By Marin Fouéré, Policy Analyst, OECD Development Centre and Daniele Fattibene, Research Fellow at Istituto Affari Internazionali (IAI)
The COVID-19 pandemic continues to take a heavy toll on African economies, home to the fastest growing population in the world. The burden of the crisis adds to the fact that Africa’s per capita real GDP growth over the period 2009-2019 was 1.3% per year, which is half the global average of 2.5%.
Ahead of tomorrow’s Summit on Financing African Economies, gathering African and other world leaders and international organisations, President Emmanuel Macron called for a New Deal for financing Africa’s sustainable recovery through profoundly innovative solutions.
Against this backdrop, on 9 April 2021, the OECD Development Centre and the T20 Co-Chair International Affairs Institute (IAI), engaged in a conversation to inform the G20 process, exploring how it could support African-led initiatives to leverage on new liquidity to mobilise more investment in the continent’s sustainable development.
The Italian G20 Presidency can do more to ensure international debt relief efforts are channelled towards Africa’s sustainable development. As the COVID-19 crisis intensifies pressure on fiscal resources, the international community is exploring ways to address the issue of debt sustainability above the scope of the G20’s Debt Service Suspension Initiative (DSSI) and Common Framework for Debt Treatments beyond the DSSI. These initiatives allow for 73 low-income and Least Developed Countries to request either a temporary suspension of payments or further treatment, from rescheduling to restructuring, of their public debt owed to G20 and Paris Club member countries. Although these initiatives can be considered as a step in the right direction, they will not cover the magnitude of the current crisis.
For this reason, other paths must be explored. Among the various options, there is a proposal to boost global liquidity through a new allocation of Special Drawing Rights (SDRs) by the International Monetary Fund (IMF). In order for the recovery to be truly global, these initiatives should provide enough resources to allow African countries to establish a New Deal for their sustainable development. It is therefore paramount that African and other developing countries’ perspectives are accounted for in multilateral processes such as the G20.
Three main proposals emerge for a structural approach that the G20 could follow to address the double faceted challenge of debt sustainability and fiscal space for sustainable development in Africa.
1) Avoiding divergent recoveries: providing new liquidity to countries that need it the most
We are in danger of divergent recovery paths. The conversation around debt has changed since the 2007-2008 Global Financial Crisis. In a 0% interest world and in the face of sudden shocks like the COVID-19 pandemic, the international community now recognises the crucial need to inject liquidity to safeguard economies. After the outbreak of the COVID-19 crisis, between January 2020 and March 2021, governments in advanced economies were able to spend USD 16 trillion in emergency measures to absorb the shock. In comparison, in emerging and low-income developing countries combined, including in Africa, additional spending has yet to reach USD 6 trillion in the same time span[1]. The ongoing economic shock is further shrinking developing countries’ fiscal space to finance greater responses. In this context, between May 2020 and April 2021, the DSSI has only freed up a total of USD 5 billion for 40 eligible countries,[2] hence more ambitious measures are needed to fully achieve a truly global recovery.
Official creditors will have to keep providing developing countries with new finance to fend off the crisis and reach the Sustainable Development Goals (SDGs). Multilateral development banks (MDBs) have stepped up in recent years and should sustain the high level of debt in the next 5 to 10 years given the current situation. The IMF will re-allocate USD 650 billion in SDRs, according to what was agreed upon at the G20 meeting of finance ministers on 7 April. However, so far only USD 33.6 billion of this total is foreseen to go to Africa, whereas around USD 230 billion is expected to be allocated to G7 countries and China. The international community must instead direct this new liquidity towards countries that are most in need. Many of Africa’s international partners such as the United States are open to explore voluntary post-allocation initiatives. Advanced economies could also on-lend SDRs into the IMF’s Poverty Reduction and Growth Trust (PRGT) to reach injection levels of up to USD 10 billion a year for 10 years.
2) Encouraging more actors to participate in platforms led by African institutions
The debt conversation must include more actors in dialogue led by African countries. Africa’s financing needs will not be covered without the private sector, which now owns 40% of the continent’s public debt and could provide far more liquidity than official creditors. MDBs can provide policy tools to bring down Africa’s risk premium and make the cost of private borrowing more affordable for the continent. In addition to these actors, discussions on debt should include international development partners and rely on country platforms driven by African institutions such as public development banks (PDBs), to direct additional liquidity towards concrete development outcomes. Only local institutions will be able to steer a transparent dialogue that can trigger reforms and advance all stakeholders’ interests in line with Africa’s priorities for sustainable development.
The international community can support African-led initiatives to leverage more resources for sustainable development. This is what the United Nations Economic Commission for Africa (UNECA) and the asset management corporation PIMCO are proposing to achieve with the Liquidity and Sustainability Facility (LSF). This special purpose vehicle aims at leveraging on a new allocation of SDRs to encourage private sector participation on affordable terms. It would assign 25% of the USD 650 billion as well as USD 280 billion of unused SDRs to a repo market. This facility would contribute to de-risk African paper and provide additional private liquidity at a cheaper rate. This could also provide additional financing to middle-income countries. In partnership with institutions such as the African Exim Bank, African PDBs and international partners, the LSF would thus ensure that the extra liquidity goes to greener, more inclusive and sustainable investment opportunities in Africa.
3) Investing in Africa’s recovery and sustainable development
The international community must first provide Africa with equal access to vaccination. A recovery will not be possible without equal access to vaccination for all countries. The first priority for Africa and its international partners will be to establish a costed game plan to provide vaccines and capabilities to distribute them throughout the continent. The United States recently committed USD 4 billion to COVAX and advanced economies could invest the liquidity generated by a new allocation of SDRs into initiatives and facilities for global vaccination.
The extra fiscal space must be invested in establishing a New Deal for Africa’s sustainable development. By supporting more comprehensive debt relief initiatives, the international community could help African governments free enough space to start a virtuous circle for fiscal revenues and accountability towards their citizens. To achieve such structural change towards more accountability, African governments have to be able to invest in priority policy areas for their sustainable development and resilience in years to come. Africa’s international partners should support initiatives to finance the continent’s transition to a greener development model, such as UNECA’s Team-Energy Africa. The international community will also have to invest in Africa’s human capital and digitalisation to harness the continent’s demographic boom and ensure tomorrow’s global workforce can maintain growth. The upcoming Summit on Financing African Economies will be an important opportunity to ensure Africa has enough resources to establish this new deal and achieve our common SDGs.
[1] International Monetary Fund (IMF). 2021. Fiscal Monitor: A Fair Shot. Washington, April.
[2] The World Bank Group (WBG). 2021. Brief. COVID 19: Debt Service Suspension Initiative. Washington, 23 April 2021