 60 per cent while gas and fertiliser prices more than doubled.
African economies are in a state of general fatigue, Sall said.
“The least we can say is that our economies are in a state of general fatigue, the extent and duration of which, unfortunately, we are yet to measure. And that is a problem,” President Sall said.
Sall reiterated his call for, among others, a more active fight against tax evasion and illicit financial flows. The AU Chairperson recently called for the creation of a Pan-African credit rating agency, noting that the arbitrary nature of the system of assessment by international organisations made it more expensive for African countries to borrow on global debt markets.
By and large, when talking about an international finance architecture that is not fair and not in the interests of Africa, experts have mentioned the “African premium” in which some countries are ranked similar, such as Morocco and Greece, but the former pays higher interest rates simply because it is in Africa.
The set up of the international financial institutions (IFIs) according to the unfavourable quota system favours rich nations, which are then used to justify successive smaller allocations and voices to Africa whose needs far outstrip those of richer nations.
President Macky Sall delivers remarks at the annual Conference of African Ministers of Finance, Planning and Economic Development in Dakar, on May 16.
In March 2021, frustrated by the slowness in accessing Covid-19 vaccines and funding for vaccine equity, African Ministers of Finance unanimously agreed to resort to the International Monetary Fund (IMF) reserves. At the time, the Ministers stressed the need for a swift, bold and positive response on Special Drawing Rights (SDRs) in the range of 500 billion to 650 billion to arrest the devastating impact of the pandemic on the continent as well as increase Africa’s access to liquidity. An SDR is an interest-bearing international reserve asset created by the IMF to supplement other reserve assets of member countries.
In August 2021, the IMF approved a general allocation of SDRs equivalent to $650 billion (about SDR 456 billion) to boost global liquidity. The newly created SDRs were credited to IMF member countries in proportion to their existing quotas in the Fund. About $275 billion (about SDR 193 billion) of the new allocation would go to emerging markets and developing countries, including low-income countries.
Experts note that the recent new SDR allocations are for short term balance of payment challenges and not talking to Africa’s long term investment needs such as infrastructure. Even if developed countries can on-lend these, experts say, they can still recall these SDRs on short notice, forcing Africa to borrow again somewhere to repay.
Then there are conditionalities that routinely preclude Africa from addressing its most basic and urgent socioeconomic needs such as health, when IFIs call for fiscal consolidation.
On Monday, during a working breakfast with African Ministers of Finance, Vera Songwe, the Executive Secretary of the UN Economic Commission for Africa (ECA), also noted that the continent needs a change in the world financial architecture.
She said: “And we need to ensure that the changes to the system are in Africa’s interest not against it. These changes may not take place tomorrow but the discussions need to take place today.”
“What can we do to have a stronger voice so that we can ensure the new instruments we seek are aligned to the development system we want?”
The UN Under-Secretary-General and Executive Secretary of the Economic Commission for Africa, Vera Songwe addresses the 54th session of the Economic Commission for Africa Conference of Ministers in Dakar.
Amadou Hott, Senegal’s Minister of Finance and Economy, said the international finance architecture is not fair to Africa.
“The cost of capital is a case in point, where African sovereigns are paying up to 200 basis points more than their counterparts with a similar risk profile. How do we get the right price because risk ratings are affected by subjective criteria. The same intrinsic risk will get a different rating elsewhere,” Hott said.
Serge Ekoué – President of the West African Bank for Development, said: “Our commercial banks, our development banks, our corporates, they are all undercapitalised. That is a key issue. So unless we solve the issue of capital we won’t find solutions when it comes to capital raising.”
Key features of unfairness in the global financing landscape
On Tuesday, Douglas Kigabo Bitonda, an economist in the macroeconomics division at ECA, shed some more light on the key features of unfairness in the global financing landscape.
He told The New Times that the IMF-SDRs allocations ( based on a country’s participation in the IMF capital) are very unfair to Africa, only allowing African countries to benefit from a tiny portion of the total amount.
“For example, out of $650 billion allocated in 2020, Africa has only gotten around five per cent ($21billion),” he noted.
Then there is the conditionality of accessing loans and support from multilaterals such as fiscal deficit of no more than five per cent of GDP. “This significantly limits ability of African countries to access the international concessional finance,” he said.
“There is also unfair credit ratings of Africa by international credit rating agencies which increases the risk perception of investing in Africa. As a result, this imposes a restriction on access to capital markets as cost of borrowing is inflated by the high-risk premium.”