AfDB proposes major reforms to global financial architecture in AEO

BUSINESS A.M. REPORTER

Africa’s emerging economic potential necessitates a substantial revamp of the prevailing global financial architecture, the African Development Bank has proposed in its recently released African Economic Outlook 2024 report.

The report, in its call for reform, highlights the need to empower Africa with greater representation and influence in multilateral development banks and international financial institutions.

The African Economic Outlook 2024 report also highlighted the inadequacies of the current global financial system in addressing the enormous funding gap hindering Africa’s quest for structural transformation, estimated at $402.2 billion annually over the next seven years.

In light of these immense challenges, the report puts forth a comprehensive and ambitious proposal for reforming the global financial architecture, with key areas of focus including:

Leveraging private sector financing: The African Economic Outlook advocates for greater private sector participation to complement public investments, particularly in areas with high social returns such as climate action and human capital development.

Simplifying the global climate finance architecture: The report calls for streamlining the global climate finance architecture to enhance coordination and facilitate access for African countries, which are disproportionately affected by climate change.

Reforming multilateral development banks (MDBs): The report urges MDBs to revise their business models to provide long-term concessional financing at scale, to developing countries, bolstering their capital positions, channelling a portion of IMF’s Special Drawing Rights (SDRs) to MDBs and ensuring a healthy replenishment of the concessional windows of the African Development Bank and the World Bank, as well as that of the African Development Fund and the International Development Association.

Streamlining debt resolution mechanisms: Recognising the slow and cumbersome nature of existing debt resolution mechanisms, the African Economic Outlook advocates for reforms to expedite debt workouts and ensure sustainable debt management, including innovative market-based solutions like “Brady bonds,” debt relief for climate purposes, and sovereign debt authority systems.

Enhancing domestic resource mobilisation: The report emphasises the importance of strengthening domestic revenue mobilisation through improved tax policies, enhancing efficiency in government revenue collection and utilisation, combating illicit financial flows and tax avoidance, and leveraging Africa’s abundant natural resources.

In his remarks at the unveiling of the report,  Akinwumi Adesina, the AfDB  president struck a cautious yet optimistic tone, acknowledging the impressive growth projections of many African countries while also highlighting the importance of addressing key challenges facing the continent.

Adesina spoke on the necessity for African countries to focus on improving governance structures, promoting transparency and accountability within governments and institutions, and ensuring sustainable management of natural resources.

Adesina stressed the importance of ensuring that the continent’s natural resources are used to benefit its people, specifically highlighting the urgent need to address climate change.

Highlighting the importance of strategic policies and political will in ensuring that resource wealth is effectively utilised for domestic revenue generation, Kevin Chika Urama, the African Development Bank’s chief economist and vice president, noted that without well-thought-out policies and unwavering political commitment, the potential benefits of natural resource endowments could remain unreleased. He underlined the importance of a strategic approach to resource management and revenue generation, with a focus on supporting sustainable economic growth and poverty reduction.

Urama further illustrated the symbiotic relationship between hard infrastructure, such as physical infrastructure, and soft infrastructure, which encompasses knowledge, institutional capacity, and governance.

He highlighted the need for a comprehensive approach to development that recognises the interconnected nature of these two critical components of the development process, likening them to “two wings of an aircraft.”

“Investing in productive infrastructure is key to accelerating Africa’s structural transformation,” he stated.