African leaders push for reforms to global financial architecture

By Jon Marks

Africa is pushing for a significant shift in financial and political power, with leaders demanding a greater voice in global decision-making, including seats on the United Nations Security Council (UNSC) and a bigger say in the International Monetary Fund (IMF).

Confronted with debt crises and illiquid markets, African heads of state have also called for greater access to IMF special drawing rights (SDRs), with a proposal that $100bn should be reallocated from wealthier countries to the continent, via the African Development Bank (AfDB).

The extent to which these goals can be achieved could prove critical to Africa’s ability to finance and structure the energy transition on its terms.

The arguments for a new deal for Africa were set out by presidents Nana Akufo-Addo of Ghana, William Samoei Ruto of Kenya and Hakainde Hichilema of Zambia in London weekly The Economist on 6 March. “The conversation on reforming the global financial architecture has often felt more like Africa against the rest of the world,” they said, while claiming “the tide is turning”.

It is notable that all three leaders have recently had to confront precipitous debt issues.

Busy coping with the impacts of inflation and social pressures, not many people in Nairobi are likely to have appreciated the finer points of Kenya’s success in selling a big dollar-denominated bond in February, but the economy benefitted from a transaction that enabled the government to avoid a costly default (AE 501).

But much more is needed if investment in green energy and other drivers of a sustainable post-carbon economy are to flow at the levels required.

In their Economist article on how to make global finance work better for Africa, Akufo-Addo, Ruto and Hichilema argued “there is something fundamentally wrong with the [global] system and it must be fixed” and called for institutional and financial change.

Many of their points have long been made – such as the push for greater inter-African trade – but others represent more recent thinking about re-engineering the international financial architecture. In particular, the presidents argued for:

● A stronger African voice – “Leaders must be bold in promoting their ideas and participating when decisions are being made that affect the continent… we will not sign on to global regulations and agreements that are not shaped with our input,” they said.

The new Alliance of African Multilateral Financial Institutions (AAMFI), known as the Africa Club and unveiled by the African Union (AU) at its annual summit in Addis Ababa in February, could serve “as a powerful negotiator on behalf of the continent” the trio suggested, helping to leverage African countries’ balance-sheets to increase investment and jobs. Such institutions need the full weight of their members behind them and Ghana has proposed that countries invest at least 30% of their sovereign reserves in African multilateral institutions;

● Cheaper money and stronger institutions – lower-income countries must have sufficient access to concessional finance through the World Bank Group (WBG)’s International Development Association (IDA). Kenya is hosting the IDA21 conference in April, where fundraising will be the priority. Channelling SDRs to African institutions would allow these assets to be used for development finance.

The presidents also complained about the high cost of capital facing African countries, “which is based on unfair risk premiums and inaccurate valuation of our economies”. They argued that stronger African institutions would “assist in valuing our economies correctly, working with international financial institutions to get this right”. There has been a start with the AU gaining a seat at the G20 in late 2023, making it the G21;

● Improved debt deals – the presidents argued for an overhaul of the Common Framework debt-restructuring blueprint, introduced by the G20 in 2020 to help countries during the Covid-19 pandemic. However, the framework has not worked as intended. Debt deals with Ethiopia, Zambia and others took far longer than expected as currencies tanked and most remain mired in complications, including how to account for Chinese debt (AE 496). There are calls for $100bn of SDRs that were meant to be lent by G20 members to poorer countries to now go only to Africa, directly to the AfDB;

● Climate finance – African, European and American leaders are examining how to raise billions in climate finance, including taxes on carbon-based transactions. Ruto’s efforts to work with French President Emmanuel Macron have become linked to innovations like ‘debt-for-nature swaps’, the presidents observed.

The AU in February urged world leaders to rally behind the idea of a carbon tax including a levy on fossil fuel trades, shipping and aviation. That could be augmented by a global financial transaction tax to provide affordable finance for climate positive investments and could enable “ring-fencing of these resources and decision-making from geopolitical and national interests”;

● Bringing the world to Africa – Ghana has proposed an annual African Economic Summit (AES), involving global heads of state and government. Kenya – which Ruto has positioned as an enthusiastic host for global summits (AE 490) – will host the first AES in 2025, followed by Zambia in 2026 and Ghana in 2027, the presidents said.

A majority of African Energy readers would likely agree with this agenda – even while observing that the presidential trio breezed over some persistent problems that can be laid at their own doors.

Institutional questions

African funding for African institutions was also on the agenda at the AU’s February summit, which celebrated G20 accession, along with commitments to push for two permanent and five non-permanent UNSC seats. But this was against the background of the AU’s own funding problems; a majority of member states are deeply in arrears to the AU Commission, adding to questions about the body’s effectiveness.

Long-standing plans to establish an African Monetary Union and create an African Central Bank, African Investment Bank (AIB), African Monetary Fund (AMF) and a pan-African stock exchange have all fallen short. Legal instruments to set up the AIB and AMF were adopted in 2009 and 2014, respectively, but have yet to be ratified by enough countries for them to enter into force. The AU also noted “there is inadequate funding for establishing the AU financial institutions.”

However, while officials concede the AU has significant problems, they argue other African institutions are now better able to take a leading role in areas which the IMF and WBG have tended to monopolise.

Analysis of recent deal flows gives some backing to the AU’s claim that the institutions that make up the new Africa Club – the African Export-Import Bank (Afreximbank), Trade and Development Bank, Africa Finance Corporation, African Reinsurance Corporation and African Trade and Investment Development Insurance (Atidi) – “have stepped up to support African states during recent times of crisis”.

Biggest of all, the AfDB is well up for the challenge of managing the anticipated huge SDR inflows, one participant told African Energy’s 12-13 March Africa Investment Exchange (AIX) Nairobi event. The AfDB has argued its AAA credit rating would allow it to leverage the funds by as much as four times.

Another AIX: Nairobi participant observed that, after years of preparation, the Eastern Africa Power Pool and other pan-African initiatives were fast getting their act together to take continental transmission and electricity trading into a new, more integrated phase. Increased funding would be well used to create more coherent, integrated Africa-wide infrastructure.

Some bottlenecks are closer to home

Such initiatives will be welcomed by African project developers, who are confronted by persistent infrastructure, financial and political bottlenecks that have undermined many economies over decades.

Some of those bottlenecks may not be fixed by changes to the global financial architecture, but they could be addressed by genuine domestic reform. Referring to the lack of independent power projects (IPPs) in Kenya over the past decade, one delegate at AIX Nairobi said “the money is there for well-structured projects”. It was government interventions in the sector that held up investment flows to IPPs, they added, and it was “for governments to sort out many of these issues”.

The extent that bottlenecks have continued to strangle developments is reflected in the African Energy Live Data platform’s estimate that, while 67GW of new generation capacity was added in 2018-23 – taking grid-connected installed capacity above 250GW across the continent – there was a worrying downward trend, from 49GW of capacity added in 2018-20, to only 16GW in 2021-23 (AE 498).

Substantial new international financial flows might help tackle some of the underlying issues, stemming from under-investment in transmission and the insolvency of utilities and other institutions. The AfDB, WBG and many others are giving more attention to such issues, but it is not the whole answer to deeply intractable problems.

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