By Bernard Yaw ASHIADEY and Ebenezer Chike Adjei NJOKU
In recent years, tales of mounting debt, high-interest loans, and dependency on foreign aid have dominated the narrative surrounding Africa’s economic development. However, as we stand at the cusp of a new epoch, with many African nations finally securing deals to address their debt issues, it is time to ask: What is next for the continent? How can Africa break free from the cycle of dependency and chart a course towards sustainable growth and development?
A helicopter view of Africa’s economic history since 1957 seems to indicate cyclical epochs influenced by geo strategic variables and domestic imperatives. The most recent transformational event was the HIPC initiative in the early 2000s spearheaded by the personalities including Dr. Ngozi Okonjo-Iweala that enabled Sub Saharan Africa (SSA) economies to develop the fiscal space to borrow on money markets.
This drive toward a new paradigm has found expression in a number of initiatives. Some players pushed for a Marshall plan for Africa but that seems to have withered. Personalities including the African Development Bank (AfDB) President, Akinwumi Adesina are projecting new ideas based on massively scaling up multilateral finance institutions.
Solomon Adegbie-Quaynor, Vice President, Private Sector, Infrastructure & Industrialization at African Development Bank Group, in a post on LinkedIn recently noted that the AfDB is leading the charge to attract private sector of scale from global sources to Africa, but on a partnership basis.
“This is therefore not for AfDB financing on its own, but rather to assure global investors and African champions that Team Africa (who include founding members of the Africa Investment Forum or AIF) is a partnership platform that will support transformative private sector and PPP projects in Africa, both financially and non-financially. The AIF’s Team Africa includes AfDB, Africa50, Africa Finance Corporation, Afrexim, BOAD, DBSA, TDB and BADEA, and the AIF partnership platform also includes founding members EIB and the Islamic Development Bank.
Team Africa also works closely with the members of the Africa Sovereign Investors Forum, an association of Africa’s quasi-government SWFs and Strategic Investment Funds, that creates a juggernaut of DFI and strategic investors to co-develop, finance and support transformative projects in Africa across several sectors. We understand the continent, and its opportunities and risks, and will de-risk, credit enhance and syndicate financing of these projects through the AIF partnership platform that is always welcoming new partners,” he noted.
A bold new proposal suggests a radical shift in approach—one that could redefine Africa’s financial set-up and pave the way for a more prosperous future. Emerging thoughts have proposed exploring the potential of leveraging African financial institutions to drive growth and development, moving away from traditional bilateral and multilateral funding methods.
The current state of affairs
For decades, African countries have relied heavily on external funding sources for development projects. The World Bank, International Monetary Fund (IMF), and Eurobonds have been go-to options for many nations seeking to finance hard infrastructure, education, and healthcare initiatives. While these funding sources have played a crucial role in supporting Africa’s development, they have also contributed to a mounting debt crisis.
Africa’s debt burden has expanded significantly over the past 15 years. The continent’s debt-to-GDP ratio skyrocketed by 39.3 percentage points in the decade-and-a-half between 2008 and 2020, reaching a peak in 2020, and has been characterised by significant instances of unilateral defaults.
The recent surge in sovereign debt defaults is a major cause for concern. After attaining a record high of US$149.4 billion in 2020, impaired loans climbed to US$112.2 billion in 2021 and US$100.2 billion in 2022. This staggering figure underscores the urgency of finding alternative financing solutions that don’t further burden African economies with unsustainable debt loads.
The traditional approach of securing high-interest loans for development has proven to be a double-edged sword. While it provides immediate access to capital, it often comes at the cost of long-term financial stability. Many African countries find themselves trapped in a cycle of borrowing, struggling to repay loans while simultaneously seeking new funding for ongoing development needs.
In 2023, macroeconomic fundamentals in Sub-Saharan Africa (SSA) reflected the challenging conditions in developed markets, with slower growth in China and policy rates elevated in response to higher inflation.
