Vera Songwe, Chair of the Liquidity and Sustainability Facility, and former Executive Secretary of the UN Economic Commission for Africa, on the multiple crises facing African countries.
Songwe is co-chair of the Independent High-Level Expert Group on Finance for Climate Action, a member of the Global Financial Alliance for Net Zero (GFANZ), and a nonresident senior fellow at the Brookings Institution. Songwe was previously Under-Secretary-General at the United Nations and Executive Secretary of the United Nations Economic Commission for Africa. Recognized as one of Africa’s 100 most influential people in 2022 and recipient of the All Africa Continental Leadership Award, Songwe was named one of the nominees for Forbes Africa 50 Top Women in 2023. She recently co-authored a book entitled Regional Integration in West Africa: Is There a Role for a Single Currency? She has spent the last three years championing the cause for additional liquidity for emerging markets and the need for a new global financial architecture fit for the 21st century’s development challenges.
Vera Songwe has held a number of senior positions at the World Bank, and the International Finance Corporation. Her main areas of interest are financial stability, macro-prudential policy, fiscal and monetary policy, innovative financing mechanisms for development, climate finance, agriculture, energy, and economic governance. She has extensive experience working in Africa, East Asia, Europe and Central Asia and South Asia regions. Prior to joining the Bank, Dr. Songwe was a Visiting Scholar at the University of Southern California and at the Federal Reserve Bank of Minneapolis. Dr. Songwe holds a PhD. in Mathematical Economics from the Center for Operations Research & Econometrics from the Catholic University of Louvain-la-Neuve in Belgium. She holds a BA in Economics and a BA in Political Science from the University of Michigan, Ann Arbor.
The African continent has been hit by a series of overlapping crises. How do you think governments have been coping across the continent? Like with COVID, does it provide a springboard for doing things differently? How can debt distress be addressed so that we do not see 3-5 years of slow growth and austerity?
As you know, Africa is a continent with over 50 countries, so there have been very diverse responses. But if you were to cluster them, for easier analysis, you have low-income countries that are really stressed. These are economies that depend largely on aid, as their main source of external finance. Some of them are also conflict-affected countries – like Guinea Bissau, Central African Republic, Somalia, and Burkina Faso. For these low-income economies their traditional creditors – the World Bank and the International Monetary Fund (IMF) - were able in the first year of the COVID crisis to extend some resources to them, but subsequently, these resources have dried up. The International Development Association (IDA - the World Bank’s Fund for the poorest countries) was front-loaded to support countries manage the COVID crisis. With a new crisis on our hands, additional resources are needed. Hence the call for additional capital.
Many middle-income countries are also vulnerable and in a very difficult situation at present. As seen in the newspapers, countries like Ghana and Egypt need significant support, and the list is growing. I believe the list of countries in need of debt relief or liquidity support is even longer.
However, due to a lack of clarity and the snail’s pace at which the G20 debt restructuring process – known as the Common Framework - is being implemented, countries are reluctant to come forward. Ghana will be a test of whether the system and process can be accelerated. We need a debt restructuring process that is transparent, time-bound, and more inclusive.
Low-income countries, like Zambia, Chad, or Ethiopia, opted for the Common Framework over two and half years ago, which has essentially shut them out of financial markets until the process is complete. No one wants to lock themselves into a process with no visibility for the next two years. Unfortunately, this means countries that need support are deepening self-imposed austerity measures domestically with a high incidence on their social sectors– cutting back on education spending, health spending – to make do with what they have, while they hope to get greater visibility on the external debt restructuring process. It is a difficult time for many.
For those countries with market access, inflation has raised interest rates in the US and Europe in particular. The issuance of new external bonds is difficult and many countries have simply been priced out of the market. We have had five crises in five years. Country financial and fiscal positions are squeezed, investments have dropped and foreign direct investment (FDI) has fled to safety. This is the situation Africa faces as 2023 begins.
There are some positives, like the African Continental Free Trade Agreement which can unlock growth, and areas which we know we can expand, such as the mining sector. Take America’s big push for alternative supplies of chips - this gives Africa good opportunities. The war in Ukraine is unfortunate, but Africa can position itself as part of the solution for European energy security - Africa has gas. The Europeans have obviously been looking closely at African gas to see if they can diversify their energy supplies through new investment on the continent, having stopped imports from Russia. Africa can and should be a major producer of wheat as well, as the world seeks to diversify supplies. However, to launch these processes Africa would need additional resources, and the global system needs to make good on some of the things that have been suggested, such as additional SDRs. I argue today there is a case for “SDRs for climate”.
