“In the context of the weakness of the international financial architecture, we must first mobilize internal savings and strengthen our institutions.”
President of the African Development Bank (AfDB) for ten years, from 2005 to 2015, Donald Kaberuka was one of the key economists speaking at the Afreximbank Annual Meetings (June 12-15, 2024, in Nassau) alongside Jeffrey Sachs. For this rather ‘sovereigntist’ economist, Africa should continue the fight to reform the global financial architecture while simultaneously building a capital market and deepening second-generation reforms.
Our era is marked by repetitive crises. What economic policy should African states implement?
Indeed, the world is experiencing frequent, multifaceted, and, in recent years, even synchronized crises. We must adapt to this reality because more crises will come in the future. Taking these parameters into account is crucial in any economic policy. It is also worth noting that in the past, the global economy has faced profound shocks. Consider the dollar crisis in 1972, the oil shock between 1973 and 1979, the Asian financial crisis in 1997… After World War II, the USA was the only nation with surpluses. This money was recycled through the Marshall Plan. In the early 1970s, due to the Vietnam War and other factors, American surpluses turned into deficits, and President Richard Nixon decided to decouple the dollar from gold. The dollar was effectively devalued. In 1973, following the oil shock, the price of a barrel of oil jumped from 2 to 32 dollars, a massive sixteenfold increase in a short period. This was when Latin America and Africa entered the crisis of negative growth and debt.
In contrast, the Middle East began to accumulate petrodollars. This was the first significant crisis. For the African continent, this was followed by two so-called lost decades marked by economic crises, the AIDS pandemic, and civil wars in several regions, including Angola, Liberia, and Sierra Leone. Other crises followed, such as the subprime crisis, the Arab Spring, and the Covid-19 pandemic. In short, Africa has faced many crises and will continue to do so. Therefore, we should learn from these experiences to build resilience.
How, then, should we face these crises?
Given the weakness of the international financial architecture, we must first mobilize internal savings and strengthen our own institutions. I am referring to the African Union, its affiliated institutions, African financial institutions, and regional bodies. This is how we can build a political and financial cushion to withstand shocks. Consider what the Southeast Asian countries did after the Asian financial crisis in 1997, with the “Chiang Mai Initiative,” a mechanism for pooling financial capacities. However, all this requires that the African Union be strengthened, including its financial autonomy. Proposals have been made in this regard, and a mechanism was even adopted, but it is currently applied by only 18 countries, with 5 more in the process of implementation. We need to end this dependence. It’s not a lack of technical proposals; it’s a matter of political will. If we want to strengthen our independence, this issue must be resolved.
Currently, the total contribution of all African states to the Union’s budget does not exceed 200 million USD. The proposed mechanism has already proven effective within the former structures of the European Union. It should also be noted that the same approach had been applied within ECOWAS. The hypothesis is that this formula would strengthen the continental free trade area. Rwandan President Paul Kagame, who was tasked by his peers with the AU reform, has worked extensively in this direction and has recently passed the baton to his counterpart, William Ruto of Kenya. Strengthening the AU and reforming international institutions are crucial. We saw this during the Covid-19 crisis, where, despite the rules of the World Trade Organization (WTO), some Northern countries imposed embargoes on the export of vaccines and medicines. Wealthy countries stockpiled vaccines. I was part of the group of Special Envoys set up by President Cyril Ramaphosa, then Chairman of the African Union. Even when the resources were available, it was practically impossible to obtain vaccines. Hence the need to reduce, not eliminate, risks in international value chains, including pharmaceuticals, food, and even energy.
Will these necessities undoubtedly guide the AfCFTA?
I hope so, and I wish for it. We must go beyond simply reducing or eliminating tariffs. The most important issues are non-tariff matters, the free movement of people, and the right of establishment. Take, for example, the Yamoussoukro Agreement on the fifth freedom in aviation, payment systems, and policy coordination.
Regarding mobility, there has been a lot of reluctance among countries?
To put things in perspective, there has been some progress, but it remains slow. I remind you that, even at the European level, not all countries have adopted the Schengen visa. Perhaps we should move forward at different paces for those who are already ready to adhere to these integration mechanisms. In Rwanda, Africans have been able to enter freely for ten years, and there has been no issue with this. Citizens of the continent can settle and work there. Some African states are hesitant on the matter, citing the risks of mass migration. But here again, it is a matter of political will rather than a real problem, even though, admittedly, 80% of African migrants are intra-African.
What are the key levers to activate in order to realize the AfCFTA?
In my opinion, there are three ongoing technical and legal elements. For example, defining rules of origin, establishing dispute resolution mechanisms, anti-dumping measures, etc. These elements help clarify the legal framework and reassure certain states that fear the AfCFTA may be used as a pretext by others to send them imported products from elsewhere. In general, three reasons have slowed down integration: the zero-sum political and economic calculations, the unjustified fear of supposed hegemonies from large neighboring countries, and, for large countries, unfair competition. But all of these are addressed in the texts governing the AfCFTA.
Regarding strengthening African financial institutions, should foreign capital be invited, as is the case with the AfDB, where non-regional members hold 40% of the capital?
