Rising interest rates, inflation and commodity shocks have raised the likelihood of an overlap of debt crises in Africa. The International Monetary Fund estimates that 30 percent of emerging markets and 60 percent of low-income countries could face difficulty paying their debts.
Additionally, there has been a marked change in the global credit landscape over the past decade, with China and private bondholders -- who are the main creditors for the low-income economies – making the traditional structures less effective for present-day debt challenges.
So how can African countries navigate these challenges to increase domestic resources and deepen capital markets, while still accessing affordable pools of international private capital?
At the Shareholders General Meeting of infrastructure lender Africa50 early this week in Lome, Togo, African financial and political leaders looked at different ways of enhancing financial and credit access and all agreed that a fundamental shift is required.
The leaders have taken up the push for a re-engineering of the global financial architecture, seeking a model that works for the continent.
“It is failing the world,” said Dr Akinwumi Adesina president of the African Development Bank (AfDB). “It is not able to mobilise the capital that the world needs to meet all of its development needs.”
“It is also failing developing countries because you can see that even after Covid, Africa still needs about $250 billion to recover. We need $277 billion a year to deal with climate change, plus you still have to deal with Africa's debt: today countries have to pay a lot in terms of repayment and service of debt,” he added.
Dr Adesina said the first thing that needs to change is for the global financial architecture to scale up its level of ambition, “because we have to attain the sustainable development goals.”
“Second is that government alone is not enough. By 2026 you're going to have roughly $1.5 trillion of assets under management globally. Now, if we are able to leverage a little bit of that, you can imagine what it will do for infrastructure globally and what it will do for us in Africa. So, when we talk about changing the global financial architecture, we are saying we need to do more to leverage the private sector where the money is.”
Dr Adesina reiterated his message at the recent Summit for a New Global Financing Pact called by President Emmanuel Macron in Paris, calling on the IMF to help unlock more resources to accelerate development, tackle climate change, address debt challenges, and close infrastructure financing gaps.
Africa will need $277 billion annually through 2030 to achieve its climate financing targets and drive green growth, as per the continent’s nationally determined contributions. A lot more resources will be needed to support accelerated development, green growth and regional integration, especially on infrastructure.
“I am delighted that the UN Secretary-General António Guterres applauded the AfDB proposal for using the SDRs to unlock global financing. This will unlock resources to finance climate change mitigation and adaptation, infrastructure for agriculture, transport, digital, airports, water and sanitation, education as well as health,” said Adesina.
Guterres told the Paris meeting that the global financial architecture is outdated, dysfunctional, and unjust, “no longer capable of meeting the needs of the 21st century world.”
At a fireside chat, Seedy Keita, Minister of Finance and Economic Affairs in The Gambia, put up a case for strengthening the continent’s capital markets, saying they “are not yet mature,” and pension funds “are not large enough to accommodate our development aspirations.”
“If you look at the financing needs, the pension funds combined cannot address them. So, it is time IFIs (international financial institutions) issued long-term financing in local currencies because they have deeper balance sheets, they have better risk management capabilities, and they can transfer the risk,” the minister said.
This is a matter gaining currency on the continent, with multilateral institutions being asked to offer a choice for borrowers to take loans in domestic currency to minimise currency risks.
Keita said with foreign currency lending, Africans have nowhere to transfer the risk, “so it becomes a residual risk.”
“Our capital markets, which are a prerequisite to local currency funding, are not yet there. To build capital markets, you need a strong regulatory environment, and strong fundamentals – which are yet to take off. It sounds unconventional, but I think the big brothers should also bear the risk in their development agenda,” said the Gambian minister, who is a former banker.
Infrastructure investments are long-term and African leaders are seeking long-term funding in cheaper local currency.
“We need 20-, 25- or 30-years interest rate curve. Now, it does not exist, because we don't have long-term liabilities. We have long-term assets, but we don't have the long-term liability. But we could construct it,” said Serge Ekué, president of Togo-based West African development bank La Banque Ouest Africaine de Développement.
He said development financial institutions and multilateral lenders like the African Development Bank could issue guarantees, so that in case of a default, the first loss will be absorbed by a multilateral development institution.
“Or just set up a cash reserve, which could absorb the first loss. And by doing so you provide long-term funding, long-term liability to face long-term assets,” Ekué said.
However, Paul-Harry Aithnard, managing director of Ecobank Côte d’Ivoire, assured that the key issue for commercial debt in financing infrastructure is not credit risk, “because the probability of an infrastructure project failing is pretty low”.