On climate, the situation is increasingly dire. There is a climate-vulnerable set of economies, very exposed to climate shocks, such as Mozambique, Seychelles, the Horn of Africa and the Sahel, Kenya, Mauritius, and other small islands, and for whom support is needed immediately. In some of these countries, they spend over 5-7% of their GDP responding to climate shocks. The Loss & Damage fund agreed upon at COP27 was a strong response to the report of the Independent High-Level Expert Group on Climate Finance which Nick Stern and I co-chaired, with Amar Bhattacharya as Secretary to the commission (IHLEG-Finance-for-Climate-Action-1.pdf (lse.ac.uk)). In the report, we call for US$150 —200bn each year to deal with loss and damage, particularly prevention, but currently the proposed fund has little or no revenue attached. The challenge will be to secure resources to support countries. Ideally, these resources should be managed by existing entities so time is not lost on new administrative setups.
The Independent High-Level Expert Group on Climate Finance has produced a report which is clear and compelling. The recommendations from this report and the outcomes from the Bridgetown meeting both recognize the Multilateral Development Banks (MDBs) could double or treble the amount of money they spend, and help leverage private sector investment, to provide the finance needed to address the series of global challenges we face. How can we make it happen?
Indeed the report on “Finance for Climate Action” has been well received and we are pleased. The report builds on and complements other initiatives like the Bridgetown initiative. The report on Finance for Climate action calls for $1 trillion dollars a year in climate financing for emerging market developing economies, excluding China, between now and 2030.
A common thread in all these discussions is how to secure additional financing, for what, and which instruments are the most cost-effective and deliver the highest impact.
The first thing is finance for energy transformation. If we are going to make a dent in cutting carbon emissions, this needs to be first in the energy sector. We don’t talk about energy “transition” because we’re talking about economies at very different stages of development. Each one needs to do an energy “transformation”, but each will have a different path, whether you’re in the US, or in a low-income, developing economy. Remember, there are still over 600 million people who do not have access to energy. How can they be transitioning when they have nothing to start with? Then there is the coal debate and the timeframe for retiring that – whether you’re Germany, China, South Africa, Indonesia, or Vietnam. What’s the process for this and at what cost? How does the replacement of coal with a better form of energy get financed? There is a lot of discussion around the kind of energy we need in the future – renewable energy is a big part of this, but what about gas? Can it be a means to transition to renewable energy, hydrogen, or nuclear? A just energy transition and transformation is a large part of the climate effort and represents about 60% of the investment for building a sustainable and resilient net-zero economy.
Second, we need finance for resilience, and loss and damage. Building resilience is a critical part of the climate agenda. Countries must adapt to increasingly changing climate cycles and harsher weather events like cyclones and hurricanes by improving their infrastructure and practices. Lack of resources for resilience building leads to even more costly expenses on the loss and damage front. This point has been clearly articulated also by PM Mottley of Barbados with the Bridgetown Initiative. You find economies doing well which are then hit by a big natural disaster and 40% of their GDP is erased. They cannot meet their obligations to citizens nor to their creditors. A key tenet of the Bridgetown Initiative calls on MDBs and other creditors to suspend debt service obligations while a country is tackling a pandemic or natural disaster, which would allow countries to focus on the recovery. The proposal goes one step further and calls for a catastrophic insurance clause to be added to all loans so this provision kicks in automatically, should a climate incident occur. Climate shocks mean poverty increases and countries get into debt distress. We propose the adoption of new instruments like catastrophic relief clauses or an insurance mechanism to support these countries.
The last component is around natural capital and nature-based solutions. How to protect the environment while ensuring that indigenous people prosper? A good example is in the Congo Basin which some estimates conclude sequesters the equivalent of 3 years of global greenhouse gases. Working to develop projects which can remunerate local people for nature conservation through carbon credit schemes is a powerful way of achieving the SDGs while at the same time protecting the environment.
Next steps on MDB reform will be the spring meetings to change mandates, broaden governance, and get different voices around the table. I had not realized how dismal the leverage of MDB money has been for private investment, at 37c for every MDB dollar. How do we get more money into the system?
The 37 cents leverage number is from the Capital Adequacy Report commissioned by the G20. It will be important to see if this is true for all MDBs as an aggregate, or just for some. At a time when there is a need for additional concessional financing to respond to the pressing and multiple challenges of development, it is appropriate to ask for more ambition from the MDBs but also from shareholders.
