Over the past few decades, market-based finance has become central to the global financial system. Huge volumes of financial instruments are traded on a daily basis. In an effort to improve access to global financial markets for African countries, the United Nations Economic Commission for Africa (ECA) – in cooperation with the asset management firm PIMCO – has proposed setting up a Liquidity and Sustainability Facility (LSF). This is designed to create a Special Purpose Vehicle to subsidise private sector investment in African sovereign debt. The LSF would be financed by official development assistance (ODA), multilateral development banks and/or by the central banks of members of the Organisation for Economic Co-operation and Development (OECD).
The LSF proposal comes at a time when several African countries are desperate to get access to finance to respond to the humanitarian, social and economic crisis triggered by the Covid-19 pandemic. It is presented as a viable alternative to debt restructuring that would accommodate the reluctance of many African countries to endanger market access by joining initiatives such as the Debt Service Suspension Initiative (DSSI), launched by the Group of 20 (G20) and the Paris Club in 2020. These initiatives have so far proved to be insufficient when it comes to addressing existing debt problems.
This quite technical proposal features prominently in the ECA’s Building Forward Together agenda, which was released in November 2020. If implemented, this could have significant consequences for the sustainable development of African countries, their access to international finance and the consequent impact on the livelihoods of African citizens. The proposal merits a detailed examination and broader public debate by finance ministries, central banks, parliaments, academia and civil society.
In order to facilitate this debate, the Heinrich Böll Stiftung, Eurodad and Nawi (Afrifem Macroeconomics Collective) commissioned Daniela Gabor – Professor of Economics and Macro-Finance at the University of the West of England – to conduct a study on the LSF proposal and ist implications. She is a renowned expert on shadow banking, with a particular focus on repo markets.
The aim of this paper is to contribute to an informed dialogue on the most appropriate forms of development finance. In view of the critical debt situation of African countries in the wake of the Covid-19 crisis, and of the longer-term ambition to deliver on the Sustainable Development Goals and the Paris Agreement, this discussion is more vital than ever.
Table of contents
01 SUMMARY AND RECOMMENDATIONS
02 THE ECA PROPOSAL IN A NUTSHELL: “LIQUIDITY FOR AFRICAN SOVEREIGNS, FINANCING FOR DEVELOPMENT, BUILDING FORWARD TOGETHER”
A. How: The liquidity benefits of the LSF proposal
B. What: Eurobonds vs local currency sovereign bonds
03 LIQUIDITY FOR SOVEREIGNS: THE LESSONS FROM THE EUROPEAN REPO MARKET
A. No repo, no (cyclical) liquidity
B. Exorbitant privilege of safe asset issuer
C. Institutional conflict between the LSF and national central banks
04 FINANCING FOR DEVELOPMENT: HOW AN AFRICAN REPO MARKET MAY CONTRIBUTE TO SDG ASSET CLASSES FOR GLOBAL INSTITUTIONAL INVESTORS
A. From bank- to bond-centric financial systems
B. The limits of public–private finance partnerships for achieving the SDGs: A Covid-19 lesson
05 BUILDING FORWARD TOGETHER: REFORM THE LSF AND RETHINK THE DEVELOPMENT FINANCING MODEL
ABOUT THE AUTHOR