Africa and the IMF after Lagarde

As the IMF chief prepares to step down in September to lead the European Central Bank, the fight for the fund’s next leader is on. Shoshana Kedem investigates Christine Lagarde’s legacy in Africa.

In 2000 the then managing director of the IMF, Horst Köhler, stepped off a plane into Nigeria’s capital Abuja for a five-country “coast-to-coast” tour of the continent. His mission was to decide whether the Fund should cease lending to African countries for long-term development assistance and pass the function to the World Bank. This was the recommendation of a 1998 US Congress report by the Meltzer Commission.

Along the way, African leaders in Nigeria, Senegal, Cameroon, Mozambique and South Africa urged him to continue the Fund’s presence.

Before becoming Liberia’s President, Ellen Johnson Sirleaf insisted to Köhler that the Fund was much-needed in Africa, but it had to stop being SAD – secretive, arrogant and domineering.

Köhler became convinced that the continent was integral to the IMF’s two-fold mission: to provide global financial stability, and assist in the global war on poverty. He concluded: “There cannot be a good future for the rich if there isn’t a better future for the poor.”

Ever since, Africa has played a prominent role in IMF lending based on the understanding that unemployment, famine and climate change have a spillover effect on Western countries, says Mark Plant, a former IMF staffer and the director of sustainable development finance at the Centre for Global Development.

The views of the outgoing managing director, Christine Lagarde, are no exception. “Lagarde always had an eye for Africa… she understood Africa well,” Plant says.

“She continued the trends that started with her three predecessors of opening up the IMF to more African decision-making. That Africans should take charge of their destiny in some ways, and that the Fund should be supportive rather than dictatorial.”

A striking example of this came in 2014 with the Ebola epidemic outbreak in Sierra Leone, Guinea and Liberia. The IMF was the first to respond with $130m in immediate assistance to help balance payments and meet fiscal needs.

Lagarde, a former French finance minister, faced criticism that the epidemic wasn’t a balance of payments crisis, and the IMF wasn’t in the business of humanitarian aid. A lawyer by trade without the technical training of an economist, she saw the IMF as an agency that tackles problems with far-reaching economic consequences.

Her role has been more as a diplomat or politician, who “has a much broader vision” of economics. “I think that’s really brought her closer to Africa and Africa closer to her,” says Plant.

Lagarde was seen as a fair arbiter, a force for growth and a “great” partner to African nations, says Alain Ebobissé, the CEO of the 28-nation infrastructure fund Africa50.

“At the IMF she has focused a bit more on Africa in a new approach which was to develop partnerships with countries and not to be dictating what the countries should do.

“As managing director of the IMF she was in partnership mode with Africans. Of course, sometimes you have to tell your partners tough truths when things aren’t working… The IMF under Christine Lagarde was a positive force for our development.”

Distressing debt

Lagarde began her first term in 2011, with the financial crisis still raging and the world slipping into global recession.

In her first five years, many African countries shrugged off the global economic downturn, posting healthy year-on-year growth rates. From 2003 to 2016 GDP in Ethiopia more than doubled while Rwanda, Ghana, Mozambique and Zambia followed closely behind. But as commodity prices slumped in 2016, commodity exporting countries like Nigeria, Angola and South Africa were hit hard, causing debt levels to spiral in relation to GDP.

African countries, 30 of which had opened up a significant amount of borrowing space in the 2000s through the 1996 Heavily Indebted Poor Country Initiative that unburdened them of debt, went on a borrowing binge. By late 2017 public debt in Africa had crept back up to 57% of GDP – almost doubling in just five years.

While much of the debt was from external private sector borrowing, under Lagarde’s leadership the Fund continued to lend to troubled African economies. Yet it was careful to sound the alarm when debt reached vulnerable levels.

“She’s managed to tread the line very well between financial discipline and rectitude and allowing these countries the room that they need to invest and develop,” Plant says.

At the same time Lagarde did not shy away from taking a tough line on countries that borrowed and spent irresponsibly or lacked transparency. In 2016 the IMF halted a funding programme with Mozambique following the discovery of more than $1bn in hidden government debt.

A more positive intervention can be found in Ghana, which secured its 16th financing arrangement since independence in April; a $918m loan from the IMF’s Extended Credit Facility to support growth and job creation.

The results were broadly positive, with inflation winding down and the banking sector reining in large portfolios of non-performing assets, says Kwadwo Sarkodie, a partner at law firm Mayer Brown International, who praised the intervention as “relatively positive and successful”.

Weeks before resigning as IMF chief, Lagarde also signed off on a $449m bailout of the Republic of Congo after two years of gruelling negotiations. The deal came after the central African nation restructured $2.5bn of Chinese debt in April, as falling crude prices caused domestic debt to balloon to 118% of GDP.

The bailout may serve as a litmus test for the growing ranks of African countries considering drawing on the Fund as the stigma attached to IMF bailouts wanes.

Next in line

Africa will continue to play a key role in the corridors of the Fund’s decision-makers, says Plant. With the continent’s population expected to double in the next 25 years there will be an explosion in the number of people looking for work and economic activity, he says.

“[Lagarde] understood climate change, she understood the need for jobs, she understood the role of women. Those are all going to be critical aspects to getting Africa’s growth on a path that’s sustainable and contributes to the world economy in 10 or 15 years rather than detracts from it.”

As African Business went to press, Eurozone countries at the G7 had narrowed the front-runners down to four Europeans, and agreed to nominate a candidate by the end of July.

Plant, who accompanied Horst Köhler on his Africa tour, says whoever replaces Lagarde should undergo the same transformation that Köhler did: “It’s really important for Africa and for the world.”