The question of additional financing is best addressed when the question is posed as “finance for what and by whom?” We look at five actors overall. The first two buckets, policy and debt, are about ownership and a just transition. While policy is not really finance, we know good policy lowers costs. When policy is responsive to markets, finance is cheaper, while poor policy makes finance very expensive. Countries must formulate and design their own policies first, in consultation with their local population. Given the high cost of climate adaptation or mitigation and the lack of fiscal space available in many economies post-pandemic, the report emphasizes the need for additional finance to address the climate and development challenge. Countries must not increase their debt burden as they embark on the race to net zero, hence the need for concessional and grant capital.
The third bucket comes from the MDBs, and you’ll have seen lots of reports on MDB reform and capital balances. If the MDBs were to use their balance sheets more effectively, we could leverage their loans substantially by building more partnerships with the private sector.
To meet the climate challenge, we need to substantially increase the role of MDBs, and the report emphasizes this will require additional finance. We call for a tripling of the flows from the MDBs and other development finance institutions in the next five years. This means increasing the flows from $60 billion to $180 billion.
The MDBs must lead the way in scaling up finance. Concessional finance will remain the most affordable form of financing for many EMDEs over the next decade. As a matter of fact, it would be better to crowd in all additional resources into the MDBs rather than multiply climate funds. This is because the MDBs’ role is beyond financing - they also serve as an important capacity-building platform and a knowledge exchange platform.
The fourth bucket is concessional, bilateral, and grant financing. Specifically, it would be important to double bilateral financing to $60 billion by 2025 from its 2020 levels. As we note in our report, it is critical that rich countries deliver the doubling of official concessional finance by 2025, given its central role in funding key priorities such as adaptation and resilience, loss and damage, and accelerating decarbonization in low-income countries. We also must expand sources of low-cost finance through innovative approaches (such as the International Finance Facility and use of guarantees) and tapping all available pools of finance such as SDRs, carbon markets, and private philanthropy.
Finally, the contribution of the private sector is essential to our ambition and its investments must triple from current values to close the gap. It is said that “the private sector will never move unless the public sector moves.” The private sector is asking – “Can I find a public sector agent robust enough with whom to co-invest?” But we know that two agencies working together can be quite onerous. If you take for example a simple project in Ivory Coast, it can take 4 months to harmonize the process, so we need to find a way to simplify this. For many potential investors, the cost of project development makes the project non-viable, because of regulatory bottlenecks. The exchange rate risks are also an important drawback for private investors. The private sector has to triple its investment in this space to make a dent, but countries must also free up bottlenecks. The GFANZ initiative set up at COP26 was a crucial advance in securing private sector engagement in emerging markets. However, the private sector demands risk-reducing and sharing mechanisms – blended finance tools – which need grants and philanthropic resources to unlock.
Sequencing of capital deployment is an important piece of the framework. While each of these segments has something to add, they must engage at the appropriate node to avoid waste and inefficiencies. The public sector should go in first in preparation for the private sector. The International Finance Corporation’s Managed Co-Lending Portfolio Program (MCPP) is a good example of how the sequencing works.
Domestic resource mobilization is an important component of the financing architecture. It’s a major item in sources of finance. But how to engineer an increase in domestic funds, say from pension funds or sovereign wealth funds? I remember this was something you were working on when at UNECA.
Domestic resource mobilization is an important component of national development agendas. For many countries, domestic resources will contribute over two-thirds of the resources needed to address the development and climate challenge. Hence the need to focus on this. Domestic resources begin with improved revenue collection. The financial sector is also an important part of resource mobilization. African countries now hold vast resources in pension funds and many countries also have sovereign wealth funds (SWF). An important element in the overall costs of project development is exchange rate volatility. Domestic resources provide essential local currency financing, for example, which can reduce the cost and exposure of projects to foreign exchange fluctuations. Pension funds also provide long-term affordable capital for investments. The Economic Commission for Africa is supporting the development of these institutions and more importantly working to see how to harmonize legislation that will allow SWFs on the continent to invest in cross-border projects. The ECA is working with the US MIDAS and the National Association of Securities Professionals in the US to see how to crowd in US investments into Africa.
The aim has been to inform, incentivize, and co-create investment opportunities, and we’ve seen examples in Senegal, Kenya, and South Africa working in collaboration with them, identifying projects on the ground. These resources provide long-term patient capital which allows for the identification of more bankable projects.
