Africa: a new financing model could help Africa recover from Covid-19 and fight debt
World leaders are looking for ways to help Africa drive economic growth.
When more than 30 African heads of state, other world leaders and representatives of international organizations – the World Bank, the International Monetary Fund (IMF), the European Investment Bank, the African Development Bank and others – come together gathered at the Grand Palais Éphémère in Paris for a Summit on the financing of African economies in the middle of the year, the stakes were high.
Leaders explored ways to boost economic growth and address the hardships caused by COVID-19 in Africa.
Specifically, they discussed Africa’s debt, which has risen dramatically since the start of the pandemic, plunging the region into the worst recession in more than half a century.
The summit, held on May 18, also identified ways to foster entrepreneurship and discussed the need for increased access to COVID-19 vaccines in the region.
Special drawing rights
To stimulate economic growth without adding to the already precarious debt burden, for the first time in history, leaders considered the possibility of advanced economies donating their quotas of IMF reserves called Special Drawing Rights (SDRs). ) developing economies, most of which are in Africa.
SDRs are a basket of the world’s five major currencies (the US dollar, the euro, the Chinese yuan, the Japanese yen and the pound sterling) used by IMF members to increase countries’ liquidity without increasing their debt.
The idea of using SDRs from major economies to support developing countries was good news for African leaders at the summit.
On August 23, the IMF announced SDR allocations worth around $ 650 billion, an unprecedented amount almost three times the $ 250 billion SDR allocated to countries in 2009 following the global financial crisis.
“The [latest] the allowance will benefit all members [as they] meet the long-term global need for reserves, build confidence and promote the resilience and stability of the global economy. It will especially help our most vulnerable countries struggling to cope with the impact of the COVID-19 crisis, “the IMF says on its website.
It’s the biggest [allocation] in our history, “said IMF Managing Director Kristalina Georgieva.
However, of the $ 650 billion SDR, only $ 33.6 billion is earmarked for Africa, an amount that many believe falls short of the continent’s needs, underscoring the need to rely on the SDRs of economic powers.
“This is not enough,” French President Emmanuel Macron said, referring to the $ 33.6 billion.
“33 billion dollars for 55 countries, it is a drop of water”, estimates Macky Sall, president of Senegal.
In his address to the 76th session of the United Nations (UN) General Assembly on September 21, Secretary-General António Guterres hailed “the issue of $ 650 billion in SDRs by the IMF,” but urged the big economies to “reallocate their surplus SDRs to countries in need.”
Mr. Guterres said many developing countries were in urgent need of liquidity and lamented that a large part of SDRs “went to countries that needed it least”.
President Macron announced that France would donate its SDR quota and encouraged other countries to follow his example. “We are ready, and Portugal is ready. We must reach up to 100 billion dollars for Africa and together triple the amount of SDRs allocated to the continent,” said at the Paris summit.
France’s quota is worth around $ 27.5 billion while Portugal’s is $ 2.8 billion.
Carlos Lopes, former executive secretary of the United Nations Economic Commission for Africa (ECA), congratulates France for taking the lead. He told Africa Renewal: “Traditionally, a donor country lends money or provides aid. The fact that France has decided to give up its quota of SDRs is important. We are talking about a member of the G7.
Nonetheless, Mr Lopes, now a professor at the Nelson Mandela School of Public Governance at the University of Cape Town, is skeptical about the possibility of reaching the target of an additional SDR 100 billion for Africa. “His [President Macron] the intentions are good but also too ambitious. He does not have the power to raise such a sum, ”noted Lopes.
He further explained: “The conference did not produce the effect Mr. Macron hoped for: France only succeeded in convincing Portugal, which was probably under pressure as it held the rotating presidency of the EU. [as at the time of the summit]. But other countries did not follow. “
Vera Songwe, UN Under-Secretary-General and ECA Executive Secretary, told Africa Renewal that the Paris meeting was important to continue “the conversation and press for the on-lending of SDRs,” which “will help countries. the poorest to acquire vaccines. “and ultimately support economic growth.
How could $ 100 billion in SDRs help African states?
It would allow Africa “to buy more vaccines, to finance the economic recovery of the continent, to train young people and to create businesses, and to restructure and reduce our debt”, according to President Macky Sall.
Africa’s GDP declined by 1.9% in 2020. Although the continent is expected to grow 3.2% in 2021, this growth is lower than global growth forecast of 6%, notes the IMF.
The IMF predicts that Africa needs an additional $ 285 billion through 2025 “for an adequate response to COVID-19.”
An entrepreneurial initiative
In addition to the SDRs, the Paris summit discussed entrepreneurship, with France announcing the creation of the “Alliance for Entrepreneurship in Africa” to support the African private sector and promote entrepreneurship. “It will mobilize $ 1 billion for small and medium-sized businesses,” Macron said.
Ms. Songwe calls the entrepreneurship initiative a positive development, adding: “Between 70 and 80% of African economies are made up of small and medium enterprises. We’re looking at multibillion-dollar SDRs, but those billions end up These kinds of alliances can help spur growth.
The Alliance for Entrepreneurship in Africa “will help young Africans, small businesses and women, empowering them and enabling them to play a greater role in our society,” said Félix Tshisekedi, President of the Democratic Republic. of the Congo and President of the African Union (AU). . “The hope of our continent is the young people, and we must focus on them.”
Tshisekedi suggested organizing the Alliance’s first meeting in Kinshasa, before his term as AU president ends in early 2022.
Calls for international cooperation to resolve Africa’s debt problem intensified last year, following the outbreak of the pandemic. On April 15, 2020, 18 African and European leaders published an editorial highlighting the need to strengthen the emergency health response in Africa.
Hopes for an economic lifeline for Africa are high, but so are the challenges. Convincing other developed countries to donate their SDRs to developing countries could potentially be a game-changer, but it is also a difficult question. And Mr. Macron’s entrepreneurial initiative should be catalytic.
The French leader is however optimistic, believing that solid foundations have already been laid “for a new growth model” for Africa. Time will tell if he’s right.