We should start with our own resources and pool our efforts. Then, we can call upon external capital where possible. To my knowledge, since non-regional countries joined the AfDB’s capital in the 1980s, it has been working rather well. President Babacar Ndiaye and his predecessor thought it wise to bring in countries with high financial ratings to support the bank’s triple-A rating. This process allowed the institution to access the capital market at affordable rates while preserving the African character of the bank. For example, its president must always be African, its area of intervention, its headquarters, and also the double majority for certain decisions. The time has come, once again, to strengthen the financial capacity of pan-African institutions like the AfDB, Afreximbank, TDB, BOAD, BDEAC, DBSA, Africa 50 Infra, Africa-Re, etc., and to define a framework for collaboration between them.
Would allocating SDRs to regional institutions rather than states not provide part of the solution by strengthening the equity of these institutions?
I was present at the G-20 meeting in London where the issue of SDRs was discussed. A decision was made to increase SDRs from 25 to 250 billion dollars in 2008. However, at that time, Africa did not really benefit from this due to its low share in the IMF’s capital quota. Today, the idea that has continued to gain ground is the reallocation of SDRs through a mechanism that is obviously non-binding but would allow African countries that need them to have access. This has taken time, but a recent IMF decision goes in this direction and is commendable, as it allows for an increase in the capital base of African financial institutions. However, this should not be counted as double in relation to official development assistance (ODA); SDRs should be dissociated from ODA.
Africa has 800 million people without access to electricity. How can this imperative of energy access and energy transition be reconciled?
The transition must be fair. Access to energy is imperative. Unfortunately, the dysfunctions in climate finance are glaring, with, for example, a carbon market that does not work and commitments from developed countries to allocate 100 billion dollars per year to Africa that have never materialized.
Given these parameters, is African debt sustainable? Should we fear a return to the 1980s?
We must distinguish the following: the crisis of the 1980s was not caused by excessive debt in Africa but by its impoverishment. At the time, it was primarily multilateral debt and not Eurobonds. As I mentioned earlier, following the oil shock of the 1970s, Africa became poorer in terms of real growth per capita. This is why, in the end, multilateral debt had to be canceled. This time, the situation is different; the nature of the debt composition has changed, its growth has been quite rapid, and the tax base has shrunk due to crises. In the early 2000s, interest rates were very low, and African signatures had regained credibility thanks to the commodities boom. Today, there have been many Eurobond issuances. I should mention that, contrary to common belief, China holds only 20% of African debt, with the rest controlled by private entities and multilateral agencies. It is also true that, in the process, it is necessary to avoid “mismatches” between exchange rates, debt maturities, and project durations. To develop and cope with its burgeoning population, Africa needs long-term credit, around 30 years, at competitive rates. Some countries are seeing their debt levels rise very quickly due to currency depreciation and deteriorating macroeconomic indicators. The most important thing in the analysis is not the debt-to-GDP ratio but rather the debt-to-budget or debt-to-export revenue ratio. Currently, many African countries devote 40% of their budgets to debt repayment. For some countries, this means they are too heavily indebted. For many others, it is more about external shocks and weak fiscal revenues. That said, not everyone agrees on the current calculation of sustainability. This must evolve. Despite these overly conservative calculation methods, only about ten African countries are at risk of over-indebtedness or are already in near-crisis and undergoing difficult, uncertain, lengthy, and challenging restructuring.
African borrowing rates include a high-risk premium. What does the banker think about that?
There is indeed a certain unjustified risk premium. There are two categories of risks considered when determining rates. There are known risks, such as political risks, which are very high in conflict (Sudan) or tense countries, exchange rate risks, default risks, etc. In each case, there are tools for assessment. But there are also “subjective” debt risks. Rating agencies do not make enough effort to understand Africa, often conducting superficial analyses. During the 2008 financial crisis, many rating agencies concluded that Africa would be the most affected continent. It turned out not to be the case. On the contrary, the mistakes made by large international banks led to restrictive rules on ratios (Basel II, Basel III) and compliance, which complicate financing the African economy. These rules are the reason Western banks are leaving Africa. It is time for rating agencies to evolve and apply more rigor in their often too subjective and approximate African analyses.
You were at the AfDB for ten years. What is the achievement you are most proud of?
It has been a little less than ten years since I left the AfDB. I have since moved on to other things. Moreover, by nature, I do not like to talk about myself or my achievements. I was with teams and collaborators. It is up to history to judge our actions. There are things I did well, and there are things I could not do. It is up to analysts and observers; it is not up to me to give myself credit.
What is your biggest regret? A project you could not complete due to lack of time?
Perhaps the word regret is not appropriate. In this line of work, there are more missed opportunities; for example, repeated crises in certain regions, where we always have to start from scratch — look at the case of Sudan today. Another example would be projects where funding is available but delayed due to a lack of political will. For instance, the bridge over the Gambia River was entirely funded by grants but took years to complete. The same goes for the Rosso Bridge between Senegal and Mauritania and the Kazungula Bridge over the Zambezi. It is often assumed that funding is the problem, which is not always the case. But strategically and globally, in today’s world with its major trends, geopolitics, and external shocks, the real challenge for any development actor in Africa is how to build real stability, resilience, and end these cycles of debt and foreign aid.