These resources should complement and allow the state to provide equity for projects under development. Inside the equity category, which means your own resources, we also have carbon credits. We are working at the Integrity Council for the Voluntary Carbon Market, where I am a member, to ensure the voluntary carbon market accelerates a just transition to 1.5⁰C by developing standardization and verification rules. This would allow for market mechanisms to level the field for pricing carbon, and with this Africa has the potential to raise tens of billions in carbon credits every year to finance the attainment of the sustainable development goals. To find the right price point, we need a larger pool of carbon projects, which can be a big new commodity market for the continent. Take Africa’s peatlands which cover 13 countries, and run from Guinea, through to Cameroun and down into the biggest area in DRC and Congo Brazzaville. If we can monetize some of that, this could offer a major source of revenue to accelerate development. Everyone knows that Africa is not a big greenhouse gas emitter, but there is little appreciation of the fact that Africa is an important carbon sink. If we didn’t have the peatlands of the Congo, we would already be at the 1.5⁰C limit.
For many countries these resources combined with philanthropic capital can go a long way to unlock critical development projects.
Talking about African pension funds – where are they invested at the moment?
In times of crisis, as we are in now, there is a flight to safety for many investors. African Pension and Sovereign Wealth Funds are not any different, and they are invested in general offshore vehicles. It is estimated that the total value of all pension funds on the continent is close to $100 billion with South Africa, Nigeria, and Kenya amongst the largest. To protect their returns and that of their investors, Pension Funds and Central Bank assets are largely invested outside the African continent at very low rates of return. Some also invest in sovereign Treasury-bill issuances. Very few have the legislative authority to invest in domestic infrastructure but that is changing. With better information and greater transparency, more funds are beginning to look at national assets. They were investing in financial vehicles deemed to be safe assets, which are critical for retirees to ensure a guaranteed income, but why put them in a safe place where you are getting less than 100 basis points when you could invest on the continent, help grow infrastructure, education and health, and get better returns, say 400-500 basis points or more? On finance, we need to educate, inform and create the institutions to make it happen. In many African countries there has not been the same development of regulation around Pension Fund investing that you find elsewhere. In the US, there is a whole body of regulation that protects investors while allowing pension funds to diversify their portfolios.
What sort of measures have governments been taking to address inflation – such as fixing or freeing the prices of food and fuel – and how do you assess their performance and success?
Many emerging market economies are buckling under the pressures of the poly-crisis – COVID-19, conflict, cost of living, supply chain shocks, and climate. Inflation is the last exogenous shock that has befallen many emerging economies. Countries like Egypt have seen a 25% increase in food prices over the last year, while grain prices in Somalia were up by 75% in 2022. Inflation is a poverty-inducing bitter pill. In Africa, it is estimated that over 50 million more people have fallen into poverty and a substantial number are suffering from malnutrition. Inflation makes debt-to-GDP ratios higher, as most emerging market economies have their debt denominated in dollars or Euros. High debt service is crowding out fiscal space since governments have to service debt as well as pay salaries and pensions, let alone undertake necessary investments to restore growth. On the external front, inflation has increased import bills and weakened currencies in many emerging markets.
Countries had already deployed most of their toolkit to fight Covid. With inflation, countries with some fiscal space left have moved to scale up their social safety net projects. Countries have also looked to switch consumption to more domestically produced goods. Many countries have refocused on increasing agricultural production. Africa and the US are working on a partnership that would help supply Africa with grain, oil seeds, and fertilizer over the next two years, while it works to encourage US FDI into Africa’s infrastructure and food security sector to improve production on the continent. The Black Sea Grain initiative has also provided some relief in the markets. Many countries are also working to diversify energy supply and transition to cleaner energy.
The problem with subsidies for food and fuel and price controls is that, once in place, it is very difficult to lift them. You get riots in the street. And they deplete your reserves. It’s a mistake to start trying to fix prices that you cannot control. And if you subsidize fuel, it’s actually very regressive, it brings much bigger benefits for the person with 3 cars in the garage than the young woman who takes the bus to school each morning. What we need to do is set up cash transfer mechanisms, to put resources straight into people’s pockets. If you have a cash transfer, the probability that you are targeting those who need it most is higher. The World Bank has been helping countries put in place cash transfer systems for a while now, and more is needed. In the US, when the pandemic hit, the government was able to send everyone cheques. We shouldn’t be putting price caps on key commodities, but building safety net programs so people can then make their own choices. Kenya put in place an excellent transfer system during the crisis transferring resources directly to the phones of those most in need. That’s what African countries should be doing – using whichever cash transfer mechanism works best for what they are trying to achieve.
