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AfDB champions a new global financial architecture

Wednesday, 24 May 2023 16:20
AfDB champions a new global financial architecture

(Ecofin Agency) - According to AfDB president Akinwumi Adesina, an ideal global financial architecture should be more responsive, inclusive, accountable, and redesigned to support the acceleration of global development, especially in Africa. 

"The African Development Bank (AfDB) is positioning itself as a leader in implementing innovative approaches to optimize its balance sheet. The majority of the recommendations of the G20 report on capital adequacy were implemented by the AfDB well before they were suggested. [...] We are the first and only multilateral development bank to implement a synthetic securitization program, transferring part of our non-sovereign portfolio to the private sector [...]"

This was part of the opening remarks of AfDB President Akinwumi Adesina (photo), at the launch of the AfDB’s annual meetings in Charm el-Cheikh, last Tuesday. During his speech, the president detailed his institution’s vision of an ideal global financial architecture. 

In seven points, Akinwumi Adesina insisted on the need to change the global architecture, a key issue in African and even global financial circles in recent months, in the face of growing challenges at a time of major crises. He stressed the need to act quickly. 

Backing his words, Moussa Faki Mahamat, President of the African Union Commission, said:  "This summit must not be yet another financial forum [...] Serve us actions, save your promises." insisted Moussa Faki Mahamat.

Address challenges related to the achievements of SDGs 

It is estimated that there is a $2.5 trillion financing gap preventing developing countries from achieving the Sustainable Development Goals (SDGs). Africa alone would need to raise $1.3 trillion yearly by 2030, to achieve the SDGs. In addition, the COVID-19 pandemic has exacerbated economic hardship and Africa needs $1 billion per year to recover from the impacts of the health crisis and rebuild its economies. For Akinwumi Adesina, the figures highlight the magnitude of the financial needs and the need for sustained international mobilization to help Africa achieve the SDGs and address major challenges such as climate, conflict, and COVID.

"We need to challenge the ability of the global financial architecture to meet global needs, especially the needs and aspirations of developing countries, and especially the needs of African countries," he said pointing out that even before the pandemic, progress toward the achievement of SDGs was already mixed.  

Vigorously tackle the climate issue: the highest priority  

Although Africa is responsible for only 3% of global carbon emissions, it disproportionately suffers from the adverse effects of climate change. For Mr. Adesina, the situation should urge the international community to take action. 

Indeed, each year, Africa loses between $7 and 15 billion to climate change. The figure could rise to $50 billion by 2030. According to projections, to meet the continent's 2030 nationally determined contribution (NDC) targets, Africa will need a massive investment of $2.7 trillion. However, "we are still far from the account because, between 2016 and 2019, the climate funding allocated to the continent amounted to an average of $18.3 billion per year, which remains tragically insufficient to fill the current gap," President Adesina noted. 

He believes that at COP 28, concrete steps need to be taken by mobilizing more private financing for the fight against climate change.  

Debt: Transparency and coordination 

Another major challenge affecting the financing capabilities is debt, which makes fundraising difficult for countries that already face more challenges.  

With the rising debt crisis, climate change, the fallout from the COVID-19 pandemic, and the impact of the recent Russian-Ukrainian conflict, the global financial ecosystem has found itself in a delicate situation and Africa is particularly affected. 

Despite a modest decline in their average public debt from 68% of GDP in 2020 to 65% currently, African countries’ debt remains above the historical average of 61%.

Over the past two decades, the composition of the debt has changed considerably. In 2000, 52% of the overall debt was constituted of bilateral debt, against 27% presently. Conversely, the percentage of commercial debt has more than doubled, rising from 20% to 43% of total debt over the same period. This change makes debt management considerably complex for the Bretton Woods institutions and the Paris Club.

Owing to these challenges, there is an urgent need to overhaul the current international financial architecture to allow for an orderly restructuring of debt, said Mr. Adesina, arguing that transparency and coordination among creditors must be improved to avoid a new debt crisis.

"To date, four African countries - Chad, Ethiopia, Zambia, and Ghana - have requested debt restructuring under the G20 Common Framework. Despite some progress, the process has not yet been completed. There is an undeniable urgency to reform the global financial architecture to reduce the costs, delays, and legal complications associated with the restructuring of Africa’s debt,” he insisted.  

Salvation through international cooperation 

The executive also emphasized one of the key themes his institution is advocating for since 2020: leveraging re-allocated SDRs to boost development.

Mr. Adesina highlighted the AfDB's innovative initiative to transform Special Drawing Rights (SDRs) into financing levers. The model was developed in collaboration with the Inter-American Development Bank, with IMF support.  Under that model, "developed countries can now channel their SDRs to the AfDB and other multilateral development banks, treating them as reserves. This transformation could be a real 'game-changer' for Africa, at no cost to the taxpayers of donor countries," he said.

He also expressed wishes that developed nations would quickly decide on their stance about the model.  "What we need now is to move forward. We need five major donor countries [...] that will transfer the SDRs to the African Development Bank,” he added. 

"In collaboration with the World Bank and the Inter-American Development Bank, the AfDB has set up the first exposure exchange between multilateral development banks, freeing up $100 billion in additional credit lines. This is tangible evidence of what we can accomplish by working together," he said.

Financializing top-line assets

Recalling that global pension funds and institutional investors are a wealth of resources (they manage more than $145 trillion in assets), Mr. Adesina insists that the global financial system should closely look at how to leverage such considerable resources.

AfDB is "the first and only multilateral development bank to implement a synthetic securitization program, shifting part of [its] non-sovereign portfolio to the private sector, freeing up more funds for additional lending."

The development bank is also the only AAA-rated institution in Africa. According to Mr. Adesina, the synthetic securitization program attracted new investors who had never been exposed to the African market. 

"Such efforts will require significant changes to their business models. Multilateral financial institutions are invited to deploy more guarantee mechanisms," the AfDB chair concludes.

Fiacre E. Kakpo

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ECOFIN AGENCY offers a selection of articles translated from AGENCE ECOFIN. Founded in 2011, Agence Ecofin is a leader in Francophone Pan-African economic news, particularly in West and Central Africa. The agency publishes daily news on nine African economic sectors: Public Management, Finance, ICT, Agribusiness, Energy, Mining, Transport & Logistics, Communication, and Training.

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