Development heavyweights back bigger role for DFIs in COVID-19 response

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A worker sprays disinfectant on a security barrier outside a hotel to prevent the spread of COVID-19 along the streets in downtown Nairobi, Kenya. Photo by: REUTERS / Njeri Mwangi

BRUSSELS — European development finance institutions need more resources and new rules to better support the private sector in Africa through the COVID-19 crisis, according to a call to action from 20 development experts Monday.

How DFIs are responding to the COVID-19 crisis

DFIs are deploying capital and working out plans to respond to immediate and long-term needs caused by the coronavirus. But can these institutions prove their worth in the wake of the pandemic? We talk to top officials at leading DFIs to find out.

The call to European governments, signed by experts including Paul Collier from Oxford University and Erik Solheim, former head of the U.N. Environment Programme, argues that: “DFIs should be countercyclical at a time when private financial flows have come to a sudden stop, and should lead other investors back into African markets on the other side of the crisis.”

There are 15 government-backed DFIs in Europe, with €15 billion ($16.4 billion) invested in Africa supporting banks and private companies. A study published last month for the Association of Bilateral European Development Finance Institutions, or EDFI, argued that DFIs now need “new capital, increased risk tolerance, temporary suspension of minimum return requirements and new credit lines and guarantees from donors of between €2 [billion] to €5 billion” to respond to the pandemic.

The call to action, coordinated by EDFI, similarly argues that governments should replenish capital injections and top up risk-sharing schemes for European DFIs while making more funding available for technical assistance to African businesses.

 “DFIs are the European institutions in the best position to act swiftly in support of the private sector in vulnerable countries by providing emergency credit lines to client institutions before it is too late.”

— A call for action to European governments and their Development Finance Institutions

“[DFIs] need a combination of risk-sharing, capital and new flexibility to respond beyond their capacities in the current stressed situation,” the experts write. “DFIs are the European institutions in the best position to act swiftly in support of the private sector in vulnerable countries by providing emergency credit lines to client institutions before it is too late, something no other institution can do.”

Not everyone is so sure. Mikaela Gavas from the Center for Global Development think tank said it was “rather strong” to portray DFIs as the vital front line in the struggle to preserve African firms.

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“It is going to be local governments and national banks that support their private sectors best,” Gavas told Devex. DFIs “can certainly play a role,” she said, but cautioned that any capital increases should be contingent on DFIs taking greater risk and being innovative.

The call to action comes at a sensitive time in Brussels, after the European Commission recently decided to postpone budget guarantees intended for smaller DFIs until its next 2021-2027 budget cycle.

A commission spokesperson told Devex that it pushed ahead with guarantees for larger DFIs because these had already been signed or were in advanced stages of negotiation. The chosen banks, including the European Investment Bank and European Bank for Reconstruction and Development, also met all the regulatory requirements, the spokesperson said, adding that the commission is “actively looking into all possibilities to integrate EDFIs further in the Team Europe response to the pandemic.”

EDFI General Manager Søren Andreasen said the commission decision was a “huge loss” to European DFIs “on the frontlines in Africa,” telling Devex that it came even though “European bilateral DFIs are doing three-quarters of the work in sub-Saharan Africa and have generally speaking more presence on the ground and more inclusive approaches to financing than EIB does.”

“There is essentially a gap in the [COVID-19] response,” Andreasen said. “You have this army of several thousand investment professionals and portfolio of actively working client relationships that is not meeting with support from the EU and, generally speaking, has not yet met with attention or support from governments in their response.”

EIB said it planned to address the health and economic crises outside Europe by boosting access to finance for small businesses and supporting African corporates, paying particular attention to women entrepreneurs, employees and caregivers.

“At the EIB we very much share the critical relevance of supporting the private sector that this call for action stresses,” Ambroise Fayolle, EIB vice president responsible for development policy, wrote Devex in an email. “The private sector in Partner Countries will need liquidity and commercial banks will need encouragements to continue extending loans in difficult times.”

The signatures on the call to action include six of the nine members of a recent “Wise Persons Group” on European development finance, which was widely seen as critical of EIB — leading some Brussels insiders to view the call as a further attempt to sideline the bank.

In a recent submission to EU member states, EIB said it financed 111 projects worth €4.2 billion in sub-Saharan Africa between 2017-2019. Some 54% of its lending in sub-Saharan Africa targets the private sector, though the Wise Persons’ report called these investments “mostly low-risk and large-scale.”

For San Bilal, head of trade, investment, and finance at the think tank ECDPM and one of the authors of last month’s study, the DFI call to action is not a slight against EIB, which is owned by EU member states.

“Providing more guarantee and possible capital increase are critical issues to increase the financial firepower of [Europe’s] DFIs, but also other multilateral development banks, such as the EIB,” Bilal told Devex, pointing out that EIB has a new Covid-related €25 billion guarantee fund for its activities within the EU, but not outside the bloc.

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About the author

  • Vince Chadwick

    Vince Chadwick is the Brussels Correspondent for Devex. He covers the EU institutions, member states, and European civil society. A law graduate from Melbourne, Australia, he was social affairs reporter for The Age newspaper, before moving to Europe in 2013. He covered breaking news, the arts and public policy across the continent, including as a reporter and editor at POLITICO Europe.