According to the IMF, a 1percent change in China’s GDP has a 0.25percent impact on growth in SSA, and with over USUS$250 billion of annual trade relations (20percent of SSA’s exports got to China) it is not surprising that growth slowed in 2023 to 3.3percent, down from 4percent in 2022. The IMF is forecasting growth of 4percent in 2024.
In 2023, commodity prices failed to provide the lift needed to boost incomes and reduce fiscal imbalances. Supply chain impediments also contributed to higher consumer prices due in part to the ongoing disruptions caused by the war in Ukraine and structural rigidities in local distribution channels. Indebtedness (debt/GDP) and fiscal balances did not materially change from 2022 to 2023, as several countries took positive steps to discontinue costly subsidies and create fiscal space for critical spending elsewhere.
According to data from the IMF, eight countries are expected to end the year 2024 with indebtedness ratios exceeding 80percent, which exposes them to potential external shocks with no meaningful buffers (especially with an increased reliance on higher priced commercial debt in recent years).
Leveraging African financial institutions
The adage ‘charity begins at home’ often rings true, and perhaps, that might be the case within the context of economic development. Rather than solely depending on direct funding from international institutions like the World Bank or IMF, should we not be harnessing the potential of African financial institutions as catalysts for growth? By drawing upon the capabilities of organizations such as Afreximbank, the African Export-Import Bank, Ghana International Bank, the African Development Bank, and the African Finance Corporation, Africa can potentially accelerate its economic trajectory.
These institutions, deeply rooted in the African context, possess a nuanced understanding of the continent’s unique challenges and opportunities. By channeling private and foreign capital through these organizations, African countries could potentially access more favorable terms and tailored solutions for their development needs.
Dean Adansi, Chief Executive Officer of Ghana International Bank (GHIB), noting the roles of these institutions and their understanding of the continent, points out their lack of strong capital base to propel aggressive growth.
“The multinational financial institutions in SSA have an important role to play, especially in supporting local financial institutions with loans, guarantees and other credit enhancement arrangements. Three of the major pan-African financial institutions in SSA currently have a combined equity base of US$9 billion, which is a pittance in relation to the commercial and development needs of the region,” he said in a recent article.
He opines that their role in promoting trade and credit expansion should be a priority for policy makers and international multilateral institutions, given Africa’s share of global trade is currently only 3percent.
The advantages of an African-led approach
- Enhanced understanding of local contexts
African financial institutions are uniquely positioned to understand the intricacies of the continent’s diverse economies. This deep knowledge allows for more accurate risk assessment and the development of financial products that are better suited to local needs.
- Promotion of Intra-African trade and investment
By strengthening the role of African financial institutions, we can foster greater intra-African trade and investment. The African Continental Free Trade Area (AfCFTA) agreement, which aims to create a single market for goods and services across the continent, could be more effectively implemented with robust support from African financial institutions.
- Capacity building and knowledge transfer
Empowering African financial institutions to take a leading role in development financing will contribute to building local capacity and expertise. This, in turn, can lead to the development of innovative financial solutions tailored to African realities.
- Reduced dependency on external lenders
By diversifying funding sources and increasing the role of African institutions, countries can reduce their vulnerability to external economic shocks and policy changes of traditional lenders.
- Potential for more favorable terms
African institutions, with their deeper understanding of local contexts, may be able to offer more flexible and favorable terms compared to traditional high-interest loans from external lenders.
Case Study: GHIB
GHIB’s capacity for the new development approach is visible when we look at its pivotal role in the West African financial ecosystem. In 2023, the bank intermediated over US$8 billion in payments for financial institutions across the region, solidifying its position as a key player. This is indicative of GHIB’s unique value proposition, which is deeply rooted in its strategic positioning and extensive expertise.
Leveraging its dual presence in London and Ghana, GHIB offers a compelling blend of global financial acumen and deep regional understanding. As a London-based bank with significant Ghanaian ownership and widespread connections across Sub-Saharan Africa, GHIB enjoys unparalleled access to global clearing markets and a profound grasp of the region’s economic dynamics. This strategic advantage enables the bank to efficiently facilitate trade transactions, navigate complex trade deals, and mitigate risks for its clients.
