The United States plays a leadership role when it comes to framing the agenda on global economic and financial policy, and it is important for African policymakers to be aware of what is at stake for the continent.
On December 3, United States Treasury Undersecretary for International Affairs Nathan Sheets outlined the top priorities of the Treasury’s global economic agenda in his debut speech at a Brookings Institution event.
Sheets is the main U.S. counterpart of the World Bank and the IMF. Since the U.S is the largest shareholder and practically has veto power in both institutions, the U.S. Treasury’s agenda typically serves as a guide for their strategies. In turn, the IMF and World Bank have immense influence when it comes to low-income African countries. As a result, what Sheets says will help formulate these institutions’ strategy towards Africa. So, I am betting that these issues will become much more important for Africa in the years to come.
Last week, the undersecretary spoke on the six core pillars of the Treasury’s strategy moving forward, including: 1) strengthening and rebalancing global growth; 2) deepening engagement with emerging market giants; 3) framing a resilient global financial system; 4) facilitating access to capital; 5) promoting open trade and investment; and 6) enhancing U.S. leadership at the IMF.
These mutually reinforcing objectives aim to strengthen economic performance at the global level, but also have specific implications for the African continent: Stronger global economic growth helps sustain the current GDP growth many African countries are currently experiencing, boosts financial and investment flows to the continent, and potentially deepens local financial markets. An increasingly resilient international financial system would insulate Africa from disruptive crises and provide a supportive environment for the continent’s growth. Improved U.S. bilateral relations with China could yield a fruitful trilateral partnership with Africa by ensuring complementarity in investments, as both the U.S. and China are increasing their commercial engagement with the continent. Giving a greater voice to emerging markets through reform of the International Monetary Fund (IMF) is also a good step toward improving relations with these countries and supporting the good governance of international institutions.
The U.S. Treasury’s Approach to African Challenges
In addition to these global objectives, in his speech Sheets specifically highlighted African issues two times. First, he named the West African Ebola virus epidemic one of the foremost challenges facing global economic policymakers as they seek to achieve the G-20 Leaders’ objective of “strong, sustainable and balanced global growth.” Second, he identified Africa as one of the focal regions of one of the “core pillars” of the Treasury’s strategy “facilitating access to capital.” Sheets stated:
“Expanding access to financial services for the over 2 billion unbanked people in the world promises to open new possibilities as the financial wherewithal in these population grows. Expanding access to finance and deepening financial markets in Africa, the Middle East and other developing regions will support businesses, empower entrepreneurs, boost household incomes, and ultimately help fuel growth across developing economies. This is why we are working with the G-20 and with other partners to broaden access for developing countries and to make access to capital within these countries more inclusive.”
The Treasury’s focus on expanding access to capital and enhancing capital markets in Africa is a welcome step, as nearly a quarter of adults in sub-Saharan Africa lack access to formal financial services. Moreover, Africa requires substantial inflows of capital to the region in order to finance transformative projects in infrastructure across the continent—estimated to cost $100 billion a year. However, to meet this ambitious target, the U.S. Treasury will need to coordinate with international and African stakeholders to leverage sufficient public and private sector investment and bolster African capital markets.
The U.S. Agenda to Expand Access to Capital and Deepen Capital Markets for Development
The five elements integral to financing the region’s development projects enumerated in Sheets’ speech are:
- Blended Finance. Sheets called on multilateral development banks, including the World Bank, to “use their balance sheets to catalyze private investment.” Development finance institutions can help guarantee investments and mitigate risks posed in unstable institutional and economic environments. In doing so, development institutions provide a safety net for private sector investors, which can reduce risks and spur investment. They will need to innovate to come up with new instruments and arrangements that can facilitate private investment in Africa.
- Domestic Private Finance. African governments and private sector leaders must collaborate to generate a stable regulatory environment conducive to the growth of financial markets and bolster financial intermediation. Indeed, small and medium enterprise finance is still in short supply. Developing local capital markets and broadening the domestic institutional investor base will help raise long-term finance.
- International Private Finance. In the past decade, international investors have increasingly looked toward Africa for high returns on investment. Maintaining sound economic policy and addressing potential destabilizing risks are crucial to continuing to attract these investments.
- Remittances. Remittances to Africa amounted to approximately $32 billion (nearly 2 percent of the continent’s GDP) in 2013 and are estimated to rise to $41 billion by 2016. These resources are key to Africa’s development, especially improving the livelihoods of the region’s poor. Yet excess money transfer fees cost the region close to $1.8 billion a year. Increasing the efficiency of money transfers by reducing fees is a crucial step to getting the most value from these important development resources.
