A Safety Net for Africa: towards an African Monetary Fund

Dominique de Rambures, Alfonso Iozzo, Annamaria Viterbo
Dominique de Rambures: Honorary Chairman of the Euro Banking Association and former Chairman of the ECU Banking Association
Alfonso Iozzo: President of the Centre for Studies on Federalism and Vice President of Robert Triffin International, former Chairman of Cassa Depositi e Prestiti
Annamaria Viterbo: Associate Professor of International Law at the University of Torino and Affiliate of Collegio Carlo Alberto, Torino

After the Second World War, the establishment of the United Nations was completed with the establishment, in the financial area, of the IMF for financing the balances of payments, and the World Bank for financing infrastructure and investment projects. The European Union has created the European Stability Mechanism (ESM) for financing the member States who are dealing with payment problems, which can be compared with the IMF, and the EIB for financing the investment projects which can be compared with the World Bank. China has numerous entities for financing investments, such as the China Development Bank, Export-Import Bank, and many funds and development banks dedicated to a specific purpose, such as the ABII (Asia Bank for Infrastructures and Investments) to support the OBOR policy (One Belt One Road, i.e. the New Silk Roads). Beyond their aim of financing investments, China uses these financial organizations and others, such as the sovereign fund China Investment Corp., and the state banks, for buying government bonds in countries such as Greece and Portugal during the 2008 crisis, that were dealing with payment problems. The African Development Bank grants loans to finance infrastructure and investment projects, but Africa has no financial institution such as the IMF or the ESM.

Why should Africa build up a financial institution of this kind, while the African countries have so far called upon the IMF for their financial needs? A few reasons are:

• the IMF does initiate a financial program but does not provide the whole amount of funds needed. IMF involvement is only a way to trigger the involvement of other sources of financing,
• even though the IMF involvement is based upon economic and financial grounds and the assessment of the borrower’s repayment capacity, the final decision is basically political. Some IMF members may request that it is part of a broader agreement on its economic or financial sustainability.
• IMF loans are subject to economic and fiscal conditions that may be justified by purely financial reasons, but they should also be implemented in a politically and socially sustainable way, as part of a development strategy.
• the creation of an African Safety Net, meeting the emergency financial needs of the African countries, would be a critical step toward further economic and political integration of the continent.

According to its Statute (2002), the African Union’s objectives are:

1. to achieve a greater unity and solidarity between the African states and peoples,
2. to defend the sovereignty, the territorial integrity and the independence of the member States,
3. to deepen the political and socio-economic integration of the continent.

The creation of an African Safety Net will be part of the ongoing negotiations of an African Free Trade Area (AfCFTA) and a common currency. In 2020 the creation of a common currency – eco – between 15 countries in West Africa (ECOWAS) should be a first step in this direction.

The world-wide recession, the fall of the commodity prices, the lack of diversification among the African economies, the drop of the foreign direct investments and more generally the exodus of foreign investors, the fall of migrant remittances (from 80 to 90%) will critically affect the African economies, and raise unbearable political and social tensions that may further deepen the economic crisis.

Furthermore, the development policies of the 54 African countries continue to be adversely affected by a fragmented market, which makes the construction of a value-chain difficult: Africa is exporting crude oil and importing refined oil. Intra-African trade amounts to 17%, as opposed to 60 or 70% in Asia and Europe. A study by UNCTAD (United Nations Conference for Trade and Development) concluded that the cancellation of internal customs tariffs would increase the annual growth rate by 1%. The increased trade with neighboring countries would allow the African economies to become more specialised and more competitive. For far too long it was assumed that Africa could not emerge from under-development for as long as an industrial base producing export-related products will not be built up. However, the service sector has been growing threefold over the last 15 years to reach 16% of the workforce, leading to a more balanced development model. In 2019, venture capital companies have invested $1.3bn in African start-ups (from $200 million in 2015), i.e. a 600% growth rate in five years.

Over the last 10 years, the African continent has experienced a 5 to 6% growth rate, meaning that the African economies were about to be liberated from the vicious circle of development, characterized by an economic growth rate chronically lower than the demographic growth rate. The current crisis may push the African countries back below the take-off growth rate.

The creation of an African Safety Net

In the months and years to come, African countries will be facing severe payment problems, and some of them may default. Thus, it is essential that the African countries build up a common financial institution to meet such a payment crisis. From $16.3bn in the sixties, the overall debt of the African countries has reached $365bn in 2019, of which a third is owned by China. Following the current crisis, this amount is expected to reach unsustainable levels. The G20 countries have decided to postpone the payment of interest charges for 6 months, but it applies only to the public debt. The situation requires a much more important package of measures to meet the oncoming crisis. In such a situation, the African countries must get together to strengthen their bargaining power, put together their resources, and take back control of their economic and monetary policies.

With this aim, the African countries may create a Fund managed by the African central banks. The contribution of each member state could be made through transferring all or part of their SDR rights and maybe an agreed part of their foreign exchange reserves. Some foreign creditors may contribute as well, such as the European Union and China. In accordance with the IMF statutes regarding the transfer of SDR, this regional financial institution may be granted the status of « prescribed holder ». In a first stage, the African Fund may be formed by a limited number of the members of the AfCFTA trade agreement, while the others may join in a further step. Using the initial capital as a leverage, the new African fund may raise up to 5 to 10 times more from the markets.

In addition to its core function, the new Fund may operate a clearing system of the foreign currency payments between the member states, with the aim of lowering their needs in strong currencies. The proposed African Monetary Fund may also provide technical assistance to member States for the management of their foreign debt. The bargaining power of the African countries facing a debt renegotiation or restructuring process would be significantly strengthened.

The proposal to raise a new issue of SDRs, which has been turned down by the USA, may be taken over by the European countries, this new issue being allocated to the African Safety Net. Given that the African Fund will be formed by central banks to strengthen the African financial system and manage a payment system, it may be operated with the assistance of the Bank of International Settlements, which has already a very long experience in the matter, as it was involved in the European Payments Union, the Fonds européen de coopération Monétaire (FECOM) and the ECU clearing system.

SDR QUOTAS

(millions of SDRs - as of April 2020)