JOSHUA NOTT: A fairer shake — towards Africa’s credit ratings agency

Regarding matters of good governance Africa’s leaders have much to account for.

In many respects foreign investors are right to be wary when making investments in markets that lack the assurances of the rule of law, sound fiscal and monetary policy, and most of all political stability. It is also true that many African states attract irrationally high interest rates. 

Take Kenya. The country is a rowdy democracy, enjoying more than 4.5% average annual growth since 2004, with 6% growth expected in 2024. Its debt-to-GDP ratio hovers around 67% (compared with the Organisation for Economic Co-operation and Development average of 88%). Its tech sector is booming, as is its trade into the rest of the continent and out into Indian Ocean states.

Despite improving development outcomes and economic growth, the country is hammered with disproportionately high interest rates. Writing in the New York Times, Kenya’s President William Ruto lamented that Africa’s debt repayment costs will rise 35% to $62bn this year. Meanwhile, the continent is paying eight times more than the rich world to finance climate-related reconstruction.

Yet analysis of infrastructure debt default rates by region cumulatively over a 10-year period, conducted by Moody’s Analytics and the African Development Bank, found that Africa has the second-lowest cumulative default rate after the Middle East. Default rates are far worse in Eastern Europe, Latin America and Oceania. If sovereign debt markets were rational, these data points would be captured within the interest rates African governments and their private sectors attract. 

In light of this state of affairs Africa’s leaders are left to ponder whether the continent attracts a “prejudice premium” — higher rates for African states simply because they are African. For its part, the AU wants to tackle sovereign credit ratings head on. To do so it has embarked on the establishment of an African credit ratings agency as an independent entity to provide alternative and complementing rating opinions for the continent. 

Support countries

The AU and African presidents taking on the global financial architecture, like Ruto, could find a ready ally in the UK. Since Africa’s latest debt crisis the UK has taken a leading role in negotiating among its G7 counterparts to reform the World Bank and IMF terms of reference. Its voice matters given that it is the third largest donor to the 20th replenishment of the World Bank Group’s International Development Association (IDA), which provides $93bn of finance to the world’s poorest countries.

Moreover, the UK has committed to channel about $4bn to the IMF’s special drawing rights (SDRs) to support vulnerable countries, including 1.5-billion SDRs to the Poverty Reduction & Growth Trust, where its contributions include implicit subsidy resources, and $2.5bn SDRs through the new IMF Resilience & Sustainability Trust. 

The UK should go one step further in backing the establishment of the African credit ratings agency, and work to demystify Africa’s perceived riskiness by opening the City of London’s doors to the hosting of bilateral and multilateral meetings between investors, banks and businesses. It can also lend diplomatic support to the AU in coalescing its G7 partners about revising the Bretton Woods institutions, leveraging the recent support for reform that emerged from the recent Marrakesh meeting.

Conditional loans have been a staple feature of Western financing. Yet, it should not be lost on the West that it is possible to advocate for a fairer debt market without excusing the years of maladministration across much of the continent. It is possible to reform international debt markets and hold badly performing governments accountable.

Failure to do so will only result in African governments and private industry finding other sources of financing, the long-term effects of which will only undermine the very institutions the West looks to protect.

• Nott works for a venture facility for public benefit and is based in London. He writes in his personal capacity.