- “Climate Finance.” Providing financial support to promote the use of low-carbon technologies is another major facet of the U.S. Treasury’s strategy that will benefit African countries by increasing the region’s renewable energy supply while also spurring employment opportunities in this sector. Recently, the Obama administration pledged $3 billion to the Green Climate Fund, which will serve as a channel through which private funds can be mobilized to support efforts related to climate adaptation and mitigation.
Aligning U.S. and African Economic Priorities: What Does the U.S. Agenda Mean for Africa?
As noted above, the U.S. Treasury’s international agenda converges with African priorities in several key issue areas. Its agenda is also broadly in line with current thinking on financing for development, which will culminate next year (July 13-16, 2015) when world leaders meet in Addis Ababa, Ethiopia for the third International Conference on Financing for Development. The U.S. agenda’s focus on remittances is apt, especially considering that flows of remittances are increasingly becoming comparable to levels of official development assistance (ODA) on the continent. The U.S. proposal to encourage competition among money transfer operators and strengthen remittance markets can help public and private sector leaders to maximize the value for money of this major development resource. The U.S. focus on climate finance is also a noteworthy area, since recent World Bank data demonstrates that public-private partnerships are driving growth in the renewable electricity sector.
One thing that struck me during Sheets’ remarks, however, was the absence of infrastructure finance in the U.S. Treasury’s priorities. At the 2005 G-8 Gleneagles Summit on development assistance, world powers made a special commitment to financing infrastructure improvements. And given the centrality of improving energy infrastructure in President Obama’s Power Africa initiative, this omission seems to be a significant oversight when it comes to U.S.-Africa policy. On another note, we got some indication of U.S. policy toward the BRICS (Brazil, Russia, India, China and South Africa) Development Bank. Sheets showed some skepticism toward the group and noted that in order to be effective the BRICS Bank needs to (1) show its complementarity and additionally with existing institutions; and (2) needs to include the hard-learned lessons of development finance: good governance, debt sustainability, adequate procurement and addressing environmental issues.
Another issue where the U.S. Treasury can help support U.S.-Africa trade and investment policy is in the area of financial regulation. Indeed, the U.S. dollar remains the centerpiece of global trade. Intra-African trade and the fast-growing trade between China and Africa are typically settled in U.S. dollars. SWIFT figures indicate that about 50 percent of intra-African import and export settlements involve a bank outside Africa. In particular, U.S. dollar clearing banks are becoming more important as trade and investment within Africa (about 23 percent of total trade according to SWIFT data) and with China and other emerging markets is increasing. Know-your-customer (KYC), anti-money laundering and combating financial terrorism (AML/CFT) regulations increase compliance and other transaction costs. At times, foreign banks decide to simply close correspondent accounts with some African banks for fear of the scale of potential fines for sanctions-breaking. Thus, there is room for regulatory cooperation and other policies that can help safeguard the objectives of U.S. financial regulation and, at the same time, help its objective to increase trade and investment with Africa.
Finally, climate finance is definitely an important global issue, and Africa can be at the forefront. Indeed, the International Energy Agency (IEA) forecasts the share of renewables in Africa’s power total capacity to more than double to reach 44 percent by 2040. The choice for African countries to turn to renewable energy is not just about addressing global warming and climate change. It is also about improving energy efficiency and diversifying energy sources and importing new technologies. Ethiopia, no doubt because it is so far less endowed in nonrenewable energy, has made the choice to invest in renewable energy technology such as the Ashegoda wind farm, the Grand Renaissance Dam on the Nile and several geothermal projects. Kenya also has a wind power project on Lake Turkana and is involved in plans for geothermal energy production. Further northwest, Morocco is investing heavily in solar power plants. In fact, recent data on public-private investment from the World Bank indicate that the renewable electricity sector is growing. In 2013, the top deals in sub-Saharan Africa included projects worth $1.6 billion for and open-cycle gas turbine (OCGT) project and a wind farm in South Africa, as well as a $440 million thermal power expansion project in Ghana.
This said, in terms of global warming and climate change, the Growth Commission argues that it makes economic sense for developed countries to bear some of the costs of developing-country investments that would cut carbon emissions to safe levels. Recently, the U.S. and other governments have pledged $10 billion toward the new Green Climate Fund to channel resources for both mitigation and adaptation, and catalyze private sector investment in clean technologies and climate resilience. Going forward, it will be important to not only make sure that the funds pledged are available but to also work with African countries to ensure that the planned climate investment are aligned with the African countries’ overall infrastructure and development strategy.