President William Ruto has been at the forefront of calling for a new global financial architecture that works for African countries, citing the fiscal pressures and climate challenges that are unique to nations on the continent, like Kenya, but which are not necessarily their fault.
At the African Development Bank (AfDB) annual meeting held in Nairobi last week, these calls for reforms took centre stage with other leaders, including Rwanda’s Paul Kagame and AfDB president Akinwumi Adesina adding their voices to it.
The global financial architecture is fundamentally the international governance arrangements that safeguard or control the monetary and financial systems. It refers to how countries get their foreign debt and the terms as well as the policies that determine the economic and financial direction of countries.
Who controls the global financial architecture?
Victor Murinde, executive director of the African Economic Research Consortium (AERC), explains that the global financial architecture is largely controlled by the World Bank and the IMF. “They very much influence the design of the global financial architecture,” he said.
“Through some of the bodies like the Bank for International Settlements, for example, concerning finance and banking, they design what is called the Basel Accord, which dictates the way banks should be regulated around the world,” Prof Murinde explains.
Essentially, these institutions are charged with ensuring global fiscal and monetary stability, meaning they influence the economic policies made at international and national levels, through their control on the banking and financial systems, interest rates, as well as monetary and fiscal policies of countries.
Apart from these institutions, the Group of 20 (G20) countries – 19 of the world’s largest economies and the European Union – also significantly influence the architecture. According to the World Bank, these countries account for more than 85 percent of the global economic output and are the creditors of most of the global bilateral debt. The informal grouping meets regularly to discuss global economic policies.
Why does Africa want the global financial architecture to change?
“The issue is that African countries are facing a lot of challenges, in particular, the issue of liquidity. And this comes up because several shocks have hit the African countries, starting with the Covid-19 pandemic and lockdown, and then the Russian-Ukraine war,” explains Prof Murinde.
“At a time when countries all over the world are trying to recover from the global shocks, liquidity has been a challenge. Countries are unable to access international debt at very reasonable costs.”
The multiple shocks over the recent years have highlighted the weaknesses in the design of the global financial architecture. They have caused the debt of most African countries to hit unsustainable levels, forcing three countries to default, and 10, among them Kenya, have now slid into high risk of debt distress, according to the IMF.
Other leaders, such as Rwandan President Paul Kagame, also believe that the way the system was designed was meant to benefit some parts of the world and it should be made to benefit all parts of the world, taking Africa’s interests also into consideration.
What needs to change?
The AfDB president last week highlighted four key issues that must be addressed to make the global financial architecture work for Africa. The first is scaling up finance accessible to African countries, through – among other things – the reallocation of IMF standard drawing rights (SDRs) to Africa through the AfDB.
SDRs refer to a mix of global currencies that the IMF uses to lend to countries. There are quotas that countries cannot borrow beyond, and this is pegged on their individual GDPs. Currently, most African countries have overstretched their limits. Kenya, for instance, has accessed 378 percent of its quota, against the allowable 435 percent.
Secondly, the bank is advocating for simplification of climate finance to Africa to make it flexible and responsive to climate shocks. “Loans should contain contingency clauses that free up countries from loan repayments when they face climate shocks,” Dr Adesina said.
The third issue is the reformation of multilateral development banks such as the IMF and World Bank, “to deliver greater volumes of concessional financing for countries.” This, Dr Adesina said, should involve fast-tracking the IMF-led push to have the G20 countries restructure debt African countries owe.
Rewriting the ‘risk’ perception of Africa, through fairer and informed rating agencies based in Africa is the fourth. Poor ratings by Western rating agencies are blamed for the high interest rates that African countries are forced to pay for commercial loans, exacerbating their debt distress. This reform should also involve the formation of a pan-African rating agency, the leaders said.
