A summit on Africa’s cost of capital on Wednesday dwelt as much on what African countries could do to tackle high debt costs as on the external drivers of high costs.
SA’s G20 presidency has put the issue of Africa’s debt and debt costs on the agenda for the G20, and the Business20 (B20), one of the sponsors of the summit, is working on recommendations that it hopes will shape the final communique.
Former Central Bank of Kenya governor Patrick Njoroge told the summit that last year was the costliest yet for Sub-Saharan Africa in terms of payments on external debt, and this year will be worse at an estimated $89bn.
“This is not an issue of excessive debt. In fact Africa’s overall government debt to GDP ratios are often significantly lower than those in many high income countries,” ONE Campaign president Ndidi Okonkwo Nwuneli said. “This is an issue of debt that is simply too expensive.”
It has been estimated that the continent loses $74bn annually on excess interest payments and lost investment, with more capital flowing out through repayments than comes in through new investment or support, said Standard Bank business and commercial banking CEO Bill Blackie at the close of the summit.
But it was time for African-led, African owned solutions. Strengthening government capacity and “reimagining our own markets” was one pillar of a solution, Blackie said.
The relationship between African governments, creditors and credit ratings agencies needed to shift. “One opportunity lies in supporting our finance ministries to build stronger, more professional sovereign investor relations functions,” he said.
Speakers at the summit also called for Africa to deploy its domestic pools of capital at home instead of exporting much of it — on one estimate $3-trillion has been invested by Africans outside the continent.
“We have vast pools of domestic institutional capital in our pension funds, in our insurance companies, that can and must be unlocked for our own development,” said Blackie. “But to truly shift the dial we need to collaborate on the plumbing, standardising legal clauses, blended finance templates, political risk insurance and first loss-guarantees.”
These technical tools could help to reduce costs and make it possible to execute more of the smaller deals that drive real development, Blackie said, as well as unlocking affordable finance for SMEs.
Risk premium
SA Institute of International Affairs director Elizabeth Sidiropoulos said while the risk premium conversation was important, there were two sides of the coin.
“The other side of the coin is what we’re doing in terms of our domestic environment … what are we doing in terms of financial integrity, of strong institutions that provide checks and balances, of accountability and dealing with corruption?” she said in an interview on the sidelines of the summit.
It was not just about the cost of capital — if countries built their pool of domestic resources by building their tax bases and creating an environment that encourages entrepreneurship, the impact of the risk premium would be less intense.
The G20 and the B20 are also focusing on reforms to multilateral development banks to enable them to scale up financing and tackle debt distress more effectively.
There is an alliance of African multilateral financial institutions such as the African Development Bank. University of Pretoria professor Danny Bradlow said it would be better for Africa to put money into those institutions than argue for reforms at global level in the final four months of SA’s G20 presidency.
But SA would still be part of the G20 troika next year, with the US and UK, which is due to host in 2027, and should do what it could do to create mechanisms to improve the cost of capital that the US could not stop. Bradlow urged a detailed technical study on the cost of capital.
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