Kigali, 7 March 2022 (ECA) – While domestic resources are not enough to bridge Africa’s financial gap, they still need to be on the driver’s seat as the countries strive to solve liquidity issues caused by COVID-19.
Speaking at the ARFSD High-level panel on Unlocking financing to build forward better from COVID-19 and accelerate sustainable development in Africa on Wednesday 3 March in Kigali(Rwanda), UN Under-Secretary-General and Special Adviser on Africa Cristina Duarte made a passionate plea for the building of strong domestic revenue systems (DRM) in Africa, insisting that they will play a crucial role in increasing countries’ policy space while allowing them to gain the credibility and trust needed to attract external financing, control financial flows in their favour and give Africa a stronger position at the international negotiation table.
When Rwanda joined the many countries looking for external financing to face the huge demands of the fight against COVID-19, the country’s healthier pre-pandemic situation turned out to be an asset. “The pandemic found us with a working health system, a decentralized government, an integrated planning system, strong coordination between institutions, investments in ICT technologies and a number of online public services. All this helped us come together quickly as the pandemic spread,” said Rwandan Minister of Finance and Economic Planning Uzziel Ndagijimana. “Our first move was to exhaust available concessional windows to respond to targeted priorities but also medium- and long-term aspects aligned with our vision. Despite our economy’s decline by – 3.4% in 2020, 2021 marked the start of the recovery. We are now foreseeing a 10.2% growth and continuing to deploy the vaccine to reach everyone”, he added.
To strengthen their domestic resources, African countries including Rwanda will have to ensure they create favourable growth conditions for their economies and especially their private sectors. However, much remains to be done in this regard, particularly in terms of access to financing.
“My business has existed for 8 years. Growing has not been easy,” said Olumide Gbadebo, Chief Executive Officer of Adunni Organics, a Nigerian cosmetics company. Gbadedo mentioned she had to use her own resources to fund her companies’ growth. “When I tried to borrow money, I was told to bring books, assets, guarantors, things beyond my reach, and pay a 27 percent interest rate. I always made a point of managing my company’s finances well, but many people who are buying and selling don’t know how to manage books,” she deplored.
By increasing African market sizes, the AfCFTA is reducing risks for investors
“We need to realise that the fates of the public and private sectors are definitely intertwined. Unless the private sector, whether it is SMEs or large corporations, is fully supported and incentivized by governments, our model will have significant leakages, said Hippolyte Fofack, Chief Economist and Director of Research and International Cooperation at the African Export-Import Bank (Afreximbank). In other words, he explained, instead projects that could be created and generate jobs locally, there would be a reliance on imports, job exports and thus more external liability for Africa.
“Empowering the private sector is in the interest of governments. This may well be the only way for Africa to own its development,” he added. According to H. Fofack, one key constraint in the past has been the fragmentation of African economies and markets which has made it difficult for corporations to spread the risk of investing in small markets. The AfCFTA and its attached rules of origins is a game changer because it is going to give priority to African companies and their industries, and that is a major incentive in terms of creating the conditions for sustainable growth and development. Financing will follow because productivity will increase”.
“We are talking here about a number of issues, one of which is the cost of borrowing. One way of helping SMEs and women is to set up credit bureaux that can build information on their ability to repay loans on time etc. so banks can assess their ability to pay back their loans”, said ECA Deputy Executive Secretary Hanan Morsy.
Another way of supporting them is the introduction of movable collateral registries, items such as machinery, livestock or gold in jewels that can help borrowers show their capacity to pay back their loans. Usually, banks ask for land or property as a collateral for loans, she added.
Supporting private sectors to increase government income
Beyond access to financing, African decision-makers have a range of options at their disposal to strengthen their private sectors, starting with facilitating access to financing for companies of all sizes when their projects are bankable. “If we look at lending in the private sector as a share of GDP, we are at less than 20 percent in the continent, compared to the 70% in the rest of the world. So the banking sector essentially has been more risk averse, but also has those prohibitive interest rates”, said Fofackwho noted that Nigeria for example, found an innovative solution to this issue. In Nigeria, the government forced banks to lend to the private sector with a private sector lending ratio of 65%. This policy led Nigerian banks to provide more lending during Covid without necessarily increasing their NPL ratios, he explained.
Fofack also mentioned the US model, where the public procurement policy grants significant support to national SMEs, thus contributing to value chain building, fiscal space expansion and generating revenue for the government through a multiplier effect.
Back in Africa, Rwanda set up several mechanisms in support to enterprises of all sizes and especially SMEs. Among them, a microfinance network, an institution that helps entrepreneurs develop their projects prior to qualifying for loans, government support that provides up to 75 percent of guarantees required to access loans, and legal reform to make the financial institution market more competitive.
Women’s economic marginalisation costs Africa 60 billion dollars a year
Policies in support to the private sector will also have to take into account the informal sector, whose opportunity cost is particularly high for Africa according to C. Duarte, who called for the issue to be addressed with a medium term rather than a short-term vision, and for governments to “roll out the red carpet” to encourage businesses to move out of the informal sector. The informal sector has a huge opportunity cost, but countries don’t need newly formalised enterprises to contribute to their tax baselines for the next ten years. Instead of asking them to pay taxes as soon as they come out of the informal sector, let’s have the formalisation process allow them to open bank accounts and pay nothing for two years or by provide them with support for their employees’ social security coverage, she added.
Women’s economic exclusion is another significant source of losses for African economies policy makers need to stem. “The opportunity cost of women being economically side-lined in Africa is about USD 60 billion a year. Social parity goes beyond fairness, human rights, being on the right side of the world: this is a key critical success factor in delivering growth and stability in Africa, and the only way to overcome these challenges is to change our mindset, C. Duarte insisted, calling for automatic linkages between women and micro-credit to be broken as they limit their economic potential. “We need African women to have access to assets such as land for them to be on an expansion trajectory,” she insisted.
The High-level panel on Unlocking financing to build forward better from COVID-19 and accelerate sustainable development in Africa was held on 3 March 2022 on the occasion of the Eighth African Regional Forum for Sustainable Development on March 3, 2022. This event aimed to identify and articulate the financing needs of African countries to enable them to mobilize adequate and sustainable resources to finance post-COVID-19 recovery and accelerate the implementation of Agendas 2030 and 2063 across the region.
Click here to view the full meeting (minute 02:43:00 to 04:20:00).
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