Can a new African Union alliance hasten global financial reforms?

More than half the countries in Africa are currently spending more on debt repayments than they are spending on health care or climate action. In December 2023, Ethiopia became the third African country after Zambia and Ghana to default on debt. Now, the African Union has launched the Alliance of African Multilateral Financial Institutions, or the Africa Club, which the continent’s leaders hope will be a vehicle to push for global financial architecture reforms. The Africa Club plans to achieve this through advocacy in addition to driving development and financial independence on the continent. Unlike the London and Paris Clubs whose role was to find solutions to payment difficulties experienced by debtor countries, the Africa Club’s mandate is to “drive sustainable economic development and financial self-reliance.” But some wonder whether this group will actually be able to address the issues it has been set up to tackle, and one expert called it a distraction from other priorities. Institutions under the Africa Club include Africa Finance Corporation, African Export-Import Bank, Trade and Development Bank Group, African Reinsurance Corporation, African Trade and Investment Development Insurance, Shelter Afrique Development Bank, and reinsurance company ZEP-RE. The CEO of Shelter Afrique Development Bank, Thierno-Habib Hann, told Devex that his bank recognizes the club as a crucial strategic negotiation body within the global financial architecture. “Through this alliance, we are committed to leveraging Africa’s capital for its development while advocating for equitable treatment and fair representation for the continent,” he said. “Together, we harness our collective strength to shape a more inclusive and sustainable financial landscape, ensuring Africa’s rightful place on the global stage.” The Africa Club, according to the statement on its launch will put together funds that will be made available to member countries for development. The alliance “will work to develop unique solutions and joint financing tools and instruments tailored to Africa’s unique developmental needs and pool resources for their effective deployment.” The club now holds assets of more than $53 billion, attracting equity investment of over $8.6 billion, primarily from African countries, to support African growth and resilience. “African countries have shown resolve to shape our collective financial destiny and AAMFI will stand as a staunch advocate for Africa’s interest in global finance forums, championing equitable treatment and fair representation for the continent,” professor Benedict Oramah, president of Afreximbank and the inaugural chair of AAMFI’s Governing Council said in the statement. Speaking at the African Union Summit ahead of the launch of the Africa Club, African leaders pointed out the need for reforms and the fact that the continent was now actively working toward achieving them. Ghana’s President Nana Akufo-Addo said: “Making the reforms also requires that we take some steps that will assist us to have a greater impact in the way in which our economies are financed,” adding that with an increase in the financial power of Africa’s institutions, the continent will be in a better place to finance its development. Akufo-Addo wants AU leaders to invest a minimum of 30% of their foreign reserves which he said are “attracting largely negative rates of interest” in African financial institutions, he said at the AU Summit. Some countries on the continent are also taking internal steps to address the debt crisis according to Serah Makka, the executive director for the ONE Campaign in Africa. With three countries in the continent already having defaulted on their sovereign debts and 21 others in debt crisis, Makka said that more countries are restructuring their debts. She said countries that have defaulted or are at risk of defaulting are undergoing debt restructuring to reduce how much they pay in debt service over the short to medium term. “For them, pursuing fiscal consolidation will not be enough to address their debt situation,” she said. Others are doing fiscal consolidation by reducing deficits by spending less for every dollar generated. Some countries are also mobilizing more revenues. “While this is difficult to achieve, large and rapid increases in revenue have been observed in some countries like The Gambia, Rwanda, Senegal, and Uganda, which relied on a mix of revenue administration and tax policy measures,” she said. Others are entering into International Monetary Fund programs to implement key reforms to ensure fiscal sustainability. In the last few years, African leaders also outlined the global reform priorities they seek, which include solutions to the debt crisis, more grants and concessionary money to Africa, rechannelling special drawing rights, or SDRs, to African financial institutions, an increase in voice and power in global financial decision making, and a commitment to green growth agenda in Africa. These reforms are also in line with the United Nations secretary-general’s recommendations from his May 2023 policy brief on global financial architecture reforms. During the Africa Club launch, Kenya’s President William Ruto, who has been vocal about the global financial reforms, said that he was happy that world leaders have agreed that there is something fundamentally wrong with the global financial architecture. “We decided in Nairobi that we are not going to take the corner of the victim and to try and point fingers and play the blame game, we are going to do something about it and be part of the solution.” Additionally, the African Union is still pushing for the establishment of other financial institutions including the African Central Bank, the African Monetary Fund, the African Investment Bank, and the Pan-African Stock Exchange. These, the AU states, will strengthen Africa’s financial architecture and put Africa in a stronger position in global financial architecture. Speaking during the sidelines of the summit, Mavis Owusu-Gyamfi, vice president of the African Center for Economic Transformation, or ACET, said that Africa wasn’t asking for too much in the reforms. “Given what Africa has given to the world as a provider of natural resource capital, it is not too much to ask for an increase and a fair share of allocations through public goods such as the International Development Assistance and the Special Drawing Rights,” she said. IDA is the World Bank’s fund for the lowest-income countries and SDRs are a reserve currency issued by the International Monetary Fund. In 2021 there was a $650 billion SDR issuance. Still, African countries only received about 5% of that total dollar figure and there has generally been disappointment that wealthier countries have not reallocated their shares as was expected. As part of the push for global financial architecture reforms, African countries called for reform of global tax architecture, which was approved by consensus at the United Nations General Assembly in 2022. In March, the African Union announced that it was finalizing the establishment of the Africa Credit Rating Agency to address unfair risk assessment of lending in Africa. Other than that, little is heard of individual country policy changes. Makka said that no country is facing the global architecture system alone. “Countries are working through the collective because it is hard for a small African country to combat a whole Global Financial architecture problem,” she said. The One Campaign is a nonprofit organization that is at the forefront of the push for global financial architecture reforms. A lot needs to be done to prove that the Africa Club can deliver. At this point it is nothing but an “MOU-level” agreement to continue doing what each member has been doing with a bit more cooperation and information sharing, Fadhel Kaboub, a senior adviser at Power Shift Africa, an NGO that mobilizes climate action in Africa, member of the Independent Expert Group on Just Transition, told Devex. “The Africa Club does not have a coherent or comprehensive vision to undo Africa’s structural economic traps. The Africa Club does not intend to be the counterweight for the Paris Club, the London Club, and the Bretton Woods Institutions,” he said. Kaboub believes that the African Union’s Financial institutions — the African Central Bank, the African Monetary Fund, the African Investment Bank, and the Pan-African Stock Exchange — should take precedence. “The grandiose announcement of the Africa Club serves as a distraction from the more important task of launching the African Union Monetary Institutions and the activation of Agenda 2063. It’s a missed opportunity for Africa to decolonize the foundations of our economies and to invest in enhancing our economic and monetary sovereignty,” he said. The AU session in Addis Ababa also sought to hasten the establishment of those financial institutions but not much was achieved, despite some of the institutions having been approved more than a decade ago. Very few countries have ratified them and funding has also been a challenge. “Aspiration is plentiful but concrete delivery much more difficult,” Alex Vines, the Africa Programme director at Chatham House, said. It is unclear if the Africa Club will in any way address issues of debt architecture, concessional finance, and Special Drawing Rights rechanneling, the main issues that developing countries seek to reform in global financial architecture, Vines said. “It is a statement of intent that AU member states aspire to greater agency in international financial architecture debates and aspire to have their own African Union Financial Institutions,” he said.