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ONE ON ONE: African Development Bank seeks capital infusion

It’s not rare for the words Africa and development to be heard in the same sentence. The continent’s development deficits top the agenda of international agencies, financial institutions, NGOs, and the like. At the African Development Bank, demand for financial support has been on a steep incline since the onset of the global economic crisis. …

It’s not rare for the words Africa and development to be heard in the same sentence. The continent’s development deficits top the agenda of international agencies, financial institutions, NGOs, and the like.

At the African Development Bank, demand for financial support has been on a steep incline since the onset of the global economic crisis. But officials at the bank say they are close to breaching their prudential ratios, and are proposing a 200 percent capital increase to shareholders.

As similar multilateral regional financial institutions – such as the Asian Development Bank and the Inter-American Development Bank – vie for the same pool of money from high-income nations, AfDB is faced with rife competition.

“We need the continent, the beneficiaries to come out in roaring support for an increase of capital; a vocal united support from Africa for an institution that is African in nature, culture, outlook.that is focused on the long-term development, Regional Director Jacob Kolster told Daily News Egypt.

Over the past year, “financial markets have dried up for countries like Egypt, and we have been approached.to in part make up for the lack of access, he added.

As a result, the bank has tripled its commitments to Egypt this year to reach $9 billion.

Kolster says if the bank continues at its current trajectory – as current demand levels suggest that it would – its prudential ratios will be breached in the first half of 2010.

If that happens, the bank’s credit ratings drop, and with that its ability to borrow money at competitive rates. “We borrow at the best rates in the market, and we can unlend to countries like Egypt, who does not have the same rating in the international financial market, he explained.

The bank says its 77 shareholders, namely non-regional members, need to rapidly mobilize. “Canada and South Korea have already committed around $2 billion in callable capital on a contingent basis, Kolster said.

Egypt operations

The African Development Bank, established in 1964, operates on four pillars: governance, infrastructure, private sector development and higher education.

“Having a thriving private sector.is a critical precondition for a thriving continent, Kolster said, and good governance is key to attracting both domestic and foreign investment.

Egypt is the AfDB’s largest country office in Africa, while its temporary headquarters are based in Tunis.

With 53 regional and 24 non-regional member countries, Egypt is the second largest regional shareholder. Since 1974, the bank has financed 50 operations in the country worth a total of $3.6 billion.

The bank sets its portfolio after consulting with its client, the governments of African countries, in this case, Egypt.

Khushhal C. Khushiram, Egypt’s resident representative, said bank officials and government representative determine how “best our intervention can be useful to the economic development of Egypt.

AfDB focuses largely on infrastructure development, and in Egypt, this has seen them heavily involved in the energy sector, Khushiram said.

The bank’s current portfolio consists of 10 operations of projects approved in the last three years, with a total commitment of $2 billion. A huge chunk of that goes to the power sector, namely the El Kureimat, Abu Qir and Ain Sokhna power plants, according to a press statement.

In October, the AfDB signed with Egypt a long-term foreign currency loan agreement worth ?53.3 million to finance 23 percent of the Gabal El-Asfar Wastewater Treatment Plant (GAWWTP) Project in Cairo.

This project is the bank’s first involvement in the wastewater sector, Khushiram said, and will provide an additional wastewater treatment capacity of at least 500,000 cubic meters per day to the existing capacity of GAWWTP.

The treatment process is described as being “highly advanced.reducing operational costs and conserving the environment, serving 8 million people in Cairo.

On private sector development, the bank gives lines of credit to financial institutions for on-lending to small- and medium-enterprises. Some projects in this sector are channeled through Egypt’s Social Fund for Development.

“We try to advance policy dialogue by conducting economic studies on competitiveness, private sector, etc, Khushiram said. “We also consider regional integration as a major priority of intervention for the bank in Africa and Egypt, as a middle-income country can help spread growth in the region to its neighbors,’ he added.

To that end, the bank recently launched a joint equity fund with investment bank Citadel Capital that will invest in the region.

Financing windows

The bank has two windows of finance. The “soft window supports near-grant terms to low-income African countries, with around $2-2.5 billion available next year, Kolster said.

The soft window is financed by non-regional member countries such as Europe, US, Japanese, Chinese and India.

There’s also a “hard window for the 13 middle-income African countries, and this includes Egypt, Morocco, Tunisia.

“This is where we function as a bank, we have a subscribed capital based on which we raise financing in the international financial markets, Kolster said.

Around 6-12 percent of that capital is paid-up, and the remainder is callable, which, according to Kolser, “means a lot when it’s [callable] from countries like Japan, China, US, UK and Germany.

Three countries have access to both windows: Nigeria, Zimbabwe and Cape Verde.

A multilateral approach

So why would the world’s rich countries choose to invest in a country like Egypt through a multilateral financial institutions as opposed to a more direct approach?

From Kolster’s point of view, “A multilateral system is particularly beneficial on average to the smaller entities in the world.

The US, for example, has more often than not expressed disinterest in a multilateral system. But for a country like Canada, Kolster said, “Being part of a multilateral institution is a way to leverage itself; a relatively inexpensive way for Canada to have a significant engagement and influence on the main financial institution in the continent.

Kolster also believes that some countries that have more “heroic, altruistic objectives in their foreign policies, naming Canada as one such country.

South Korea, as another example, has over time been subtly engaged in Africa on a private sector level; but the AfDB is an institution where little money can actually equal significant policy level engagement.

To put it simply, Khushiram says that investing through a multilateral institution is more cost-effective as countries have access to the bank’s existing structure.

It also a form of leveraging since AfDB can borrow from international markets, he added.

Citing another advantage, Yasser Ahmed, Tunisia’s country officer, said members prefer to go through the bank because it offers legitimacy. As the main African financial institution, “that added respect is very important to member countries.

The three F’s

In the past 18 months, Kolster said, Africa has been hit by three crises: fuel, food and financial.

Last year’s unprecedented rise in crude oil prices benefited some of Africa’s oil producers, while a country like Egypt was unaffected and poorer countries were devastated, he said. And the food crisis was a reflection of a “devastating harvest and a policy of exploiting certain crops for fuel purposes that drove up food prices.

The current economic downturn spurred by the financial crisis hit Africa on two levels: through its impact on global growth and trade, which declined significantly from 2007 to 2009, and through governments’ financial accounts.

“Emerging market countries like Egypt, South Africa, Morocco.suffered from the near collapse of international financial markets, and for around six to eight months, there was no access [to financing] even at exorbitant prices, Kolster said.

“That has double whamied the middle-income countries, so the immediate challenge Africa is facing is to get out of that downturn with its major ba
lances in check.

In outlining the medium-term challenges the continent is facing, Kolster was optimistic that they are working with a “relatively positive backdrop in terms of the “major economic progression Africa has seen since the turn of the millennium.

On the longer-term, Kolster pointed out Africa’s need to integrate with the world at large as a key challenge. “Overcoming the lack of integration, both physical, economic, political and otherwise, he said, should be less inward looking and more about integration with the world.

Topics: FJP

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