The IMF or the AMF: Defining the Future of Financing for Investment and Development Projects in Africa

Since independence the government of many African countries have depended on the International Monetary Fund (IMF) and the World Bank as their main sources of finance for major developmental and investment projects in their respective countries. Accordingly, besides the granting of loans to Low Income Countries (LICs) at zero interest rate, the IMF also assists member countries to resolve their balance of payment challenges as well as granting interest-bearing loans to both member and non-member countries. Similarly, the African Monetary Fund (AMF) which is a prototype of the IMF was created by the African Union (AU) and is not yet operational. Just like the IMF, the AMF is intended to fund major developmental projects in Africa. This article examines the IMF loans conditionality and the award of Special Drawing Rights (SDR) to African Countries as seen during the COVID-19 crisis. It argues that the AMF would not be the African countries’ panacea as far as funding for developmental projects in Africa is concerned. In this regard, the article further examines Agenda 2063 as a future development model for Africa, as well as the various sources of project finance as envisioned in the Frameworks Document of Agenda 2063. It concludes that IMF still has the financial muscle to fund developmental projects and resolved balance of payment problems in Africa despite alternative sources of finance recommended by Agenda 2063.

Nigeria Eurobonds will ease short-term budget pressure

Significance This comes a month after the National Assembly approved an external borrowing plan of USD6.2bn in August. Also, the IMF has approved the allocation of USD3.35bn in Special Drawing Rights (SDRs) to boost Nigeria’s foreign reserves. Combined, these have provided a modest boost to Nigeria’s faltering foreign-exchange reserves. Impacts The proceeds from the Eurobonds sale will form a significant part of funding the 2022 budget. The Eurobonds and SDR allocation, by boosting reserves, could help narrow the gap between formal and informal exchange rates. There will likely be another Eurobond sale in 2022 as well as more multilateral and bilateral loans. Nigeria’s weak tax collection infrastructure will not generate substantially improved revenues from expected growth.

Nigeria forex restrictions are unsustainable

Significance Instead it ordered that all foreign exchange purchases should occur through commercial banks. This move aims to stabilise the value of the naira by reducing effective domestic demand for foreign currency. Impacts The CBN may allow commercial banks to provide forex to retail dealers as an alternative policy. The cost of imported goods and services will increase. A USD3.35bn IMF special drawing rights (SDR) allocation will bolster Nigeria’s short-term reserve position. Full exchange rate unification will not occur under President Muhammadu Buhari’s administration.

Sri Lanka will try to manage debt without IMF help

Significance The government nevertheless remains under pressure from domestic critics and external stakeholders because of dwindling foreign exchange (forex) reserves and a growing debt crisis. Sri Lanka approached the IMF in early 2020 for macroeconomic support under the Fund’s Rapid Financing Instrument, but negotiations were shelved. Impacts The government will face increasing domestic pushback over its efforts to curb capital outflows. Although India and China will remain Sri Lanka’s most important partners, ties with Bangladesh will grow markedly. Sri Lanka should be able to access an allocation of IMF special drawing rights later this month.

Developing economies will struggle to rebound solidly

Significance Although the Fund upgraded its forecast for global growth this year to 6%, the recovery is becoming more uneven. Decisions were taken on global corporate tax, extended debt relief for developing states and a large disbursement of Special Drawing Rights (SDRs). Whether these measures are wide or deep enough to support lower-income countries is debatable. Impacts Led by the United States, support for corporate tax reform is rising, but benefits will not come soon enough for fiscally distressed states. The firm global recovery relies on China’s GDP gaining more than 8% and India’s more than 10%; India faces greater immediate downside risks. The economic outlook is brighter for developing nations with robust public finances and limited tourism reliance where COVID-19 is in check. COVAX delivery timings may be optimistic, and the WTO is unlikely to waive intellectual property rights to production capability transfers.

Hesitancy to share vaccine IP will increase inequality

Significance Although eight vaccines have been developed and approved for use against COVID-19, production constraints leave many lower-income countries facing a lengthy wait. They are backing an initiative to waive intellectual property (IP) rights on treatments to facilitate transfers of vaccine manufacturing capability. Impacts Low-income nations may opt to issue compulsory licences, allowing governments to waive IP rights without the licence owners’ consent. The IMF backed a USD650bn round of special drawing rights at the spring meeting, in part to help vaccinate developing nation populations. A YouGov poll recently found that 74% of the UK public think governments should ensure vaccine expertise is shared globally.

The G7 is edging closer to a new round of SDRs

Significance The COVID-19 crisis has exposed the disparity in fiscal and monetary firepower between developed and developing economies. Within the G7, support is growing for a new allocation of IMF special drawing rights (SDRs) -- international reserves that can be swapped for hard currency -- now that the US leadership is better disposed to multilateral action. Impacts The US Congress must approve an SDR round over USD685bn; a smaller issue is likely as many Republicans oppose financing Iran and China. The G20’s moratorium on developing nations debt servicing payments is set to be extended beyond June, but vast payment gaps still remain. The rising US yield curve and dollar rally will pressure emerging market borrowers by raising their dollar-denominated debt repayments.

Ethiopia’s debt plans may spare private creditors

Significance The announcement provoked panic among some bondholders but their concerns appear unfounded given Ethiopia's overall debt sustainability and the government's ability to engage with Chinese lenders on favourable terms. Impacts Other African governments will follow Ethiopia's progress before requesting debt restructuring. Ratings agencies may need to tweak their methodologies to account for such relief, lest they needlessly downgrade proactive sovereigns. Pressure on Chinese lenders may rekindle Beijing's calls for the IMF to issue new Special Drawing Rights to boost international liquidity.