Firstly, it would adversely affect the global supply and prices of oil and gas, fertilisers and food. Secondly, local currencies would be affected. More than a month after the war had started a number of African currencies had begun to lose value against the US dollar.

Thirdly, interest rates stopped falling and further rate increases were highly likely. Fourth, there will be a decline in access to affordable foreign financing.

How should Africa respond?

African countries cannot avoid being harmed by the current Gulf war. Nevertheless, based on my work in international economic law and global economic governance, I think there are two lessons that, if followed, can help the continent emerge from the crisis in a better place.

First, governments and societies need to be pragmatic. Their first priority must be to do whatever they can to mitigate the impact of the war, particularly on their most vulnerable citizens. This will require governments to make trade-offs.

They will have to reallocate budgets to at least maintain the level of imports necessary to meet the society’s basic needs. They will need to convince their creditors to help finance their necessary imports. They will also need to persuade them to be flexible enough that they leave governments with at least some policy space.

Second, states and societies need to identify opportunities within the crisis for actions that over the medium term can help them meet their financing, economic, environmental and social challenges. This requires collaboration between the state and its non-state stakeholders. Business, labour, religious groups, civil society organisations and international organisations all have something to contribute.

Action in the short run

The focus of Africa’s efforts in the short term must be on minimising the negative effects of the war and on managing the state’s external debts in the most sustainable and effective way.

This is easy to state, but hard to implement. This is particularly the case in the current international environment, in which it is not realistic to expect donor countries and other international sources of finance to be particularly generous.

African countries will need to convince their creditors to acknowledge that this crisis is beyond Africa’s control and that they should not compound the pain that’s being experienced. This will require, at a minimum, that the creditors agree to suspend debt payments for the next year.

Creditors have already accepted the principle that debt payments can be suspended when debt challenges arise from sources beyond the debtor’s control. Many of them have accepted clauses requiring such action under specific conditions in their most recent debt contracts. They also did this during COVID.

Second, African countries, which are already heavily indebted, should challenge their multilateral creditors to accept the consequences of being among the biggest creditors for the continent. This includes the World Bank, the International Monetary Fund and the African Development Bank. By custom these institutions are treated as preferred creditors. This means that they get paid before all other creditors. Instead of participating in any debt restructurings, they also make new loans to the debtor in crisis. This shifts the debt restructuring burden onto the debtor’s other creditors. It also increases the total amount owed to the multilaterals.

This cannot continue. These institutions need to be more creative in providing Africa to financing. This should include:

• Using their financial resources to guarantee the financial transactions of African countries so that they can reduce their borrowing costs and attract new equity investments.

• More generously supporting innovative debt for development swaps. These involve creditors agreeing with African sovereign debtors to convert a portion of the existing debts into financing for specific local projects, for example in health or education.

• Helping African governments convert their foreign exchange denominated debts into local currency debts at affordable interest rates.

Third, governments should work with the Alliance of African Multilateral Financial Institutions to use these institutions more effectively to finance African development. For example:

• They should require the institutions to only undertake transactions that are consistent with their development mandates. This means no more opaque transactions like the recent one that the African Finance Corporation concluded with Senegal.

• African governments should take the necessary action to activate the African Financial Stability Mechanism that they agreed to establish last year. This would create a useful financial safety net for the continent.

Fourth, African governments must build on the efforts they began last year to become a more effective advocate for African development financing interests at the international level. Among these efforts was the initiative by African ministers of finance to develop common African positions on sovereign debt restructurings. Another was South Africa’s launch of the African Expert Panel that proposed a number of initiatives on African debt and development financing.

In the medium term

African countries should advocate for the IMF to review its governance arrangements so that it becomes more accountable and responsive to developing countries, including African states and societies.

They should also advocate for the IMF to more use its existing resources, including its gold reserves, more creatively to support Africa.

Second, Africa should call for a debate on the preferred creditor status of multilateral financial institutions. This has become particularly relevant because the members of the Alliance of African Multilateral Financial Institutions are claiming that, like all other multilateral financial institutions, they are entitled to this status.

It is not clear that there are good arguments for excluding these institutions from preferred creditor status while protecting the position of the legacy institutions. This suggests that there is a need for some general principles that help determine which institutions should be treated as preferred creditors. These should be acceptable to all multilateral financial institutions and other market participants.

Third, African societies must make every effort to demonstrate that they are taking control of their own development. They should demand that their governments and all other actors in African development finance behave responsibly in regard to the financial, economic, environmental and social aspects of these transactions.

Another medium term objective should be to limit the illicit financial flows that are so often associated with international trade and investment. This goal would be advanced by the successful conclusion of the current efforts to agree on a UN Framework Convention on International Tax Cooperation.

Written by Danny Bradlow, Professor/Senior Research Fellow, Centre for Advancement of Scholarship, University of Pretoria

This article is republished from The Conversation under a Creative Commons license. Read the original article.