Africa’s Crisis Recovery Requires Upgrading the Global Financial Safety Net
The COVID-19 pandemic has taken a significant toll on African economies. Economic activity in Africa is estimated to have experienced its worst contraction on record in 2020, thereby pushing tens of million more people into extreme poverty. In the face of limited domestic resources and borrowing space, many countries on the continent have been constrained in their ability to implement expansionary macroeconomic policies to contain the crisis, particularly in sub-Saharan Africa.
Despite the significant support for COVID-19 response provided by their bilateral and multilateral partners, African countries continue to face significant financing needs to protect lives and livelihood and bolster prospects for a stronger and more resilient economic recovery.
In this light, the time for the international community to go big on supporting Africa’s pandemic crisis recovery is now. To this end, I believe the following steps—which I detail in a new policy paper—will go a long way toward making the global financial system more effective, thereby helping countries on the continent mobilize more adequate levels of external financing for their crisis recovery.
Allocate IMF special drawing rights and implement a multilateral reallocation initiative
More immediately, the first priority must be to promptly provide additional liquidity to countries on the continent by building on the growing consensus on the need for a general allocation of IMF special drawing rights (SDRs) supplemented by a multilateral reallocation initiative for low-income countries (LICs).
To this end, both new allocations and unused SDRs need to be urgently put to good use in efforts to help Africa’s LICs bolster economic recovery, whilst contributing to global health security objectives. While boosting the pool of IMF concessional resources remains imperative and urgently needed, other avenues for reallocating excess SDRs through a complementary on-lending arrangement within or outside the IMF could be considered as well subject to appropriate safeguards. But as any SDR reallocations should, in principle, be voluntary, successful implementation of such an arrangement will be contingent not only on the transparency of its governance framework, but also on the strength of political commitment from global leaders.
Scale up IFI financing
The global community must also aim to work collaboratively to significantly scale up IFI financing which is likely to be among the key sources of external financing for Africa given market volatility and domestic fiscal pressures facing bilateral partners. Among multilaterals the IMF should play a critical role, notably by at least sustaining record levels of concessional commitments achieved at the onset of the crisis and boosting access to its non concessional resources by frontier markets with strong debt indicators. Similarly, the World Bank should live up to expectations by at least doubling IDA lending to low-income countries and quadrupling IBRD exposure to other countries on the continent over the duration of the crisis. At the same time, increased access to IFI financing should be linked to reform efforts by eligible borrowers to sustain strong policy performance and safeguard or restore debt sustainability.
Critically, the World Bank and other multilateral development banks should commit to make greater and enhanced use of guarantees and other risk management instruments to help African countries lower borrowing and project implementation costs. They should also make their credit enhancement capabilities readily available to countries at risk of debt distress or in debt distress to incentivize creditors to participate in debt restructurings.
Continued provision of debt relief will prove critical, including the extension of the G20’s Debt Service Suspension Initiative at least through end 2021. Effective implementation of the G20 Common Framework will also greatly benefit African debt-distressed countries, should it materialize into timely debt restructurings, including debt write-offs where needed to restore debt sustainability. To make progress on this front, all parties involved will need to demonstrate flexibility, including the G20, official and private creditors as well as African countries seeking debt treatment under the Framework. In parallel, the success of the Common Framework will require taking steps to secure private creditor participation in debt restructurings, while preserving the rights of concerned LICs acting in good faith to benefit from IMF financing. In collaboration with the authorities, the IMF should also play an active role in coordinating debt treatments by official and private creditors.
Successful implementation of these various financing options would be contingent on the strength of the political commitment from the international community to support rapid and resilient recovery in LICs. It would also require linking access to new financing to sound policies and reforms on the part of recipient countries.
But the ultimate measure of success will be the genuine commitment of all involved stakeholders to upgrade the global financial safety net so that it leaves no country behind at this critical juncture.