Call for urgent global debt architecture reform

FINANCE, Economic Development and Investment Promotion Minister, Professor Mthuli Ncube, is calling for urgent reform of the global debt architecture saying that it is inadequate for Africa’s needs.

In an article published by CNBC Africa, Prof Ncube underscored the need to build a prosperous, inclusive, and resilient Africa through renewed partnerships and strong institutions.

He emphasised the importance of African nations mobilising domestic resources but warned that almost 40 percent of African countries are in or at high risk of debt distress.

His demands for reform include the G20 Common Framework, which he believes should be made more effective, transparent and relevant and appeals for the suspension of debt service for all countries entering Common Framework restructurings.

He also called for “a comprehensive review of the IMF-World Bank Debt Sustainability Analysis Framework” to prioritise solvency over liquidity.

He indicated that a troubling trend had emerged whereby governments worldwide are grappling with mounting public debts, limiting their ability to invest in core social services their citizens so desperately need.

“The average public debt in Africa is around 65 percent of gross domestic product, amounting to US$1,1 trillion, with some countries having much higher debt levels.

“Alarmingly, nearly 40 percent of African countries are in, or at high risk of, debt distress. To make matters worse, 60 percent of African nations now spend more on servicing their external public debt than on healthcare,” he said.

“The existing global debt architecture is ill-equipped to address the pressing needs of African countries. Urgent reforms to the G20 Common Framework are required to make it more effective, transparent and fit for purpose.

“Furthermore, we appeal for the suspension of debt service for all countries entering Common Framework restructurings and a comprehensive review of the IMF-World Bank Debt Sustainability Analysis Framework to prioritise solvency over mere liquidity.”

Prof Ncube said the current global financial architecture faces significant challenges in addressing the financial needs for climate action, sustainable development and debt management.

“The calls for reform are growing louder, seeking to create a more equitable, inclusive, and sustainable financial system. Increasing the representation of developing countries, particularly African nations, in global economic decision-making processes is crucial for the continent’s development and prosperity,” he added.

Prof Ncube acknowledged that the path ahead is not without its challenges, noting that achieving the Sustainable Development Goals (SDGs) by 2030 will require an estimated US$1,3 trillion per year, while the costs of addressing climate change alone are projected to reach US$2,8 trillion by 2030 in Africa.

Money – Image taken from Pixabay

“Sadly, even as these financing needs grow, official development assistance to Africa declined by 3,5 percent in 2022, while borrowing costs have soared in the tighter global monetary environment and private capital remained side-lined.”

He said the continent had made significant strides in financing its development through domestic resources in recent years.

However, he said this funding is inadequate to close a widening financing gap.

“To bridge the funding gap, African countries need to boost domestic resource mobilisation (DRM) by increasing financial resources, improving public spending efficiency, leveraging large pension fund markets and sovereign wealth funds, curbing illicit financial flows out of the continent and harnessing partnerships.

“New sources of tax revenue should be sought, including those from digital payments, informal sector taxes and sin taxes among others.

“Africa must explore innovative solutions and leverage the ongoing Financing for Development processes to secure adequate financial and technical resources to support its participation and engagement in the tax reform process.”

Zimbabwe has intensified its domestic resource mobilisation efforts because it is unable to secure funding from the World Bank, IMF and other Western financial institutions due to sanctions.

Consequently, the Government has been developing infrastructure such as roads, dams, schools and clinics as well as providing clean water to communities using funds mobilised internally.

Prof Ncube said scaling up resources from International Financial Institutions (IFIs) is vital for African countries to address economic challenges, including those exacerbated by geopolitical tensions. These resources, he said, should be more concessionary, long-term and inclusive.

“In particular, the Poverty Reduction Growth Trust (PRGT) and the Growth and Sustainability Fund (GSF), under the IMF, need reform to better serve Africa and developing countries.

“Affordable finance is crucial for sustainable development, and strengthening multilateral development banks (MDBs) is essential to increasing lending capacity and supporting development projects. By strengthening MDBs, we can unlock more resources for sustainable development, bridge the financing gap and achieve the SDGs.”

Innovative financing tools and mechanisms can help reduce financing costs, making it easier for countries to access affordable finance for development.

Added to that, the balance sheets of IFIs can also be utilised to provide guarantees for crowding in resources from the private sector.

Minister Ncube said debt swaps can be valuable for managing debt and alleviating financial stress.-chroncile