African Stability and Liquidity Mechanism could help avert debt crisis — study
The looming debt crisis in Africa can only be resolved with a more stable and liquidity market in African government bonds, argue Daniel Cohen, the chair of Finance for Development Lab (FDL), and Ibrahim Elbadawi, the managing director of the Economic Research Forum, in a recent policy brief.
As they struggle to secure investment to aid post-Covid-19 recovery, African governments are facing the specter of a debt crisis that threatens to become as big as that of the 1980s. The policy brief proposes that an African Stability and Liquidity Mechanism (ASLM) would combine specific tools, which could help ensure macro-financial stability and reasonable funding costs for African governments.
The world currently faces the biggest set of economic challenges since the 2007-08 financial crisis. Global supply chains continue to experience severe dislocation as a result of the COVID-19 pandemic and associated lockdown restrictions, while these inflationary pressures are further aggravated by the Russia-Ukraine war. This is making it more difficult for African governments to secure investment in post-pandemic recovery, in much needed infrastructure, and in climate change mitigation as part of sustainable development.
Partly also because of plentiful Chinese lending, the sovereign debt of many African governments has built up in recent years, but they now face much higher servicing costs and greater difficulty in securing new lending.
Cohen and Elbadawi argue that an ASLM would provide a financial safety net to help ensure macro-financial stability and reasonable funding costs for African governments by providing a stability mechanism rather than a bail-out facility. Hosted by the African Development Bank (AfDB), it could leverage renewed enthusiasm for multilateralism and G20 countries’ commitments to re-channel their special drawing rights (SDRs) issued by the IMF. It would also provide financial support without the stigma that can come with being placed on an IMF program.