Development finance institutions have critical role in recovery
Criticism is often levelled against development finance institutions during times of economic distress, questioning their role and even their relevance.
But for more than 100 years development finance institutions have embarked on innovative ways of raising funds and have remained at the cutting edge of development finance research and practices to ensure adequate adaptation to the changing global economic development landscape. The post-lockdown period is no different in this regard.
The global economy suffered its largest Covid-19-induced contraction during the second quarter of 2020. This was much deeper than the 2007/8 financial crisis-induced contraction. The great shutdown saw at least 125 countries implementing some form of lockdown during the first wave between March and May 2020.
The post-lockdown recovery, led by China, depends heavily on the pace of the global vaccination programme and therefore the speed with which countries ease lockdowns.
The general expectation is that the global economy will recover by about 6% this year, while the SA economy is expected to edge up by about 2%. Despite China’s lead, particularly giving the impetus given to commodities, global demand will remain generally unsatisfactory in the short term, hence the envisaged slow-paced inflation and interest rates. Monetary and fiscal policies will generally remain easy.
The main economic fallout from the Covid-19 pandemic in Sub-Saharan Africa has largely manifested in the socioeconomic deterioration represented by increased unemployment and poverty as well as rising public debt. The informal economy, from which 60% of Africans earn a living, has also been heavily affected.
The World Bank estimates that Covid-19 is likely to push 110-million to 150-million people into extreme poverty by the end of this year — having to survive on less than $1.90 a day — 30% of whom are from Sub-Saharan Africa.
The “visible hand” role of development finance institutions such as the Development Bank of Southern Africa (DBSA) is about mobilising finance to solve infrastructure challenges facing the country and continent and deploying longer term, patient capital to allow a business/investment to bear fruit.
This visible hand is evident in the actions of development finance institutions as they either defer or change repayment terms for distressed borrowers to prevent business collapses. It is also evident as they inject upfront grant finance in the form of project preparation and municipal infrastructure maintenance programmes.
This is despite, for example in the case of SA, the total collapse of the public financial institutions bond market in 2020. Most useful development finance institutions rely on functional capital markets to raise funding. The market collapse came along with high costs of borrowing and repricing of risk by lenders.
Despite all this the estimated value of Covid-19 interventions by African development finance institutions in 2020 still amounted to no less than $5.2bn.
In the post-lockdown period development finance institutions are looking to focus on several main areas to enable themselves to perform better.
These include improving their internal processes; finding new sources of funding and ensuring continued disbursement to current commitments and new business; embarking on co-ordinated and collaborative investment approaches to share risks; focusing on projects that support transformation and inclusivity; strengthening project preparation to set up project pipelines to be funded through blended instruments; and supporting the just transition and implementing sustainable infrastructure deployment methods.
The main hurdles and challenges anticipated by the DBSA in restoring growth and prosperity through an infrastructure-led recovery are:
- Governance — all dealings should be above board and where governance deficiencies exist, especially in sectors of interest, assistance should be provided in collaboration with others.
- Enabling policy and regulation — it is important to ensure that regulatory approvals for infrastructure projects are seamless across different regulators so as not to present stumbling blocks to infrastructure development.
- Private sector willingness to take adequate risk — the appetite shown thus far should be harnessed by creating a huge infrastructure project pipeline. The envisaged levels of investing a total of about R500bn for infrastructure per annum in coming years is totally inadequate. This level should be positioned to escalate by about 15% annually to breach the R1-trillion mark in the next five to six years and continue to 2030.
Finally, it is an accepted eventuality that most small businesses will not recover from this pandemic. It will be crucial for development finance institutions to play increased roles, within their areas of focus, in rebuilding small business — especially in the informal economy.
However, this can only work if done in a collaborative manner with partners playing predominantly in spaces where they have the best skills and greatest experience.
Nhleko is DBSA chief economist.
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