How to empower Africa’s multilateral development banks

Boosting the capital base of multilateral development banks in Africa has been a perennial problem. Finding a solution — which has taken on new urgency as international development institutions continue to scale down concessional financing — requires examining the underlying causes.
For starters, the structural asymmetries embedded in the global financial system have resulted in capital flows from low-income African countries to rich countries, a pattern known as the Lucas paradox. African countries have allocated their hard-earned foreign reserves and institutional savings to low-yield securities outside the continent, while confronting exceedingly high borrowing costs on international markets.
Credit ratings agencies such as Moody’s, Fitch and S&P exacerbate this dynamic by assigning most African countries sub-investment-grade scores, despite their relatively low default rates. These sovereign ceilings obstruct African multilateral development banks’ access to affordable long-term capital and restrict their capacity to leverage the continent’s expanding pool of domestic savings.
Compounding the challenge is Africa’s fragmented monetary and financial landscape, which constrains African multilateral development banks’ ability to mobilize capital at scale. Compare the African Export-Import Bank and the Export-Import Bank of China, both of which were established in the early 1990s as policy banks with a mandate to foster trade and international cooperation. But at about $8.4 billion, Afreximbank’s capital base remains significantly smaller than China Eximbank’s $22 billion. More broadly, the assets of three Chinese policy banks account for more than 26 percent of Chinese gross domestic product, whereas African multilateral development banks’ assets total just 2 percent to 4 percent of the continent’s GDP.
This is why, to meet its development needs, Africa should leverage the more than $4 trillion held by the continent’s pension funds, mutual funds, insurers, commercial banks, sovereign wealth funds and central bank reserves to strengthen regional multilateral development banks. The African Development Bank estimates that, with the necessary reforms, the continent could mobilize an additional $1.43 trillion from domestic sources. At the same time, it will also be necessary to pursue monetary and capital market integration, use innovative financing mechanisms and forge stronger partnerships.
This strategy rests on five pillars. The first is periodic capital increases from shareholders to bolster multilateral development banks’ lending capacity. African governments (many of which remain undercapitalized), major private sector firms and nonregional partners should regularly increase their paid-in and callable capital contributions to African multilateral development banks. Wealthier African economies and strategic international partners are well positioned to lead these efforts.
Second, instead of investing domestic savings abroad or holding them in low-return assets, African countries should emulate Ghana, which allocates 5 percent of its state pension fund to local private equity and venture capital and has signed new frameworks to channel retirement savings into infrastructure and small enterprise investment vehicles. Similar reforms in other countries would unlock more patient capital for development.
Third, African multilateral development banks should expand their use of hybrid capital instruments, blended finance, guarantees and securitization structures to crowd in private capital. Green bonds and climate-linked instruments are particularly promising, as are diaspora bonds, which could mobilize patriotic capital while providing secure, long-term investment opportunities.
The fourth pillar is to increase tax collection, especially by curbing illicit financial flows and tax evasion and avoidance by multinational corporations, which cost Africa billions of dollars each year. Strengthening tax administration and improving digital revenue systems would help retain more African wealth within the continent’s financial system.
The last pillar is deepening monetary integration and strengthening regional capital markets. This would do much to mobilize domestic savings, decrease transaction costs and plug financial leakages. Projections for Afreximbank’s Pan-African Payment and Settlement System indicate that the region could save more than $5 billion annually by implementing an integrated payment and regional settlement mechanism.

Better-capitalized African multilateral development banks would yield benefits that are difficult to overstate.

Hippolyte Fofack

Better-capitalized African multilateral development banks would yield benefits that are difficult to overstate. They would help fast-track the implementation of the African Continental Free Trade Area, driving the development of regional value chains, deepening integration and boosting industrialization. This transformation is necessary for African economies to move from exports of basic raw materials to higher-value processing and innovation. It would also generate organic growth for multilateral development banks’ balance sheets.
With the better credit ratings implied by improved capitalization, African multilateral development banks could more easily access international capital markets, enabling them to act as both “project-taking” and “project-making” organizations. In their new role as proactive first-movers, they could crowd in significantly larger pools of private and institutional capital for projects that individual states cannot fund alone.
Ultimately, African multilateral development banks are a strategic investment in the continent’s economic development. Failure to capitalize them risks leaving Africa trapped in a debilitating cycle of dependency and vulnerable to external shocks. With stronger multilateral development banks, Africa would be better positioned to industrialize at scale, increase its participation in global value chains and emerge as a major driver of global growth in the 21st century.

• Hippolyte Fofack, a former chief economist at the African Export-Import Bank, is Parker Fellow at the Sustainable Development Solutions Network at Columbia University, a research associate at Harvard University’s Center for African Studies, a distinguished fellow at the Global Federation of Competitiveness Councils, and a fellow at the African Academy of Sciences. ©Project Syndicate