African ministers must act now on credit ratings

How can African governments ensure they can meet their debts and other payments while raising patient, long-term funding to grow the economy?

Opinion by

Image : ECA

African ministers of finance, economic development, and planning have been meeting in Dakar for the Economic Commission for Africa’s (ECA) 54th conference, focusing on “Financing Africa’s recovery: breaking new ground.”  And indeed, there is a compelling urge for new approaches to address Africa’s development finance challenges.

Some analysts fear that a “great finance divide” may be a key driver of divergence between developed economies and developing ones during the recovery period from the COVID-19 pandemic and beyond. The annual Sustainable Development Goal (SDG) financing gap for developing countries has increased by $1.7 trillion. For Africa alone, annual expenditures related to the SDGs are expected to rise by $154 billion as a consequence of the pandemic.

The current global economic climate with the lingering impact of the pandemic and the repercussions of the war in Ukraine are not making this challenge any easier. Governments, and finance ministers in particular, find themselves grappling with the varying requirements of short-term liquidity shortages – with high borrowing costs – as well as filling the large gaps in infrastructure financing needed to meet global objectives.

I have often compared my former role of Minister of Economy and Finance with the treadmill challenge, which is about trying to find your balance while having your feet on two different treadmills – one that would go at a breakneck pace and the other one at a slow pace.

This requires constant juggling to create and maintain an adequate fiscal space to ensure governments have the ability to meet their debts and other payments as they fall due, while raising the appropriate combination of patient, long-term funding to grow the economy.

As African policymakers leave Senegal, after thorough discussions, they should also keep in mind the following themes:

African needs its own credit agencies

First, the African continent needs more of its own credit rating agencies. Not only that, it needs agencies that count for the informal sector.

Financing is as much about numbers as it is about risk perception and narrative. These are partly driven by credit rating agencies’ assessments. They influence the extent to which African countries can raise capital on international markets.

To date, 31 countries have been assigned a sovereign credit rating, which has had positive impact on their ability to raise more financing on international markets for capital projects and infrastructure development. According to the African development bank, the number of international bond issuances by African countries reached about $155 billion in the last decade. This is good news indeed.

However, the perceived lack of transparency, objectivity, and opaque methodology of international credit rating agencies calls for a new approach that local rating agencies can provide. As Finance Minister, I kick-started preparations for a shadow-rating with a regional agency. What I looked for was an independent interlocutor that would understand our specific context and take into consideration the informality of our economy. This could help to have a better appreciation of our economic potential with improved ratings.

Against this backdrop, providing the space for more African rating agencies is critical, as it helps to diversify policy recommendations in order to fully capture the complexities of our economies, while guaranteeing quality and highest standards of the assessment process.

Fund the right projects

Second, increasing the ability of African countries to raise more resources for development means ensuring that funds go toward the production of goods and services, as well as the development of infrastructures that benefit a majority of the people.

According to the IMF, the average debt-to-GDP ratio in Africa has increased from 61.9% before the pandemic to 67.7% in 2021. These figures are very worrying. However, they sometimes fail to fully account for the quality of projects funded and their future economic and financial impact.

It is a principle of double-entry bookkeeping to focus in equal measure on how we fund transactions and on what these transactions are. This means ensuring that carefully selected productive projects are financed, which will enable economic growth and the repayment of debts in the future.

In 2020, I wrote that it was crucial to get value for money through fair competition when selecting the companies that will be involved in project execution. What held true then, holds true now. Companies must have technical and financial capacities and be subjected to thorough due diligence.

This also means ensuring that we get some return by fostering sub-contracting during project execution, thereby generating growth, job creation, and the mobilization of domestic resources. It also means working on transferring technology and know-how to local SMEs so that,later on, they become contractors able to implement larger infrastructure projects.

Raising capital for projects without ensuring that the returns would bring large-scale benefits to the population is, therefore, counterproductive. I strongly believe that the quality of projects and their returns matter– especially amid the global challenges that we face.

Africa needs smart financing mechanisms

Third, the African continent has a major role to play when it comes to tackling global challenges, such as climate change and the transition to greener energies. But addressing such challenges cannot be done at the expense of our social and economic development. Adequate funding mechanisms must be put in place to develop renewable energy infrastructure across Africa and to safeguard our planet and our continent’s environmental assets.

We, therefore, need smart financing mechanisms and different ways to account for debt when countries decide to finance renewable energy projects—discounting funding for green energy from debt estimates.

Credit ratings must also be based on climate change considerations. Agencies should provide a way to include issues relating to the net-zero transition and renewables in their methodology, weightings calculations, and assessments. This evolution within credit rating agencies is urgent and critical, and could readdress the bargaining power imbalance between lenders and borrowers.

Share good practice

Lastly, sharing good practices and lessons learned between African countries is a sure way of increasing bargaining power and agency – particularly when dealing with terms of debt such as maturity, amount, interest rates, and other technical aspects. Moreover, African nations could exercise more agency at both regional and continental levels when discussing funding for infrastructure, especially in conjunction with economic integration imperatives.

Africa is on the right path to enhance its agency and to provide a much-needed contribution to the global financial architecture. A further push is a must to place our continent at the centre of the solutions to the global challenges facing this planet.

Malado Kaba is a global economist and served as the first female Minister of Economy and Finance of the Republic of Guinea (2016-2018). She is the Managing Director of Falémé Conseil and a member of the inaugural cohort of the Amujae Initiative, the flagship programme of the Ellen Johnson Sirleaf Presidential Center for Women and Development

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