African ministers must act now on credit ratings

African ministers of finance, economic development and planning gathered in Dakar for the 54th conference of the Economic Commission for Africa (ECA), on the theme “Financing Africa’s recovery: innovating”. And indeed, there is a dire need for new approaches to address the challenges of financing development in Africa.

Some analysts fear that a “great financial divide“may be a key driver of divergence between developed and developing economies during the recovery period from the COVID-19 pandemic and beyond. development has increased by $1.7 trillion. For Africa alone, annual spending on the SDGs is expected to increase by $154 billion following the pandemic.

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

I have often compared my former function as Minister of Economy and Finance to the treadmill challenge, which consists of trying to find your balance while having your feet on two different treadmills – one which would go at a frantic and the other in slow motion. pace.

This requires constantly juggling to create and maintain adequate fiscal space to ensure governments have the capacity to meet their debts and other payments as they come due, while mobilizing the right mix of patient and long-term financing to grow. the economy.

As African decision makers leave Senegal, after careful discussions, they should also bear in mind the following four aspects:

Africa needs its own credit agencies

First, the African continent needs more credit rating agencies. Moreover, it needs agencies that matter to the informal sector.

Funding is as much about numbers as it is about risk perception and storytelling. These are partly driven by ratings from credit rating agencies. They influence the extent to which African countries can raise capital in international markets.

To date, 31 countries have been granted a sovereign credit rating, which has had a positive impact on their ability to raise more finance in international markets for investment projects and infrastructure development. According to the African Development Bank, the number of international bond issues by African countries reached about 155 billion dollars 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 Minister of Finance, I launched preparations for a fictitious rating with a regional agency. What I was looking for was an independent interlocutor who 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 better odds.

In this context, providing space for more African rating agencies is essential, as this helps to diversify policy recommendations to fully capture the complexities of our economies, while ensuring the highest quality and standards of assessment process.

Fund the right projects

Second, increasing the ability of African countries to mobilize more resources for development means ensuring that funds are spent on the production of goods and services, as well as the development of infrastructure that benefits the majority of the population. .

According to the IMF, the average debt-to-GDP ratio in Africa has risen from 61.9% before the pandemic to 67.7% in 2021. These figures are very worrying. However, they sometimes do not fully take into account the quality of the projects financed and their future economic and financial impact.

It is a principle of double-entry bookkeeping to focus equally on how we fund transactions and what those 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 obtain the best value for money through fair competition when selecting companies who will participate in the execution of the project. What was true then is true now. Companies must have technical and financial capacities and undergo thorough due diligence.

It also means ensuring a certain level of profitability by favoring subcontracting during the execution of projects, thus generating growth, job creation and the mobilization of domestic resources. It also means working on the transfer of technology and know-how to local SMEs so that they later become entrepreneurs capable of implementing 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 feedback are important, especially in the face of the global challenges we face.

Africa needs smart financing mechanisms

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

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

Credit ratings should also be based on climate change considerations. Agencies should provide a means to include issues relating to the transition to net zero and renewable energy in their methodology, weighting calculations and assessments. This development within rating agencies is urgent and critical, and could rebalance the bargaining power between lenders and borrowers.

Sharing best practices

Finally, sharing good practices and lessons learned among African countries is a sure way to increase bargaining power and agency – especially when it comes to debt terms such as maturity, amount, interest rates and other technical aspects. Additionally, African nations could exert greater agency at regional and continental levels when discussing infrastructure financing, particularly in conjunction with economic integration imperatives.

Africa is on the right track to strengthen its agency and make an indispensable contribution to the global financial architecture. Further effort is needed to place our continent at the center of solutions to the global challenges facing this planet.