“It is essential to rethink the international financial architecture”

Grandstand. Recently, the Secretary General of the United Nations, Antonio Guterres, sounded the alarm bell, raising concerns. The achievement of the Sustainable Development Goals (SDGs) is lagging behind, he warned. French President Emmanuel Macron has convened a global conference on the subject in Paris this month. Seven changes must be undertaken.

1) Recognize that the international financial architecture is losing momentum as the world faces multiple global challenges.

The international financial architecture has a vital role to play in addressing global food insecurity, climate change, ever-increasing debt, the disruptive effects of Covid-19, in addition to contributing to more effective preparedness to deal with a future pandemic. This is essential for a future that is already here. Prior to the first outbreak of Covid-19, progress towards achieving the SDGs was mixed; the annual SDG funding gap was $2.5 trillion for developing countries. Africa alone will need $1.3 trillion a year to meet its sustainable development needs by 2030. Yet available financing is limited and insufficient to meet these global challenges.

2) The international financial architecture must resolutely tackle climate change.

Climate change is devastating for African economies. Africa loses $7-15 billion per year due to climate change, a loss that is expected to reach between $45-50 billion per year by 2040. To reverse the effects of climate change, Africa needs an average of $2.7 trillion by 2030. Current developments will make it impossible to support the continent’s climate resilience and a just energy transition.

3) The current financial architecture is ill-prepared to deal with the growing debt crises around the world, particularly in developing countries and in Africa.

Africa’s debt structure has changed dramatically. If bilateral debt represents 27% of the debt – against 52% in 2000 – commercial debt represents 43% of the total debt – against 20% in 2000. The expansion and fragmentation of the creditor base contribute to complicate the debt settlement by the Bretton Woods institutions. Debt resolution in Africa outside of the Paris Club has often been haphazard and protracted, with costly economic consequences. To avoid future debt crises, high debt resolution costs and legal complications, the international community must push for greater transparency and coordination among creditors globally.

4) Africa is not taking sufficient advantage of global emergency funding.

Special Drawing Rights (SDRs) issued by the International Monetary Fund (IMF) have made considerable resources available to countries to help manage their shrinking fiscal space. However, Africa only received 4.5% of the $650 billion in SDRs issued, or $33 billion. The African Development Bank (ADB) and the Inter-American Development Bank (IDB) have been innovative in proposing as a solution to developed countries the granting of long-term loans in SDRs to multilateral development banks (MDBs) in the form of of hybrid capital, combined with a liquidity support agreement. This will allow the MDBs to multiply by 3 or 4 the leverage effect of the SDRs to meet the most important financing needs. The solution meets IMF requirements for reserves, solvency and liquidity. Its implementation should take place quickly.

5) Addressing development challenges requires a change in the operating models of multilateral financial institutions.

For example, global pension funds and institutional investors have over $145 trillion in assets under management. Tapping into these massive resources will require significant changes in the operating models of multilateral financial institutions, the deployment of more risk guarantee facilities, the expanded use of synthetic securitization to increase the leverage of balance sheets and transfer some sovereign and non-sovereign assets to the private sector.

6) It is essential to strengthen the leverage effect of development financing by the private sector.

In this regard, calls for MDBs to do more are timely. In reality, these are largely dependent on callable capital of which only a tiny part is released. This has the effect of limiting the effective risk capital available to them to reduce risk and mobilize private sector finance at scale, due to strict prudential limits that all MDBs must adhere to in order to maintain a credit rating. essential triple A credit for them. This means that the paid-in capital of MDBs should be increased significantly.

7) Regional efforts to address systemic risks in Africa should be promoted.

Africa is the only region in the world that does not have liquidity reserves to protect against shocks. To remedy this lack, the AfDB and the African Union (AU) are joining their efforts to set up an African financial stability mechanism.

Ultimately, what is needed is a redesigned, more responsive, inclusive and accountable international financial architecture to support the world’s accelerated development.