“The issue for us is liquidity. So, we want to have access to long-term liquidity. Number two, if we want to find that liquidity, we need to partner commercial banks and DFIs. The capital market is about investors, and issuers, so we need to ask ourselves: Do we have investors in Africa that are ready to take that risk? And the answer to that is yes, we do. Because if you are a pension fund, or an insurance company, if you are looking for a long-term asset where you can match your asset and your liability outside of real estate, the only thing that you have is infrastructure,” he said.
“What we need to do now is to see how we can incentivise them to go into the capital markets. Then we need issuers and I know the question that comes up every time is we don't have enough good projects in Africa… I disagree. I have a portfolio of eight projects that are bankable. So, I think the match between issuers and investors can be made. We just need to incentivise those issuers and promote those investors to go into the capital markets.”
Solomon Quaynor, vice-president for Private Sector, Infrastructure and Industrialisation at AfDB, cited a programme of the African Securities Exchange Association that links different stock exchanges, including South Africa, Egypt, Morocco, Nigeria and Kenya, essentially creating a single capital market of $1.3 trillion, which could be harnessed to create the requisite level of liquidity, on top of the $2.3 trillion worth of pension funds across the continent.
“We have to start thinking pan-African,” said Quaynor.
The leaders recommended reforms in the pensions sector to enable investments across borders.
“There's something that we call the five percent agenda, where we're trying to advocate to different countries to allow five percent of the pension assets under management, and also potentially life insurance, to be invested outside of their countries in Africa, so that we can begin to actually aggregate these funds to put in investable projects,” Quaynor said.
He noted the supply-demand imbalance in infrastructure, with a lot of money targeted at just a few projects.
“We still have a dearth of bankable infrastructure projects relative to the needs that we have, which is about $68 billion to $108 billion a year. And, given that we cannot address everything, you know, on a pan-African basis, we need to look at the InfraCredit model.”
InfraCredit is designed to provide local currency guarantees for corporate and project bonds issued across a range of sectors.
So, what is the role of DFIs?
AfDB’s landmark synthetic securitisation in 2018 – the first by a multilateral development bank – took assets belonging to the non-sovereign operations ($1 billion) and transferred them to the private sector, then in 2022 it took another $2 billion worth of assets in the sovereign operations and transferred them again to the private sector with insurance on the London insurance market.
Dr Adesina said the guarantee of the UK government gave them $1.6 billion “and then we have $400 million for private insurance to be able to secure the risk for that.”
“So, what this means for the global financial architecture is that all the capital we have, we have to make it work better for us and that's one of the changes that we're talking about. If you are jogging and you are sweating but you're not drinking, eventually you're going to pass out. So, sweating balance sheet is not enough, you need new capital; you have to recapitalise for the global financial architecture to be able to make the kind of needs that we are talking about.”
The leaders also favour asset recycling – where governments monetise existing infrastructure assets through a concession to the private sector, with funds received reinvested in other priority projects.
On July 3, Africa50 signed an asset recycling agreement with Togo, effectively freeing the government from all or part of the debt associated with the Lomé-Kpalimé Road project, thus giving it some fiscal headroom to allocate public investments to other priority areas.
Togo President Faure Gnassingbé in his opening address said: “There are huge needs for infrastructure, without which development is not possible in Africa. This is at the heart of our roadmap. The involvement of the private sector in infrastructure is unavoidable and this means we must develop more bankable projects. Government involvement is also essential to attract foreign capital, and this is why it is important for governments to provide a stable, and transparent economic environment that is receptive to economic actors.”
“Most governments in the developing countries have large assets: roads, power stations, bridges but as soon as they are inaugurated no attention is paid to them,” said Minister Keita.
“That's why we partner with Africa50 to do an asset recycling and asset-backed security will be issued. The [Senegambia] bridge was constructed at the tune of $110 million, and Africa50 will now do an asset recycling for the tune of $100 million, which will be used to create similar type of assets.”
Quaynor said multilateral lenders have to do more.
“The Alliance for Green Infrastructure in Africa is a bold move to create also the right risk assets and we at AfDB working with our partners, Africa50, AFC and the others, will continue to use the Africa Investment Forum as a convening in a way to look at transformational projects.”
They said DFIs have to be counter-cyclical: invest where when no one wants to, inject liquidity when no one wants to, risk-on when the whole world is risk-off.