Rethinking development financing

Africa needs to rethink its debt sourcing systems. 

Photo credit: Shutterstock

Economic development anywhere is intricately linked to the accessibility and cost of capital. The cost of money, or interest rates and financial terms under which money can be accessed, plays a crucial role in determining the pace and sustainability of economic growth.

However, African governments face a starkly different reality. Burdened by high levels of debt and, in some cases, defaulting on their obligations, these nations find it increasingly challenging to secure affordable capital.

High interest rates and stringent borrowing conditions imposed by international lenders further exacerbate the situation.

This financial strain limits their ability to invest in critical infrastructure, healthcare, education, and other sectors essential for sustainable development and growth. African leaders have persistently advocated for reforms in multilateral financial institutions (MFIs) to address these challenges.

They have called for more flexible and inclusive lending criteria, reduced interest rates, and better support for sustainable development projects. However, progress has been slow despite these efforts, and the desired reforms remain elusive.

Reluctance of major global lenders to adjust their policies has left many African nations in a precarious financial position. The existing frameworks often favour more affluent countries, leaving developing economies with limited options for accessing affordable capital.

These dynamics hamper immediate growth prospects and stifle long-term development, perpetuating a cycle of dependency and underdevelopment.

The hope that significant reforms will one day come to fruition is an exercise in futility. Rich countries know a more equitable global financial system is imperative, but their interests supersede.

Africa must learn from Asia's newly industrialised countries (NICs) to achieve its full potential.

These countries focused on what they could control, such as fiscal discipline and domestic resource mobilisation. They prioritised internal financial stability and efficient use of domestic resources, paving the way for sustainable economic growth.

Learning from such strategies, Africa can harness its potential by implementing robust fiscal policies, reducing dependency on external debt, and maximising the value of local assets.

For example, the Chinese banking system played a transformative role in the country's remarkable economic growth, serving as both a catalyst and a backbone for its development strategy. Beginning in the late 1970s under Deng Xiaoping's leadership, China transitioned from a centralised, Soviet-style monobank system to a decentralised, market-oriented banking structure.

This shift allowed for a more dynamic and diversified financial system, fostering regional competitiveness and catering to the varied needs of a rapidly growing industrial economy.

Public ownership remained a key feature of Chinese banks, with the state holding significant stakes in most institutions. This ownership structure enabled the government to align banking practices with national economic goals.

Senior management appointments were centrally controlled, ensuring public banks operated as economic development and technological innovation instruments.

These banks were pivotal in financing SOEs, private enterprises, and SMEs, balancing public and private sector growth.

A cornerstone of the banking system's success was the People's Bank of China's (PBoC) policy of "window guidance".

This mechanism directed bank credit to productive sectors of the economy, such as manufacturing, agriculture, and infrastructure, while avoiding speculative bubbles in real estate and financial markets.

This policy minimised financial instability and supported long-term growth by ensuring that credit creation was channelled into activities that boosted GDP. Notably, the decentralised banking system empowered thousands of loan officers at local banks to make informed decisions, further driving efficiency and adaptability in credit allocation.

The banks also played a significant role in achieving broader social and economic goals.

Africans must focus on what they can control, fiscal discipline, domestic resource mobilisation, and the efficient use of local assets.

The writer is Kenya’s Ambassador to Belgium, Mission to the European Union, Organization of African Caribbean and Pacific States and World Customs Organisation.

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