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Africa’s proposed new financial institutions risk being Potemkin villages

Can the AU’s blueprint for an ambitious new financial architecture be converted into actual structures?

The African Union (AU) has launched a drive to establish its own panoply of financial institutions to address what it regards as the failure of global financial bodies to meet Africa’s transformation and development needs.

Plans for an African Central Bank, African Monetary Fund, African Investment Bank and a Pan-African Stock Exchange – elements of an African Monetary Union – were announced last weekend by a group of African presidents and heads of African financial organisations on the margins of the AU summit.

The new institutions should improve Africa’s access to capital, impartial debt management and fair credit and risk assessments, says the AU. They will strengthen the continent’s financial architecture and its position in relation to global financial bodies. Priority areas for global reforms include debt architecture, concessional finance, rechannelling International Monetary Fund (IMF) Special Drawing Rights, more decision-making power, and Africa’s green industrialisation and growth.

Ghana’s President Nana Akufo-Addo told the launch event that if Africa could increase its institutions’ financial power, it could finance its own development. Zambian President Hakainde Hichilema said the global financial system urgently needed reform because African countries were unfairly given a higher risk profile. ‘We expect African institutions to assist us by valuing [our assets] correctly.’

It isn’t clear how parallel African bodies could remedy problems with the global financial architecture

It’s probably not coincidental that Ghana and Zambia have recently defaulted on some of their debt. AU Economic Development Commissioner Albert Muchanga said 23 African countries were in financial distress and three had defaulted. He stressed the need to accelerate domestic resource mobilisation to reduce reliance on foreign capital.

Dr Hanan Morsy, Deputy Executive Secretary and Chief Economist at the United Nations Economic Commission for Africa, called for more concessional finance through the increased capitalisation of multilateral development banks and more risk taking by them.

What should we make of this rather baffling array of new institutions, and why is it being launched now? On the push side, it would seem that COVID-19 and the debt crisis it precipitated were a major motivation. On the pull side, it may have been the AU joining the G20 this year and feeling the need to tackle global financial problems that are the core of the G20’s agenda.

There is no doubt much truth in the underlying diagnosis that the current global financial architecture isn’t as representative as it should be. And that Africa should have more voice in the World Bank and IMF – particularly to secure increased funding.

Yet it isn’t immediately obvious why creating parallel African bodies could remedy such problems. ‘There seems to be a fundamental flaw with the motivation behind the establishment of these institutions,’ says Andrews Atta-Asamoah, Head of Africa Peace and Security Governance at the Institute for Security Studies.

Over the last three years, 93% of AU decisions have not been implemented

‘It is evident that the push for their establishment is conflating issues regarding the fairness of the global financial space with Africa’s need to control such institutions. This constitutes a major problem and is not strong enough to sustain the motivation of individual member states, who are currently confronted with numerous pressing needs.’

And the AU is already struggling to implement its countless decisions. As AU Commission Chairperson Moussa Faki Mahamat bluntly put it in his opening address to this year’s summit: ‘The frantic tendency to make decisions without real political will to implement them has grown to such an extent that it has become devastating to our individual and collective credibility. As an illustration, over the last three years, 2021, 2022 and 2023, 93% of decisions have not been implemented.’

Included in that history are economic bodies that haven’t materialised. In December 2023, the AU acknowledged that the legal instruments establishing the African Investment Bank and African Monetary Fund – adopted in 2009 and 2014 – hadn’t come into force because too few countries had ratified them. The AU also said: ‘There is inadequate funding for establishing [these institutions], which is particularly detrimental to the operationalisation of the African Monetary Fund, which is the first step toward establishing the African Central Bank.’

Indeed, that was a statement of the obvious. It’s all about the money, and the argument seems to be circular. Africa needs a new African financial architecture because it lacks the finance for its development. But it lacks the money to establish the new architecture in the first place.

Africa should instead focus on reforming existing global institutions, which is where the money is

Akufo-Addo realised the problem and said he would propose to the AU summit that all member states invest at least 30% of their foreign reserves in Africa’s financial institutions. But it seems rather unlikely that member states would do that before these institutions have proved their credibility and legitimacy.

Africa’s push should instead focus on reforming existing global institutions, which is where the money is. But ultimately the real momentum for adequately capitalising African development must come from individual countries, including through greater mobilisation of their domestic resources – especially more efficient tax collection, as Muchanga suggested.

Another economic analyst who requested anonymity told ISS Today: ‘I think it’s wishful thinking. The problem isn’t who owns or controls the institutions, it’s that the governance structures in place at the national level create investment and financing risk.’

He also doubted the AU’s ability to lead the initiative. ‘It’s also quite condescending – that African banks who might come under this framework would somehow make different investment decisions than western lenders just because they are African. They are also sophisticated lenders and make decisions based on objective investment criteria.’

It’s clear then that Africa’s financial problems must be tackled from the bottom up. The AU’s top-down approach of erecting a whole new parallel financial architecture risks creating Potemkin villages of grand but make-believe institutions that forever remain on paper.

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