In an environment of elevated debt vulnerabilities exacerbated by increased fiscal exposure to the pandemic, extreme weather events and rising food and energy prices, improving Africa’s access to financing at competitive rates is vital for the continent’s recovery from the pandemic.
Concessionary financing from multilateral and bilateral sources remains the dominant source of Africa’s development financing. However, notwithstanding their low-cost of use, concessional financing is lacking in scale and scope to adequately respond to Africa’s financing needs. For instance, with respect to scale, the continent’s SDG financing gap of $345 billion annually is about a third of the IMF’s total balance sheet of $1 trillion.
Furthermore, the scope of concessionary financing is too narrowly focused on low-income countries to serve the needs of most African countries. With 42 percent (or 23 countries) of African countries classified as low-middle income, the number of countries eligible for concessionary financing is fast declining in the backdrop of escalating financing needs.
Rising financing needs, inadequate concessional financing and declining eligibility for such resources have compelled several countries to access capital markets to close their development financing gaps.
But this has come at a cost. It is estimated that the continent’s interest payments on their Eurobond issuances are 100 to 260 basis points higher than countries with similar economic fundamentals and risk profiles. With almost one half of African countries exposed to private capital markets this premium is significant and weighs heavily on their debt service obligations.
The Liquidity and Sustainability Facility established in 2021 by the ECA, in collaboration with Afreximbank, BNY Mellon and Amundi, aims to lower the cost of capital market financing by providing holders of African sovereign bonds the option of refinancing their positions at competitive rates through a repo facility. In effect, the LSF, replicates the dynamic of a repo market for African sovereign Eurobonds by providing investors with competitive funding through repurchase agreements (“repo“).
Collectively, BNY Mellon ($2.4 trillion) and Amundi ($2.13 trillion) control $4.53 trillion in assets as of December 2021. With their support, the LSF will crowd in substantial investments to African States in a transparent market driven framework and at competitive rates. BNY Mellon acts as a repo daily for approximately $5trillion of US treasury bills. They are the leader in repo market transactions worldwide, are ISDA compliant and have the best understanding of the rules regulation.
Elaborating on the significance of the LSF, Brian Ruane, CEO of Clearance & Collateral Management at BNY Mellon, stressed that the facility will address the gap in market infrastructure for financing Africa’s international sovereign debt. Similarly, Vincent Mortier, CIO of Amundi observed that the LSF will foster the emergence and the structuring of the African sovereign debt market, on par with the best international standards,”.
Recognizing the potential for the LSF to catalyze green growth in Africa, he also noted that the LSF “represents an important milestone for investors, as the African continent offers promising opportunities in terms of sustainable fixed income investment, in particular green bonds.”
Notwithstanding the continent’s vast green resource endowments and rising demand for green bonds, Africa accounts for less than 1 per cent of global green bond issuances. In general, “sustainability-themed products” were worth $3.2 trillion in 2020.
The LSF can incentivize green bond issuances by offering preferred repurchase agreement rates to institutional investors that refinance their positions using African green bonds as collateral. As such, the LSF can mobilize capital investment towards key sustainable efforts and trigger green and sustainable recovery for Africa.
The LSF is a bold solution to Africa’s financing needs and constitutes an important milestone in the move to step up development financing from billions to trillions by channeling significant private financing to Africa at competitive rates.
*The Chief of Section, Development Planning, Macroeconomic & Governance Division (MGD), Economic Commission for Africa (ECA)