Kigali, 7th March 2022 (ECA) — Although domestic resources are not enough to bridge Africa’s financial gap, they must still be in the driver’s seat as countries struggle to address liquidity issues caused by COVID -19.
Speaking at the ARFSD High Level Panel on Unlocking Finance to Build Better from COVID-19 and Accelerate Sustainable Development in Africa on Wednesday, March 3 in Kigali, Rwanda, UN Under-Secretary General United Nations and Special Adviser on Africa, Cristina Duarte, has made an impassioned plea for building strong domestic revenue systems (DRMs) in Africa, insisting that they will play a crucial role in expanding the political space for countries while allowing them to gain the credibility and confidence necessary to attract external financing, control financial flows in their favor and give Africa a stronger position at the international negotiating table.
When Rwanda joined the many countries seeking external funding to meet the enormous demands of the fight against COVID-19, the country’s healthier pre-pandemic situation proved to be an asset. “The pandemic has found us with a functional health system, decentralized government, integrated planning system, strong coordination between institutions, investments in ICT technologies and a number of online public services. All of this helped us come together quickly as the pandemic spread,” said Rwandan Finance and Economic Planning Minister Uzziel Ndagijimana. “Our first step was to exhaust the concessional windows available to meet the targeted priorities but also the medium and long-term aspects aligned with our vision. Despite the decline of our economy by -3.4% in 2020, 2021 marked the beginning of the recovery. We now expect 10.2% growth and continue to roll out the vaccine to reach everyone,” he added.
To strengthen their domestic resources, African countries including Rwanda will have to ensure that they create favorable growth conditions for their economies and especially their private sectors. However, much remains to be done in this regard, particularly in terms of access to finance.
“My business has been around for 8 years. Growth has not been easy,” said Olumide Gbadebo, CEO of Adunni Organics, a Nigerian cosmetics company. Gbadedo mentioned that she had to use her own resources to fund the growth of her businesses. “When I tried to borrow money, I was told to bring books, assets, guarantors, things out of my reach and pay 27% interest. J I’ve always made it a point to manage my company’s finances well, but a lot of people who buy and sell don’t know how to manage the books,” she laments.
By increasing the size of African markets, the AfCFTA reduces risks for investors
“We must realize that the destinies of the public and private sectors are definitely linked. Unless the private sector, whether SMEs or large corporations, is fully supported and incentivized by governments, our model will have significant leaks, said Hippolyte Fofack, Chief Economist and Director of Research and international cooperation at the African Export-Import Bank (Afreximbank). In other words, he explained, instead of projects that could be created and generate jobs locally, there would be import dependency, job exports and therefore more external responsibility for Africa. .
“Strengthening the private sector is in the interest of governments. This may be the only way for Africa to take ownership of its development,” he added. According to Fofack, one of the main constraints in the past has been the fragmentation of African economies and markets, which has made it difficult for companies to spread the risk of investing in small markets. The AfCFTA and the rules of origin attached to it are a game-changer because they will prioritize African companies and their industries, and this is a major incentive in terms of creating the conditions for growth and sustainable development. Funding will follow because productivity will increase.”
“We’re talking about a number of issues here, one of which is the cost of borrowing. One way to help SMEs and women is to set up credit bureaus which can collect information on their ability to repay loans on time, etc. so that banks can assess their ability to repay their loans,” said ECA Deputy Executive Secretary Hanan Morsy.
Another way to support them is the introduction of chattel collateral registries, items such as machinery, livestock or gold in jewelry that can help borrowers show their ability to repay their loans. Usually, banks ask for land or property as collateral for loans, she added.
Support private sectors to increase government revenue
Beyond access to finance, African policymakers have a range of options to strengthen their private sector, starting with facilitating access to finance for businesses of all sizes when their projects are bankable. “If we look at lending to the private sector as a percentage of GDP, we are at less than 20% on the continent compared to 70% in the rest of the world. So the banking sector has basically been more risk averse but also has these prohibitive interest rates,” said Fofack, who noted that Nigeria, for example, has found an innovative solution to this problem. In Nigeria, the government forced banks to lend to the private sector with a private sector lending ratio of 65%. This policy led to Nigerian banks granting more loans during Covid without necessarily increasing their NPL ratios, he explained.
Fofack also mentioned the US model, where public procurement policy gives strong support to domestic SMEs, thus contributing to strengthening the value chain, expanding fiscal space and generating revenue for the government. through a multiplier effect.
Back in Africa, Rwanda has put in place several support mechanisms for businesses of all sizes, particularly SMEs. Among them, a microfinance network, an institution that helps entrepreneurs develop their projects before qualifying for loans, government support that provides up to 75% of the guarantees needed to access loans, and legal reform to make the market for financial institutions more competitive.
The economic marginalization of women costs Africa $60 billion a year
Private sector support policies will also have to take into account the informal sector, whose opportunity cost is particularly high for Africa according to C. Duarte, who called for addressing the issue with a medium term rather than with a short term. vision, and that governments “roll out the red carpet” to encourage businesses to move out of the informal sector. The informal sector has a huge opportunity cost, but countries do not need newly formalized businesses to contribute to their tax bases for the next ten years. Instead of asking them to pay taxes as soon as they get out of informality, let’s make the formalization process allow them to open bank accounts and pay nothing for two years or accompanying them in the coverage of their employees, she added.
The economic exclusion of women is another major source of loss to African economies that policy makers need to stem. “The opportunity cost of women’s economic exclusion in Africa is approximately $60 billion a year. Social parity goes beyond equity, human rights, being on the right side of the world: it is a key success factor for ensuring growth and stability in Africa, and the only way to overcome these challenges is to change our mindset, C. Duarte insisted, calling for breaking the automatic ties between women and microcredit as they limit their economic potential. “We need African women to have access to assets such as land for them to be on a trajectory of expansion,” she insisted.
The High-Level Panel on Unlocking Finance to Build Better from COVID-19 and Accelerate Sustainable Development in Africa was held on 3 March 2022 during the 8th Africa Regional Forum for Sustainable Development on 3 March 2022. This event aimed to identify and articulate the financing needs of African countries to enable them to mobilize adequate and sustainable resources to finance post-COVID-19 recovery and accelerate the implementation of Agendas 2030 and 2063 in the region. .
Click here to see the full meeting (minute 02:43:00 to 04:20:00).
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