AEC: Proposals for Africa’s Investment Guarantee Agency

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The African Development Bank (AfDB) Group, on Wednesday, 27 October 2010, presented a proposal for the Financial Sector Strategy and Action Plan (FSSAP) for the 2011-2016 period. The presentation took place during a seminar on financial development within the context of the African Economic Conference (AEC) which is taking place from 27-29 October 2010 in Tunis. The seminar on financial development was also an opportunity to discuss a study on the impact of Information and Communication Technologies (ICT), with emphasis on mobile phone roll-out, on economic growth in selected African countries. This seminar was marked by an examination of two proposed ways of financing Africa’s infrastructure development.

The proposed AfDB Financial Sector Strategy and Action Plan aims to address such issues. According to AfDB Expert, Michael Mahmoud, the strategy draws upon its experience and history in dealing with the diverse needs of its various regional member countries. The strategy takes into account the implementation of the Bank’s financial sector policy adopted in 2003, as well as emerging issues and lessons learnt from the recent global economic crisis.

The FSSAP focuses on activities that reflect the Bank’s role as knowledge builder, strategic partner and catalytic financier, and its core mandate in regional integration, governance, and private sector development. Operationally, the activities will be undertaken at four levels. Firstly, at the regional level, it will enhance regional collaboration and harmonization to strengthen financial integration. At the country level, it will strengthen policy dialogue, analytical work and country systems towards an integrated and coherent financial sector development. Thirdly, at the sector level, it will improve financial governance by supporting the strengthening of financial regulation and supervision as well as financial infrastructure, and finally it will enhance the diversity and commercial viability of financial institutions to increase opportunities for the Bank’s funding of Micro, Small and Medium Enterprises (MSMEs).

UNECA expert, John Atta-Mensah, in a paper titled: “An African Type “MIGA” and Infrastructure-indexed Bonds: Potential Means for Financing Africa’s Infrastructure Agenda”, proposes two ways of financing Africa’s Infrastructure. The first is the potential role of financing Africa’s infrastructure projects with bonds indexed to the project. Mr Atta-Mensah argues that the capacities of the various Multilateral Development Banks, the European Union and the many bilateral development partners will not be enough to support the continent's infrastructure needs. “We need to look for alternatives,” he said, pointing out the pressing need for Africa to consider more innovative mechanisms for financing its infrastructure needs, relying on its own resources. However, the proposed financing vehicle requires that Africa addresses and mitigates risk.

In this context, Mr Atta-Mensah’s second proposal called for the creation of an African Investment Guarantee Agency (AIGA) to support and strengthen the financing of infrastructure projects. “Africa needs its own guarantee agency,” he said. The AIGA's main objective will be “to provide non-commercial investment guarantees to African and non-African investors, private or public, who are desirous of investing in Africa, but do not have the appetite for the above non-commercial risks”. These risks, as defined in the paper, would include an investor’s inability to repatriate funds due to an unstable political environment, war or sectarian conflicts and unlawful nationalization, confiscation and seizure of investment projects by the government of a host country.

The study on ICT, jointly conducted by the IMF and R&D Orange Labs, argues that the recent development of mobile financial services could be one of the channels through which ICT contributes to growth. It therefore calls on African countries to create an enabling regulatory environment to encourage both domestic and foreign ICT investment to promote the sector's development and widespread use of ICT, especially mobile telephones. The paper also points to the important contribution of ICT in fostering financial inclusion (measured by the number of deposits and loans per head), by easing the provision of cost-effective financial services to the poor and the middle class, given the low banking coverage in African countries.

The seminar also underscored the performance of most African financial sectors that have major constraints in serving private sector needs, and in addressing emerging issues such as the growing need for trade finance in a globalized and competitive international trade environment.

As African countries make efforts to improve economic growth, in the face of rising youth unemployment and rapid urbanization, there is a need for policymakers to pay greater attention to the real economy. Also, there are additional challenges arising from climate change and other external shocks, requiring governments to develop appropriate safety nets and financing mechanisms in support of MSMEs.