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After democratic gains, Africa must think big to meet its financial reform challenges
In the 1980s, African countries set up stabilization and adjustment programs to restore economic growth. The schemes included liberalization, privatization, and increased supervision by central banks. That did not work.
The urgent issue now is at what pace Africa can catch up with the development of capital markets, have adequate regulations and policies to fast-track financing the continent’s development, and use financial and digital innovations to attract investors. To meet that goal, there are many parameters and hurdles to consider. Public debt, for instance, drastically reduces African countries’ fiscal maneuvering space.
On the second day of the African Economic Conference in Cabo Verde, a panel discussion was devoted to tracking the progress of financial reforms – and the road ahead. Marie-Laure Akin-Olugbade, African Development Bank Director General for West Africa, moderated the panel.
Anouar Hassoune, Professor of Finance and CEO of the West Africa Rating Agency, pointed out that there is a long way to go, even though there are signs of hope. “The states are not able to finance growth. It is something that is clear – this is not about the states, but about the sustainability of debts,” said Hassoune.
The panelists acknowledged that growing democratic and governance reforms had resulted in a broader ecosystem of financial institutions, increased competition, and improved financial sector efficiency. But critical weaknesses remain and need to be addressed. The financial architecture in most countries remains weak, and the sector’s contribution to growth is still low. A healthy and competitive economy requires a financial system that moves funds from people who save to people who invest.
In addition, business conditions on the continent need to be improved, said Augustine Ujunwa, economist at the West African Monetary Institute. “One thing we have to consider is the cost of doing business in Africa,” said Ujunwa. “Our markets are small and we need to adopt a regional approach in market integration.”
Currency and monetary integration also remain a giant puzzle. One key piece of this puzzle is the role of central banks. According to Hassoune, central banks’ current models are limited and they have little capacity to contribute to reshaping African financial systems.
As Africa is economically and culturally diverse, the panelists suggested a continental cryptocurrency – distinct from a digital currency. Even though current efforts to integrate the capital market for the ECOWAS zone look promising, there are many obstacles to overcome. Digital finance was suggested as one of the best alternatives during the meeting.
Citing the case of Nigeria, Ujunwa believes Africa can create its own unique identity by developing a digital currency. Strengthening regulation and establishing standardization are determinants for this target. According to Hassoune, another solution to Africa’s development gap is Islamic financing, which is one of the ways to channel funds within and outside the continent. “We have sufficient credibility – I am from Morocco and now in Senegal, we have the credibility to attract the attention of foreign partners. The continent has 50% of its stock in gold, 10% for water and renewables,” he added.
The 2021 African Economic Conference began on Thursday, December 2, with the theme: Financing Africa’s Post Covid-19 Development. Organized by the African Development Bank, the Economic Commission for Africa and the UN Development Program, the conference has brought together a wide range of actors from the public and private sectors as well the development and research communities.