The region has been buffeted by shocks — but there are three multilateral policy shifts that can support it.
African countries are facing a cost of living crisis, tightening global liquidity and worsening climate shocks. All of this is intensified by unsustainable debt burdens, which have been deepened by the devaluation of local currencies against the dollar and the US Federal Reserve’s interest rate hikes.
As a result, African finance ministers are now having to make impossible choices between paying the salaries of civil servants, keeping schools and hospitals open and servicing increasingly costly debt. The current situation has serious implications for the region’s stability and the wellbeing of its citizens. In the year after the pandemic began, 62mn people in Africa were pushed into poverty — by the end of 2022, approximately 18mn more had joined their ranks.
Food and fuel inflation has hit families hard, as the cost of producing basic commodities has increased. This is unfair. African countries have been buffeted by shocks that they did not create, yet they have limited involvement in the multilateral decisions that affect them. A succession of international moments in the past two years — G20 and G7 Summits, IMF and World Bank meetings — could have provided opportunities to change this dynamic but largely failed to do so. There have been some welcome initiatives.
Several countries have committed additional resources to the IMF’s Poverty Reduction and Growth Facility (PRGT) and the Resilience and Sustainability Trust. World Bank members have agreed to leverage the bank’s balance sheet more effectively to lend more funds. But such commitments pale in comparison to the current need, which amounts to more than $1tn each year to address poverty and help create clean energy systems.
African countries have seen the west take unprecedented steps to support Ukraine’s banks, as well as to bolster their own economies. Meanwhile, Africa has been left to wait, fuelling frustration and anger. This must change. There is an opportunity to alter this dynamic at next month’s Summit for a New Global Financial Pact. The meeting, which France will host, will aim to increase finance for sustainable development alongside specific policy commitments to mobilise those funds. The summit should deliver three discrete but significant policy shifts.
First, African countries urgently require more liquidity. Advanced economies should pledge to increase their commitments to the PRGT. World Bank shareholders and management must present a plan of action to triple grants and loans to low- and middle-income countries. They should agree that the IMF special drawing rights — a reserve asset designed in the 1960s to support countries with liquidity challenges — can be used by multilateral development banks to leverage low-cost lending. The African Development Bank has presented a credible technical proposal to do this. With just $2.5bn in SDRs, the ADB could leverage $10bn in additional lending through its hybrid capital instrument.
Second, countries facing debt distress require effective, timely and transparent processes for debt restructuring. The G20’s Common Framework for Debt Treatments was designed to do this, but in the two years since it was established, no restructuring has come about for Zambia and Ethiopia, while Chad came to a tentative conclusion at the end of 2022. The framework needs reforms, including an automatic standstill on debt service payments for those that apply and extended eligibility to middle-income countries. Only then can nations begin to rebuild, rather than being stuck in a repayment cycle.
Third, African countries must be given a meaningful voice in these critical discussions. The entire African continent — with a population of over 1.4bn — does not have much more voting power at the IMF than Germany, which has a population of 84mn.
While the current vote formula is largely based on members’ relative economic size and financial position, the majority of the institution’s operating costs are paid by developing countries through their interest payments on IMF loans. This system needs to be reformed, possibly by creating a new category that considers countries’ vulnerability to external shocks. A global financial system that is responsive and inclusive benefits everyone. If the world wants to avoid a lost decade for Africa, 2023 must be a year of action — starting with the Paris Summit for a New Global Financial Pact.