African ministers, development actors and research institutes gathered on 14 April in Washington DC, on the margins of the 2023 World Bank/IMF Spring meetings, to discuss the impact of credit ratings on the cost of development finance in Africa. At this meeting, organised by the United Nations Development Programme (UNDP), the Africa Growth Initiative at the Brookings Institution and AfriCatalyst, the need was raised to review international financing systems and particularly the determination of sovereign credit ratings for African countries, where data is often missing or of poor quality.
The event was centred around a new study by the UNDP which shows that African countries could save up to US$74.5 billion if credit ratings were based on less subjective assessments. This, in turn, would enable them to repay the principal of their domestic and foreign debt and free up funds for investments in human capital and infrastructure development.
“If we want to bring about change, we need to change the game,” emphasised Oulimata Sarr, Minister of Economy, Planning and Cooperation, Republic of Senegal. “This week, all Finance and Economy ministers have been highlighting that they are looking for reform. The current qualitative assessment is not a true reflection of our economies.”
Borrowing from capital markets to finance economic development is a necessity, not a choice, especially as official development assistance (ODA) flows have been shrinking in recent years. Subjective credit ratings increase the cost of servicing debt, and put cash-strapped countries in a difficult position, having to choose between repaying debt and feeding their population. Furthermore, non-objective credit ratings also reduce the amount of investment that countries receive, as they are perceived to be riskier than they really are. These negative impacts can occur even if the inaccurate credit ratings are not due to conscious bias, but rather to inadequate data and/or methodologies that are too subjective.
“African countries rely on international capital markets and credit ratings become crucial for crowding in the required development finance,” said Ken Ofori-Atta, Minister of Finance and Economic Planning, Republic of Ghana. “It is time for Africa to have its own credit rating agency. However, major challenges, such as systemic bias and limited data are still a hindrance.”
“We are at the heart of polycrisis and African governments are struggling with a drought in development financing,” stressed Ahunna Eziakonwa, UN Assistant-Secretary General and UNDP Regional Director for Africa. “We urgently need more fairness and justice in the way we conceptualise multilateral agencies. We need to foster agency for African people to meet development aspirations and a system where risk can be fairly priced.”
African countries, and their development partners, can take immediate steps to address these credit ratings idiosyncrasies, in partnership with global rating agencies, some of which are highlighted in the new UNDP report titled “Lowering the Costs of Borrowing in Africa – The Role of Sovereign Credit Ratings”.
“African countries need to engage with credit rating agencies to understand their methodologies and make sure the assessments are in line with macroeconomic fundamentals,” Explained Daouda Sembene, Managing Director of the Dakar-based think tank AfriCatalyst.
“The attempt to quantify future uncertainty is indeed a difficult task. Often though we observe that the Credit Rating Agencies provide counter intuitive opinions because they employ inexperienced staff who are good in mathematics but lack an appreciation of the complexity of the real world, especially the complex operating environment in Africa.”
At the event, the UNDP, the Africa Growth Initiative at the Brookings Institution and AfriCatalyst announced the creation of a bespoke database of key macroeconomic indicators and a new Concilium of high-level advisors to support African countries during the credit rating process.