The Executive Secretary of the United Nations Economic Commission for Africa (UNECA) on Tuesday advocated the creation of a financial mechanism to lower financing costs for countries issuing public debt in international markets.
“We can reduce the cost of financing the bond or give additional interest if the investment is for resources that foster `green’ and sustainable growth, renewable energy and better infrastructure,” Vera Songwe said.
In an interview with Bloomberg financial news agency on the sidelines of her participation in an investment forum in Qatar, Songwe explained that this idea does not imply “any favor treatment for emerging and frontier market economies.”
“We are even trying to perfect the market,” he commented.
This proposed financial vehicle can be financed by the International Monetary Fund (IMF) issuing $650 billion, of which at least $33 billion will go to African countries.
This financial vehicle could increase secondary market liquidity for emerging markets, reducing the fee that some issuing countries have to pay to investors who cannot immediately trade the bonds they have bought, Vera Songwe explained.
In practice, her idea follows the example of overnight banking transactions, in which investors can sell their securities at the end of the session and buy them again in the morning, paying a premium, but allowing for increased liquidity and enabling cash management of the value of the securities.
Increased liquidity is critical to address Africa’s financing needs and increase the speed of economic recovery, which has resulted in the worst recession in living memory on the continent, she argued.
Several African countries have already returned to the international debt markets this year, achieving lower interest rates than before the covid-19 pandemic, but the slow economic recovery and weak domestic tax revenues raise concerns about the ability of these countries to service debt in the coming years, especially if the pandemic continues to spread across the continent and forces further containment measures.
The Fund is preparing to make the largest ever injection of resources into its member states, increasing global liquidity and helping lower-income and more struggling countries deal with the economic consequences of the pandemic.
In addition, the IMF has been advocating that richer countries channel some of the money they will receive to the countries in greatest difficulty, particularly those in Africa, which are particularly vulnerable due to the economic and health impacts of the pandemic.
This aid can be done with the current instruments, namely the Poverty Reduction and Growth Fund, which allows for interest-free loans, but the model only applies to countries considered low-income, and the IMF wants to extend the model to the economies of small archipelagos and to middle- and low-income countries.
This Resilience and Stability Fund, one of the IMF’s proposals, could be finalized by December, depending on the necessary approvals, but for now what the most vulnerable countries can count on, among them the African ones, is the receipt of $33 billion resulting from their DES quota, and probably another $100 billion, which have been promised by the richest countries.