While countries are demonstrating remarkable resilience in the face of multiple crises, they are stretched and some are facing a debt overhang. Countries will need additional financing in the form of external support from MDBs to manage the crisis. Additional SDRs or on-lent SDRs will be important in the medium to long term. In the short term, extending the Debt Service Suspension Initiative for another two years will create additional fiscal space for many countries. Some countries will need a debt restructuring strategy to help them manage their debt. In this regard, it is important that the G20 debt restructuring framework becomes more effective. Low-Income Countries could also access the IMF’s Poverty Reduction and Growth Trust but they need grant financing to allow the release of concessional resources to LICs in a timely manner. In the long run, and as part of the Bridgetown agenda, a review of the global financial architecture will be necessary to build a more resilient architecture for future crises. Middle-Income Countries will require particular attention to navigate the crisis. To increase their access to additional resources, the IMF will need to waive the quota fees for those who have exceeded their borrowing limits. The IMF’s Resilience and Sustainability Trust is a welcome long-term financing tool but resources are needed for this to be truly additional and impactful.
The global situation is still causing difficulties in all regions. The high price volatility witnessed since the pandemic, particularly in 2022, suggests that many prices will remain at high levels and could rise yet again. In addition, although the prices of some commodities have fallen, due to high inflation, the situation has remained tight for billions of people, whose socioeconomic prospects have deteriorated as a result.
Look at countries like Mozambique and others spending 11% or more of GDP on dealing with the cost of climate impacts. How can we provide for these countries in a different way? Mottley talks about insurance. We can certainly build more resilience in countries like Kenya by, for example, developing new forms of cement for buildings that are better able to withstand climate extremes. We are also looking at what kind of fertilizer is best for drought and other conditions. There is a whole ecosystem around the climate now, with people seeing climate action not just as something good to do but as a fundamental tenet of the development agenda. It is also becoming a job-creating opportunity, forcing Africa to look at new forms of energy, such as in Namibia where $7.5bn is being invested in green Hydrogen, which hopefully will bring in a lot of jobs, new skills, and commercial opportunities for the region as a whole. Overall African countries are using the multiple crises to innovate and adopt more resilient forms of agriculture, health care service delivery and energy, which will serve them well. With supply chain disruptions, African countries are also looking to source more within the continent which should help accelerate the benefits of the AFCFTA as well as advance the use of digital technology.
Before you go, can you tell me what you’re doing now with the Liquidity and Sustainability Facility?
With each new crisis, the developed nations have innovated to respond using the full battery of monetary and fiscal tools available to them and in some cases innovating to meet the moment. These innovations have strengthened the financial sector, protected business, and led to much shorter downturn episodes in the US. Many emerging markets do not have the benefit of all these tools and, as such, the response to the crisis and the speed of recovery has been even more challenging.
The Liquidity and Sustainability Facility which I began is meant to help address one of the financial market infrastructure gaps which emerging market economies lack – access to short-term liquidity. Very often the market for emerging market bonds is illiquid. Therefore, creditors charge countries a premium to buy and hold their illiquid bonds. The additional spreads can be the difference between a sustainable debt-to-GDP portfolio and an insolvent one. African countries alone have Eurobond market exposure of about $140 billion and pay on average an additional 170 to 250 basis points due to the illiquidity of their paper. Removal of this liquidity premium would save them billions every year in debt service.
This is a solvable problem. The illiquidity of EMDE bonds can be remedied through the creation of a repurchase vehicle or what is commonly known as a Repo market. The repo market provides holders of EMDE securities with the ability to sell and re-purchase their portfolio of EMDE securities on demand for a market discount. This essentially creates a new asset class. The availability of a secondary market reduces the cost of bonds for EMDEs by increasing their liquidity, and by increasing the number of market players on the creditor side is also expected to help lower the costs of the bonds since the market is more active. The benefit of the LSF is that it reduces the debt service cost, encourages longer maturity securities, and therefore helps to manage the debt-to-GDP challenges faced by many countries. It also provides countries with a more diversified creditor base. The LSF was launched at COP26 in Glasgow, the first operation was completed in November 2022, and we have since finalized a first trade with Citibank. The concept is proven of a market for this, and there is demand. The LSF is getting calls from the market. We have to sensitize more of the market and fund the facility appropriately. That is what keeps me busy and it is extremely rewarding to be providing solutions.
