BY MENGISTEAB TESHOME
According to documents, the current development finance architecture is not and has not been meeting African needs for many years. Africa is the world’s eighth-largest economy, and by 2063, the continent is aiming to become the world’s third largest.
Yet, the world’s financial architecture to support growth and development has several structural problems finance is very limited and often expensive (although some emerging economies such as China have been more helpful in recent years in this regard); finance providers are over focused on risk rather than opportunity; it is donor/creditor-led rather than recipient/borrower-led, and it is also ridden with market failures when it comes to analytical tools such as debt sustainability analysis and doing business indices.
Right now, for example, Africa is the only region globally that does not have its own (African) Monetary Fund, meaning African countries can only turn to the IMF as lender of last resort for balance of payments problems. Many of these problems arise from a fundamental design based on an outdated narrative setting up rich countries in the Global North as ‘donors’ to the poor Global South.
However, the COVID-19 pandemic as well as the Black Lives Matter and decolonizing development and global health movements have begun to challenge this limited understanding, especially when applied to key public goods issues, such as infrastructure, health and climate change.
Grants are funds provided with no expectation of repayment at the same time Concessional loans, or soft loans, a form of providing financial assistance in more generous terms than market loans. These generally include below-market interest rates, grace periods in which the loan recipient is not required to make debt payments for several years or a combination of low interest rates/grace periods.
The Ethiopian Herald reached out him via e-mail to Habtamu Girma Demiessie, who is Doctoral Student at the Department of Economics, University of Ibadan, Nigeria share his insight why Africans should be supported through Concessional loan than other loan forms.
According to him, the shocks from financial, health and climate change have proved to reverse the development of Africa, including Ethiopia. COVID-19, drought and debt crunch that Ethiopia has faced in the past couple of years have deterred the scope of growth of the country.
All interventions in past years have been focused not just on new capital formation, but in repairing the damages from those shocks. The question is how to get the required capital to steer-up growth and hence tackle poverty in the already impoverished countries. The available answer is for the international financial bodies to grant those affected countries concessional loans so that they can finance their development agenda that can at least defend the growing number of population on the edge of entering into the poverty zone.
African Ministers of Finance, Planning and Economic Development have called for decisive action to reform the global debt architecture to enable the investments needed for achieving sustainable development and climate goals around the world in March 2023. The call was made at a meeting of the High-level Working Group on the Global Financial Architecture on the margins of ECA’s 55th Conference of African Ministers of Finance, Planning, and Economic Development in Addis Ababa, Ethiopia.
Coordinated by the Economic Commission for Africa (ECA), the High-level Working Group comprises African Ministers of Finance, Planning and Economic Development, the African Union, the African Development Bank, Afrexim bank, and the World Bank, and includes the participation of IMF staff and Executive Directors. The Group serves as a forum to develop reform proposals for the global financial architecture and strengthen the African voice on the global stage.
Hanan Morsy, ECA’s Deputy Executive Secretary and Chief Economist noted that 2023 presents a critical moment to make progress on reform efforts advocated by the High-Level Working Group. Many of the Group’s ideas align with the UN Secretary General’s proposals for international financial architecture reform, which form part of his call for an SDG stimulus of at least USD 500 billion per year to achieve Agenda 2030.
The Group underscored the need to leverage key organizations and platforms to advance the global financial architecture reform agenda. These include: the Global Sovereign Debt Roundtable – a joint initiative by the Indian G20 presidency; the IMF and the World Bank; the Summit for a New Global Financial Pact (to be held in June); the Climate Action Summit; the Climate Ambition Summit; and the SDG Summit to be held in September.
The Ministers expressed their hope that Africa, represented by the African Union, would finally obtain a permanent seat in the G20, thereby further strengthening Africa’s voice on the global stage. The Ministers also voiced concerns over rising debt vulnerabilities in Africa, as eight African countries face debt distress and 13 are at high risk of debt distress per the IMF-World Bank’s Debt Sustainability Analysis. They acknowledged that the G20 Common Framework, designed to address today’s more diverse creditor profiles, has not effectively supported nations in debt distress.
They further urged the G20 to urgently overhaul the Common Framework to make it more effective, time-bound, and transparent while providing debt service standstill for applicants. Key proposals include: forming Expanded Creditor Committees with private sector creditors to smooth coordination challenges, establishing a ‘Comparability of Treatment’ formula to minimize technical disputes, and bolder use of the IMF’s Lending into Arrears Policies to reduce the leverage of holdout creditors.
In the long run, the establishment of a Multilateral Creditor Club, acting in partnership with debtors, could support the coordination of future Common Framework restructurings and oversee outstanding global debt challenges. In this regard, the Ministers called for reviewing and updating the IMF-World Bank Debt Sustainability Analysis to make it more SDG- and solvency-focused.
They also stressed the need to fortify the international debt legal framework through enhanced collective action and force majeure clauses, anti-vulture fund legislation, and state-contingent debt instruments. They also expressed concerns about biased credit ratings for many African countries and emphasized the need to address transparency and regulatory issues.
The Ministers welcomed and endorsed the Sustainable Debt Coalition initiative, which was presented by Mohamed Maait, Minister of Finance of Egypt. The Coalition aims to increase access to affordable green and SDG finance while supporting debt refinancing or issuance aligned with debtor-defined sustainability objectives.
It also fosters consultations at the intersection of debt, climate, and development. Its focus areas include: debt-for-climate investment swaps; green and blue bonds; blended finance; the sustainable budgeting approach; automatic debt suspension for climate events (so called ‘hurricane clauses’); prioritizing grant finance; and debtor-defined key performance indicators.
THE ETHIOPIAN HERALD FRIDAY 21 APRIL 2023
