AfDB Leverages Support to Middle Income Countries

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Cape Verde’s recent graduation from Low-Income to Middle-Income status two years ago was one of the heart-warming development stories to emerge from African in a while. In a continent where over 70% of the countries fall under the low-income category, Cape Verde’s “breakthrough” can not go unnoticed.  

Besides, the fact that the country’s graduation was “policy-induced” and not as a result of some natural resource endowment makes it a unique case. The implication in this regard is that any of the remaining three dozen or so countries in the low-income category can move up the ladder onto the big league by simply implementing good policies.

If Cape Verde, a resource-poor country characterized by an arid Sahelian climate and little arable land can make it, then other countries can as well achieve the same results if they implement good policies.

In this regard, the African Development Bank (AfDB) Group President, Donald Kaberuka, has identified good governance and sound economic policies as key to this transformation. “Rich natural resources endowment does of course help, but here is evidence that no matter how bad the initial conditions, with good governance, solid institutions, and a peaceful political and social climate, take-off is possible,” Mr. Kaberuka said during an official visit to Cape Verde in April 2010.

For operational and analytical purposes, Development Finance Institutions classify countries in three broad – Low, Middle and High-income – based on their per capita Gross National Income (GNI).

Globally, there are about 86 middle income countries which  account for just under half of the world's population. They are home to one-third of people living on less than 2 dollars per day; and cover a wide income range, with the highest income MICs having a per capita income 10 times that of the lowest. The group, ranging from China ( USD 5,370 GNI Per Capita) to Cape Verde (USD 3,130 GNI per Capita) , has grown in number since the mid-1990s, as poverty levels declined and wellbeing improved.

At the AfDB, the institution’s regional member countries (RMCs) fall under three broad categories – Low Income Countries (LICs), Lower Middle Income Countries (LMICs) and Upper Middle Income Counties (UMICs).

Currently, the LICs comprise Zambia, Tanzania, Mozambique, Eritrea, Uganda, Gambia, Kenya, Central African Republic, Zimbabwe, Comoros, Somalia, Niger, Mali, Madagascar, Burkina Faso, Senegal, Rwanda, Guinea-Bissau, Ghana, Guinea, Congo, Dem. Republic., Burundi, Malawi, Sierra Leone, Togo, Chad, Mauritania, Ethiopia, Benin and Liberia.

Nigeria, Sudan, Egypt, Arab Rep., Djibouti, Lesotho, Tunisia, Cameroon, Morocco, Cape Verde, Congo, Rep., Sao Tome and Principe, Angola, Cote d'Ivoire, Swaziland fall under the LMICs while Algeria, Botswana, Gabon, Namibia, Equatorial Guinea, Seychelles, Mauritius, Libya and  South Africa are in the UMICs category.

However, there are wide disparities in terms of economic development indicators such as per capita income, economic competitiveness, private sector development, and the degree of integration into the global economy. Differences also exist in financial market development and the ease of doing business in the country. These divergences account for wide variations in incomes and income inequality, poverty levels, investment flows, and growth performance.

In Cape Verde’s case, absolute poverty levels have consistently declined over the past years, coming down to 26% in 2006. The country recorded USD 3,130 GNI per capita in 2008 and USD 1.9 Billion in GDP in 2009.Tourism and migrant remittances have boosted its economy respectively contributing 48% and 12.3% of GDP growth between 1999 and 2008.

However, the setback suffered by some notable members of the league serves as a reminder that the MICs are also vulnerable to economic vicissitudes and external shocks, in particular.  The case of Botswana, a stable, well-managed resource-rich country which has been badly hit by the financial crisis through falling commodity prices, especially diamonds, easily comes to mind. The government, which had run budget surpluses in past years, found it had to fill a huge gap in the country’s 2009-2010 budget deficit.

Botswana therefore became a noteworthy example of the Bank’s speedy and flexible response to the request for urgent assistance by approving a USD 1.5 billion for budget support, which has now become a recognized key instrument for promoting economic and financial governance reforms in Africa.

The Economic Diversification Support Loan (EDSL) approved in June 2009 was designed to help Botswana cope with the immediate challenges from the global financial crisis and to fill part of the gap in the government’s 2009-2010 budget deficit estimated at 13.3 percent of its GDP.

The EDSL was followed five months later by the approval of €1.86 billion loan to South Africa’s Energy utility, ESKOM, for the development of the Medupi coal-fired power station. These two loans largely resulted in tripling Bank Group approved operations for MICs in 2009 to UA 4.35 billion (USD 6-5 billion)  above  the 2008 level of UA 1.11 billion (USD 1.7 billion), excluding multinational projects and programmes.

“This significant increase is primarily the outcome of intensive demands for Bank resources, against the backdrop of the global financial and economic crisis, and the Bank’s subsequent response,” says AfDB’s 2010 Annual Report.

A sectoral breakdown of the operations shows that infrastructure was the top priority with 54.2%, followed by multisector operations with 37.2% as against 3.9% for the social sector, as against 3.6% and 1.1% for finance and agriculture, respectively.

The 2009 MICs financing recorded a major shift to Sub-Saharan Africa after six years, with a majority 78.2% share compared with North Africa’s 21.8%, largely as a result of the operations in Botswana and South Africa.

Project financing dominated the Bank Group’s 2009 operations, accounting for 65.3% of policy-based loans, including the counter-cyclical Emergency Liquidity Facility (ELF), and the Trade Finance Initiative (TFI) which were set up in March 2009 to assist the institution’s RMCs affected by the global financial crisis, accounted for 34.1%. Guarantees and grants from the MICs Technical Assistance Fund (TAF), the African Water Facility (AWF), and Special Relief Fund (SRF) made up the remaining 0.3% of the resources. The 2009 MICs financing program featured a greater use of small grants from the MICs-TAF, the AWF and SRF.

“In implementing its MICs framework approved in 2008, the Bank continued to deepen its business approach of being more responsive, flexible, and innovative, and thereby more competitive in 2009. In particular, the Bank adjusted its product and pricing flexibility to better meet the needs of MICs,” the report noted.

The MICs stand to benefit immensely from the Bank’s recent general capital increase given their exclusive access to its non-concessional lending arm. Their capacity to deploy funds to productive use makes them the destination of choice for infrastructure and private sector funding, two key areas of focus for the Bank in its efforts to take Africa’s development to the next level.

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