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Could an African Stability and Liquidity Mechanism avert a debt crisis?

1 Mins read

As they struggle to secure investment to aid post-Covid recovery, African governments are facing the spectre of a debt crisis that threatens to become as big as that of the 1980s.

This crisis can only be resolved with a more stable and liquid 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 in a recent policy brief.

The authors propose that such a market can be achieved by combining specific tools under a regional African financial arrangement that would be known as the African Stability and Liquidity Mechanism (ASLM).

Unprecedented challenges

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. This created inflationary pressures even prior to the Russian invasion of Ukraine, but the war has restricted the supply of basic foodstuffs, including wheat and vegetable oil from Black Sea exporters, driving up food prices in the process. At the same time, international efforts to deter Russian aggression, coupled with Moscow’s response to them, has led to a spike in oil and gas prices.

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. Beijing had been a key source of finance for infrastructural projects but the Chinese government had severely slashed funding for such investment streams in the years running up to the pandemic.

Partly because of plentiful Chinese lending – much of it for badly needed projects – 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.




Source: | Neil Ford

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