Opinion
Journal Op-Ed: Africa needs additional fiscal space to achieve short & long term goals in this pandemic period
By the Habari Journal Editorial Board
It feels like we are living through the worst days of the 2008 global financial crisis (GFC). Even if that recessionary period ended over a decade ago, the nightmares of what we witnessed then have come back with a vengeance. The bitterness of the coronavirus is that it has driven a stake right through the heart of the things that drive the global economy: ambition, optimism, co-dependency, and empathy.
A Fiscal Crisis versus a Recessionary One
Supply chains shrunk to a trickle at the height of the COVID global pandemic. By July 2020 – a mere six months into coronavirus – foreign direct investment to Africa had contracted at alarming proportions. But unlike the GFC where more advanced nations marshalled resources to get out of recession, Africa’s 55 sovereign nations stand to bear the brunt of this fiscal crisis. To a large extent, the continent does not have an adequately-sized tool shed or the tools necessary to dig out of the fiscal hole the region’s frontier markets are mired in now. With surging public debt and pending debt crises, presidents and ministers have had to make difficult decisions: to pay down their debt, or to keep COVID infections and death at bay while continuing to build infrastructure. Ask any of the professionals in our field and they will tell you that for the first time in over fifty years, none of them would gladly be atop African central banks.
Countries like Angola and Nigeria are doing things that they don’t want to do. Tightening monetary policy and dealing with this magnitude of currency weaknesses is not for the faint-hearted. Fortunately, the World Bank Group, G20 and others made a strident case for debt service suspension. A fast-acting measure such as a time bound debt service suspension saw the world’s richest and most advanced economies allow their less developed cousins to suspend official bilateral credit repayments. In this welcome development, the G20 committed policy tools to ‘support the global economy, boost confidence to maintain financial stability. Essentially, this is neither the time to preach austerity, nor the period to experiment on perfect economic policy.
A Little More Would Go A Long Way
However, let us remember where we are right now. Whereas needles are going into arms to vaccinate developed country citizens, a handful of Africans on the continent have gotten a COVID vaccination. And if projections are correct, some Africans will not receive their dose until 2024. Secondly, if you go back to pre-COVID days, over 50 percent of Africa had fiscal deficits that were above 3 percent of respective annual GDPs, and debt-to-GDP ratios that stood at 61 percent in 2019. Even if debt pressure is mostly because of massive infrastructure spending, the major concern is that Africa borrowed outside the Paris Club, mostly from the non-concessional commercial market. Thus, suspending debt service obligations do not apply.
Available Policy Tools to Support Africa
Of course, you should ask why more advanced countries ought to bail out the developing world if they, the advanced ones, have challenges of their own. Travel is still restricted in the United Kingdom, and the United States’ unemployment remains high. But if demand for your oil or corn cratered, leaving you with very empty coffers, you’d be in a much worse place than those that rely on services and work online. Thus, unlike governors of African central banks, a Chancellor of the Exchequer or a Chairman of the Federal Reserve Bank has many more tools at their disposal to dig their countries out of the COVID craters. After all, their economies are not as commodity-dependent as the ones in our part of the world. More specifically, even though the IMF availed US$10 bn in Africa financing via a Catastrophic Containment & Relief Trust and Rapid Credit Facility, the Fund must go a little further by allocating African countries with new special drawing rights (SDRs).
SDRs and The United States
Technically, before any member of the IMF can acquire a new SDR allocation, other members, most likely wealthier countries like the United States, need to actually donate or lend portions of their SDRs to the cause. Distributed by the IMF to its 190 member states, the open secret to SDRs is that the ‘paper gold’ proportions are determined by their IMF share or economic might. Basically, richer countries have more SDRs than poorer ones. One can sell a portion of their SDRs and have access to foreign exchange or repay debt to another IMF member state. Or as happened in 2009, SDR worth US$ 182.6 billion – the IMF’s largest allocation to date – was used to tackle the global financial crisis. In the present circumstances, African countries desperately need additional financing to address clear and present challenges. If the United States and other G7 or G20 countries apportioned some of their SDRs to Africa, the latter’s central bank governors would have more flexibility to purchase vaccines, get their youthful populations back to work and give requisite support to their struggling economic sectors.
‘… The G-20 needs to move beyond the Debt Service Suspension Initiative (DSSI) and fill the gaps in the international debt architecture and think about more comprehensive debt relief for many countries, including stepping up action on Special Drawing Rights (SDRs) …’
Kristalina Georgieva, Managing Director | International Monetary Fund
While we mention Africa’s fiscal and economic pressures, the reality is that the rest of the world needs SDRs just as much as Africa. Finance ministers across the developing world are making the same decisions their counterparts in Africa are making. But unlike the others, if Africans does not have SDR relief, the vaccine will be the least of the continent’s challenges.
Economic Relations between the U.S. and Africa
Away from SDRs, COVID and vaccines, there is a major opportunity for Africa to close her current funding deficit and even achieve targets under the SDGs. In the United States and across the Atlantic, in various African capital cities, there’s the usual start-of-an-administration buzz. From what we have seen, the U.S. President Joe Biden has assembled a pro-Africa government. As the American representative to the UN, Ambassador Linda Thomas-Greenfield will, without a doubt, oversee a world of change, so to speak. Rejoining the Paris Agreement is a good move on America’s part. We are also hearing all the right noises on the multilateral side of things; one of these being President Biden’s key endorsement of Dr. Ngozi Okonjo-Iweala, as the 7thDirector General of the World Trade Organization.
On the economic front, we join African leaders in recognizing that the African Growth and Opportunity Act (AGOA) expires in less than four years, and call for the U.S. to find a more permanent preference program for the world’s fastest growing region. After all, despite its post-NAFTA challenges and loss of competitive advantage, the Caribbean Basin Economic Recovery Expansion Act of 1990 (CBI II) that emanated from the Caribbean Basin Initiative (CBI) is a permanent preference program that remains in existence these many years later.
On the other hand, we are quite encouraged by what we see in the U.S. and Africa. In the first place, Africa continues to move towards liberal democracy. The evidence is laid out in the World Bank Doing Business (DB) rankings, and in Heritage’s Index of Economic Freedom. Each year, more than one African nation is recognized for improving its business environment.
For its part, the United States has a new development outlook for Africa, and the push for institutional quality should work to increase foreign direct investment to the continent. We are mostly excited about what the U.S. International Development Finance Corporation has in store for Africa. Combining the tools of the Overseas Private Investment Corporation and the financial muscle of over US$ 60 billion is just short of super powers in the world of capital. We can only hope that the U.S. Congress can pass legislation that allows the IMF to issue at least two trillion in SDRs. Despite what naysayers may say, US$ 2 trillion in actual money would be a big shot in both the international business and development arms.
The Journal Op-Ed is a compilation of opinions and insights from experts in various institutions including the African Union Commission, Economic Commission for Africa, United Nations Development Programme, Common Market for Eastern & Southern Africa, the AfCFTA Secretariat, the East African Community and the International Monetary Fund.