Dr Caleb Fundanga (in picture), the current president of the Institute for Finance and Economics and former Governor of the Bank of Zambia from 2002 to 2011 has underscored the need for a turnaround in Africa’s economic performance in recent years which resulted from mainly due to improved economic management, the Highly Indebted Poor Countries (HIPC) initiative as well as high commodity prices in recent years.
He points out that the fiscal space created as a result of debt forgiveness and improved economic management has enabled African countries to invest in vital infrastructure. This has also enabled them to accumulate foreign currency reserves, which reached US $461 billion in 2011. These reserves are mainly kept at and managed by European and US institutions where African Central Banks consider the perceived risks are low.
The article argues that the current economic and financial crisis has increased the cost of borrowing for Africa entities, and drastically reduced the yields on investments of African central banks. It also points out that the current yields on some of the investments stand at below 0.2% which is almost nothing at a time when those reserves are at historical highs.
It is stressed that Africa, has the resources to meet the financial requirements of its development which is perhaps less than US $30 billion, a small fraction of the US $400 billion plus reserves. Suchsums would not jeopardise the central banks’ need for liquidity. Therefore, if the reserves of the central banks are put towards African debt instruments, the yields would certainly be much higher than the sub-0.2% levels they currently get in the developed world. Similarly, if African development finance institutions borrowed the reserves of African central banks, the cost of such borrowings would certainly be lower than the current levels. This is undoubtedly a win-win situation. Both borrowers and investors would be better off
To address the problem of some of the Africa’s development financing institutions having poor credit ratings, the AfDB (with its AAA rating) could guarantee the borrowings of some of these institutions. Dr Fundanga states this will make African development the real winner.
He underscores the case for Africa using its own resources for its development, and cites the example of the use of local currency loans by development entities such as the World Bank and AfDB which are proving popular and helping to reduce the foreign exchange risk faced by borrowers. He also emphasises the importance of the growth of stock exchanges in Africa, with money coming in from local investors to open new funding avenues for African entrepreneurs.
In a similar manner, the article argues that the use of African central bank reserves to finance African development finance institutions would mean utilising a huge pool of local resources hitherto targeted at developed countries. The real challenge, the article states, is to establish institutions that can help to make this possible.