GHIB’s commitment to supporting financial institutions and state-owned enterprises in West Africa is evident in its comprehensive suite of services. By providing critical trade finance solutions such as letters of credit, foreign exchange services, and correspondent banking, the bank plays a crucial role in bridging the trade finance gap in the region. This support is essential for fostering economic growth and development.
A prime example of GHIB’s impact is its foreign exchange support to the government of Malawi. The bank’s ability to structure a well-priced, one-year transaction for a country facing macroeconomic challenges demonstrates its deep understanding of market dynamics and its willingness to take calculated risks. This transaction not only benefited Malawi but also showcased GHIB’s capacity to deliver innovative and tailored financial solutions.
Furthermore, GHIB’s long-standing partnership with Ghana’s cocoa regulator – Cocobod highlights its commitment to supporting key industries in the region. By serving as the collection agent for Cocobod’s loan receivables back facility for over 25 years, GHIB has played a vital role in the success of Ghana’s cocoa sector, a cornerstone of the country’s economy.
GHIB’s success story exemplifies the potential of African-led financial institutions to drive economic growth and development.
“Funding assistance for these regional and indigenous institutions through term facilities and equity support would be a welcome addition to the arsenal of options to address the woeful lack of funding for trade and the private sector, and would provide a meaningful boost to GDP growth in the region. It is a herculean task, but good progress can be made in the medium term with relentless focus and an uncompromising stance from policy makers, development and commercial finance institutions and partners in the private sector,” Mr. Adansi notes.
Challenges and considerations
While the potential benefits of this new approach are significant, several challenges need to be addressed:
- Capacity building: African financial institutions will need to enhance their capacity to handle large-scale development financing. This may require significant investments in technology, human resources, and risk management systems.
- Regulatory frameworks: Robust regulatory and governance frameworks will be crucial to ensuring transparency, accountability, and effective risk management in these institutions.
- Capital mobilization: African financial institutions will need to develop innovative strategies to attract and mobilize both domestic and international capital.
- Coordination and collaboration: Effective coordination among various African financial institutions and with government entities will be essential to maximize impact and avoid duplication of efforts.
- Resistance from traditional lenders: There may be resistance from traditional lenders and donors who have long played a dominant role in African development financing.
A call to action
As Africa stands at this crucial juncture, it’s time for a bold reimagining of the continent’s financial future. Here are key steps that can pave the way for this new approach:
- Strengthen African financial institutions: Governments and stakeholders should invest in building the capacity of African financial institutions, enhancing their ability to handle complex development financing.
- Develop tailored financial products: African financial institutions should focus on creating innovative financial products that address the unique needs of African countries and projects.
- Foster collaboration: Encourage collaboration between African financial institutions, governments, and the private sector to create a robust ecosystem for development financing.
- Enhance regulatory frameworks: Develop and implement strong regulatory frameworks to ensure the credibility and stability of African financial institutions.
- Promote financial literacy: Invest in financial literacy programs to build public trust and understanding of African financial institutions and their role in development.
- Leverage technology: Embrace fintech solutions to enhance efficiency, reduce costs, and increase access to financial services across the continent.
So…
The vision outlined above represents more than just a shift in financing strategy; it’s a call for Africa to take control of its economic destiny. By leveraging the power of African financial institutions, the continent can chart a new course towards sustainable development, one that is driven by local knowledge, responsive to local needs, and built on the foundation of African ingenuity and resilience.
As debt issues begin to resolve and African countries secure deals to address their financial challenges, the time is ripe for this transformative approach. The path ahead may be challenging, but the potential rewards – a more prosperous, self-reliant, and economically empowered Africa – make it a journey worth undertaking.
The future of African development financing lies not in perpetuating cycles of high-interest borrowing, but in utilising the power of African institutions that understand the pulse of the continent. As we look to the future, let us embrace this vision of an Africa that finances its own growth, on its own terms, for the benefit of its people.
