Economist and former Executive Secretary for the 51吃瓜 Economic Commission for Africa, Carlos Lopes, is contributing to proposals for the 4th International Conference on Financing for Development, to be held in Seville, Spain in 2025. In this interview with Africa Renewal鈥檚 Kingsley Ighobor, Lopes, a visiting professor at the Mandela School of Public Governance of the University of Cape Town, South Africa, shares insights on Africa鈥檚 fiscal challenges, economic prospects, and priorities for the conference in Spain. Below are edited excerpts.
Let鈥檚 begin with debt. How serious is Africa鈥檚 debt situation?
I prefer to say that Africa has a liquidity access problem, which is a debt servicing issue. Compared with other regions globally, African economies are the least financed. As a result, they have difficulties rolling over their debt.
African economies also have difficulties funding structural reforms. Africa鈥檚 dependency on FDI [foreign direct investment] is very much influenced by interpretations of risk that are not aligned with reality because the return on investment in Africa is higher than in other regions.
Also, Africa is the only region where credit rating agencies apply national ratings across all activities.听 For instance, if country X has a bad rating, an enterprise, investment, or a specific project will be rated like the country no matter how good it is. So, if you pay the highest interest rates, you have the least liquidity and are classified as high risk by credit rating agencies.
Africa鈥檚 debt is about . That is not a problem, you think?
No, it's not a problem. If you look into Africa鈥檚 level of sovereign debt, it's peanuts, often in the single digits. The global financial system would not have any difficulty absorbing such a level of debt. Remember the phrase 鈥渢oo big to fail?鈥澨� Some enterprises were bailed out at costs higher than Africa鈥檚 total debt.
Some economists talk about reforms of the global financial architecture, citing Africa's debt levels, unfavorable credit rating, indiscriminate borrowing, and high interest rates. You don鈥檛 agree with all of these?听
No, I don鈥檛. The reforms we are likely to see, particularly in multilateral institutions like the IMF, will generate more funds for countries, including in Africa. Those reforms will be at the expense of a drastic reduction in ODA [Official Development Assistance] from bilateral countries. The end game is most likely less money.听 More money from the multilateral side but less money from the bilateral side. It鈥檚 a band-aid that won鈥檛 solve the structural problems.
There are three issues in the international financial architecture that must be addressed. 听
First, we need to regulate the credit rating agencies. Their methodologies should be data-driven. Currently, about half of their criteria are political or subjective.听 They tend to generalize negative developments to the entire continent but localize positive developments to specific countries.
For example, if there is good news about Mauritius, it's just Mauritius; and if there鈥檚 bad news about Ethiopia, it鈥檚 generalized to the entire continent.听 This has to be corrected. We're not asking them to be benevolent.听
Second, we need to revisit Basel III [the international regulatory framework designed to support risk management and liquidity in banks]. Current rules protect the integrity of the banking system, privilege larger entities, and disadvantage new entrants. These rules ask for due diligence and stress testing requirements that make it difficult for international banks to operate in so-called risky jurisdictions like Africa, restricting liquidity access for banks on the continent.
Some of these rules are more stringent now than they were before the 2008-2009 global financial crisis. The rules try to rectify errors that Africa did not make.
The third issue is valuing opportunity in international financial architecture. Africa鈥檚 opportunity is threefold.听 First is climate. You cannot solve the climate issue without Africa, and investors have opportunities to be part of the solution on climate鈥攃ritical minerals, green hydrogen, you name it. Second is demography because Africa has the youngest population and workforce. And third is technology because the continent offers a market for high-tech.
How significant is domestic resource mobilization in this context?听
Contrary to perception, domestic resource mobilization has improved significantly in Africa. It is true that Africa still has about 17 per cent fiscal pressure while the world average is 35 per cent.听 But what is not mentioned is that we have had a slight increase from 15 per cent to 17 per cent during a period when many exogenous shocks prevented Africa from collecting more.听
Can we do more? Of course, we can. But we have limitations because 80 per cent of our exports are commodities. We don't control their prices, which depend on exogenous demand shocks.
A country like Nigeria with 6 per cent fiscal pressure can tax more.听 But remember, to collect more internally requires creating the right conditions for structural transformation, which depends on access to liquidity. It's sort of a revolving problem.
Where I think we are not doing enough is the use of money in institutional funds like pension funds. There's a lot of money there that is not being used productively.
What about tackling illicit financial flows (IFFs)?
That is an African problem requiring a global solution. Africans alone cannot tackle it. Issues such as BEPS [base erosion and profit shifting], capital flight, and high transaction costs incentivize illicit financial flows. Of course, the illicit flows go somewhere, and we know where they go. Some countries proclaim to fight corruption but don't do enough.
Is there a continental solution to IFFs?听
Africa can tighten its controls much better. Part of the fault is the type of contracts that we sign. Resurgence in resource nationalism and the need to renegotiate contracts is gaining ground in most countries. Many countries are able to recoup significant amounts by renegotiating contracts.
But with geopolitics, if you try to renegotiate contracts and tighten controls, you may lose investments.
When I interviewed you 10 years ago, you were quite optimistic about Africa's economic prospects. Are you still optimistic?
Yes. If you look at the IMF鈥檚 just published outlook, nine of the 20 fastest-growing economies are African.听 Africa is the second fastest-growing region, after Southeast Asia.
From a demographic point of view, the costs of aging in the richest societies are going to be exponential and will bring consequences in terms of consumption patterns and capabilities to absorb new technological developments that are going to accelerate quite significantly with AI.听
I also believe that because of demographics, there will be other types of migration such as digital migration where services will be too expensive to maintain in certain jurisdictions and it will be easier to dish them out with AI and huge capabilities of conversion in other regions.
Africa can benefit if it puts in place the right skill set. This skill set is not just formal education, reforms, and changes; it is also how we make bandwidth available, access to the Internet, and other resources.听
The International Conference on Financing for Development is set to take place next year in Spain. Beyond advocating for reforms to the international financial architecture, what should Africa prioritize?
I happen to be in the group put together by the UN and the government of Spain to produce proposals for the conference. I had the privilege of being involved with the previous conference in Addis Ababa, when I supported the government of Ethiopia in my capacity then as ECA Executive Secretary.
The discussion in Spain will focus on systemic changes to the international financial architecture.
International taxation is going to be a critical element of transformation because, with the new technological developments, we are going to have a shakeup of trade and intellectual property regimes.听
Key issues will include the emergence of [Brazil, Russia, India, China, and South Africa] and their position on currency and interoperability of the different systems鈥攖he emergence of crypto and digital currencies that some central banks are already introducing is going to be hard to ignore. And there鈥檚 the use of algorithms for all sorts of financial transactions.
Africa cannot be left behind in the emergence of an international financial architecture that embraces a new type of transaction and interoperability model.
Africa must also advocate for reforms that go beyond concessional lending and play an integral role in shaping a fairer and more inclusive global financial system.
