An African Monetary Fund could help continent reach financial stability
Institution would cut reliance on external funding, create a fiscal stabilisation fund and improve terms of trade
A full 12 years passed between the formation of the much-vaunted Bretton Woods institutions in 1944 and the creation of the first postcolonial African state. During that period the International Monetary Fund (IMF) helped establish the dollar as the world’s reserve currency, while the World Bank facilitated the reconstruction of Europe via the Marshall Plan. These newly formed institutions, whose role was to protect and grow the global financial system, seemingly saw no inherent contradiction between the economic drain of colonialism and accomplishing their mandates.
This observation leads to an uncomfortable question: just how important, if at all, is the success of the African economies to the Bretton Woods institutions? After all, the continent makes up just 3% of global GDP. Maintaining the stability of the global financial system doesn’t require the stability and development of Africa’s economies. For these ideals to be achieved, perhaps the creation of an Addis Ababa institution is required?
There are existing funding institutions on the continent with developmental mandates, such as the African Development Bank (AfDB) or the New Development Bank (NDB). But these institutions focus more on funding private sector projects as opposed to macroeconomic stability.
Moreover, a third of the AfDB’s members are non-African states that sit on the board of directors and contribute significantly to its operational funding, so its mandate cannot be said to be purely driven by African states. The same can be said of the NDB, which is more Brics than African in outlook.
Before delving into how an African Monetary Fund (AMF) might tackle these factors, the question of how the institution itself would be funded should be addressed. To avoid reliance on foreign aid and funding, African governments would need to capitalise the institution themselves and provide for its ongoing funding. The initial capital outlay would need to come mostly from the larger economies, such as Nigeria, Egypt, SA and Kenya.
SA, despite its deteriorating fiscal position over the past decade, has been able to fund its growing revenue shortfalls via its local bond market
Ongoing funding would require a permanent fiscal allocation from each member state, which could be set as a percentage of their annual tax receipts; perhaps 0.5% to begin with. Such a model would ensure the AMF’s board, executive committee, policies and disbursements remain the exclusive remit of African member states.
How would the AMF achieve the goal of financial stability? Recurring factors cause financial instability in Africa, which leads to inherent structural imbalances that cause periodic crises whenever a macroeconomic shock occurs. An AMF would enhance regional payments and currency stability by focusing on these factors, namely reducing reliance on external funding; creating a fiscal stabilisation fund; and improving terms of trade.
Regarding external funding, the cardinal sin of fiscal policy is an overreliance on external debt. This is even more dangerous when the debt incurred is in a hard currency while the revenue generated to pay that debt is in a local currency. To avoid this debt spiral African countries need to deepen local capital markets and prevent this currency mismatch. SA, despite its deteriorating fiscal position over the past decade, has been able to fund its growing revenue shortfalls via its local bond market. In contrast, countries such as Zambia that relied on issuing Eurobonds and incurring bilateral debt with China, now find themselves in acute fiscal difficulty.
Certain targeted policy directives could be driven by the AMF with national governments to deepen local capital markets. These include creating retail and institutional savings pools; the former via retail savings bonds and the latter via enabling pension fund contribution infrastructure for small and medium enterprises. Improving the liquidity of local securities exchanges, as well as developing investment management industries, is also necessary to drive larger demand for government debt locally.
An AMF should also tackle the creation of a continentwide stabilisation fund. Such a fund is usually the preserve of sovereign wealth funds. However, given the lack of such funds in Africa the AMF could look to fill this role.
These stabilisation funds ensure balance of payments stability by providing countercyclical funding to government. When a country’s currency weakens dramatically, the government can draw down on capital in the stabilisation fund to ensure that imports can still be purchased with hard currency and that government expenditure continues without budget cuts or raising debt. This buys the central bank time to defend the currency, without having to deplete its foreign currency reserves. It also signals to currency markets that the country is able to withstand shocks.
Central banks of member states would be in constant communication with the AMF and receive capital injections before situations reach panic levels. The AMF would invest most of its member contributions into special drawing rights currencies, such as the dollar, euro, pound, yen and yuan. This provides a countercyclical mechanism to help governments fund fiscal deficits as well: a common problem for low-income and mid-income countries is an overreliance on a few industries; when these industries fall into a recession government tax revenues decline substantially. AMF contributions in the good years would help tide over the countries during the lean years.
The AMF would furthermore help member states improve terms of trade by enhancing export competitiveness. This function would resemble an industrial policy project, but given its importance to financial stability the AMF should play a role as well. The purpose is to assist countries in growing their foreign exchange holdings via export earnings. This can be done by facilitating intraregional trade and disbursing loans to export-orientated industries.
Intraregional trade has multiple benefits. The AMF could work with the AU by providing technical expertise on how best to accelerate trade between African countries. This goes beyond removing tariffs and non-tariff barriers — it also involves the creation of continentwide supply chains for essential manufacturing goods. This has the added benefit of reducing imports and freeing up foreign exchange for allocation to export industries, as well as creating a virtuous cycle of improved terms of trade with the world.
It is always during times of economic distress that the shortcomings of our systems are exposed. Covid-19 has once again prompted Africa to approach the powers that be, cap in hand, asking for alms. The only way to end this unsustainable cycle is by creating resilient economic institutions that can provide sound buffers for Africa’s economy.
Imagine that an AMF had been established after the great recession of 2008. By the time Covid-19 arrived, African countries would have had only moderate exposure to external debt; fiscal deficits would be funded by the stabilisation fund; urgent spending on medical personal protective equipment could be provided by emergency AMF loans; and the economic recovery would be quicker due to enhanced intra-African trade. This may only be an ideal now, but it could be made a reality.
• Mashigo is a portfolio manager at Sanlam Private Wealth and a director of CFA SA. He writes in his personal capacity.
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