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Nigeria’s outgoing agricultural minister Akinwumi Adesina |
The African Development Bank (AfDB) should leverage its balance sheet to increase funding towards infrastructure and energy projects, says a leading candidate to be its next head.
Nigeria’s outgoing agricultural minister Akinwumi Adesina, in a wide-ranging interview with Euromoney, set out his platform to lead the bank by signalling he would diversify the AfDB’s loan book across the region and expand its partial-risk guarantees to boost regional-integration and private capital-raising efforts.
He also issued a stark warning over the fallout from Africa’s inequitable economic gains in recent years.
“Africa faces massive challenges, from migration from rural to urban areas and jobless growth, which is creating economic, social and political fragilities that could unravel some of the progress Africa has achieved in recent years,” he says. “What’s more, a large number of countries, up to 53%, are still classed as fragile.”
Citing the transnational Inga hydropower project in the Democratic Republic of Congo as a baby step towards building up Africa’s manufacturing capacity, Adesina says energy projects will be key to boosting manufacturing and employment.
“The AfDB could play a greater role in co-financing private-equity and venture-capital firms in order to leverage investment in energy,” he says. “Its balance sheet is very healthy and I would look to maximize it to transform development outcomes through intelligent risk-taking.
“Our share of global manufacturing in value-added terms, for example, is very low compared to Asia. Without an increase in energy infra, Africa won’t be able to industrialize.”
The challenge the next president will face is dealing with African sovereign borrowing as well as managing the commodity-price downturn and the severe power crisis Todd Moss, Centre for Global Development |
Adesina is a much-respected policymaker, who jumpstarted Nigeria’s stuttering rural economy through, for example, forming partnerships with international development agencies and venture-capital firms, including a $100 million private equity-fund for agriculture with German development bank KfW.
The AfDB is one of the most highly capitalized regional multilateral development banks, with an equity to adjusted total assets of around 30%, according to Fitch, boosted by a 2010 capital increase.
Its leverage is also below peers at 222.1% at the end of 2013. Risk exposures, however, are highly concentrated relative to peers, with the five largest countries accounting for 64%, led by North Africa.
In 2013, the AfDB’s loan book was $18 billion, according to current exchange rates, with total subscribed capital of around $100 billion.
In his remarks to Euromoney, Adesina effectively endorsed outgoing president Donald Kaberuka’s near-term vision for the institution, which is eyeing a more-aggressive lending strategy with a 55% growth in the loan book between 2013 and 2017.
The AfDB, rated AAA, or equivalent, by all three main rating agencies, must tread carefully, however, as credit risk exposure is higher than peers, with an average loan rating of BB+, given the low credit quality of African sovereign borrowers, and an increase in private sector operations in recent years.
The latter is now around 25% of its total portfolio. Adesina says a 10% to 15% increase in the AfDB’s capital base could substantially boost the fiscal multipliers of the institution.
Kaberuka is widely credited with building up the institution by emboldening its technical and risk-management capacity, catalysing private-sector finance, and focusing on infrastructure as the AfDB’s principal lending focus.
Todd Moss, senior fellow at the Centre for Global Development, adds: “All candidates have rightly embraced Kaberuka’s vision of infrastructure and private-sector-oriented investment.
“The challenge the next president will face is dealing with African sovereign borrowing as well as managing the commodity-price downturn and the severe power crisis in the continent.”
Regional integration
Kaberuka, a Rwandan economist, played a key leadership role in the global financial crisis by calling on rich countries to redouble aid efforts in the face of the crisis ravaging global trade and capital markets, and touting the virtues of fiscal and structural reform.
One focus of an Adesina leadership would be regional integration.
He says: “I would like to see more done to strengthen regional blocs in Africa, from boosting their institutional capacity to establishing regional risk-sharing tools.
“We have no choice but to integrate so Africa is not just a dumping ground for the world’s producers. Africa’s participation market in global trade has only grown by 0.6% over past six years and it’s less than 3%.”
In many emerging economies, and India most notably, banks are compelled through prudential regulations to allocate a proportion of balance-sheet lending to rural projects, challenging banks’ business models and risk metrics.
Signalling his pro-market stance, the minister who oversaw an increase in bank lending to the rural sector from 0.7% of the loan book on average to 5% at the end of 2014, without intrusive regulations, says: “Policy-based lending decisions don’t work since you are taking allocation decisions away from the banker and you could end up with a large pile-up of NPLs as a result.”
Adesina, who spent more than two decades as an agricultural development practitioner before his political career, adds: “African development bodies should work with banks as a partner not through policy-based conditionalities.”
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AfDB outgoing president |
The leadership contest, consisting of eight prominent policymakers across the continent, is wide open. Frontrunner candidates alongside Adesina are Sufian Ahmed, the finance minister of Ethiopia, who has overseen the transformation of the high-growth economy for the past two decades, and Kordje Bedoumra, an AfDB veteran and current finance minister of Chad.
Cristina Duarte, the finance minister of Cape Verde, who has charted the country’s journey to middle-income status over the past decade, as well as boasting notable multilateral development bank and private-sector experience, is considered a dark-horse candidate. She would be the first woman president in the bank’s history, and the first from a Lusophone country.
Though Cape Verde lacks regional clout, its neutral status could boost Duarte’s candidacy if she is able to muster sufficient votes to advance to the later stages of the contest.
A development consultant familiar with the AfDB leadership campaign says: “The government of Nigeria tried hard during the last AfDB presidential election and feel that this time around this is their opportunity, boosted by the successful election and the economy’s newfound status as Sub-Saharan Africa’s largest.
“However, voting is traditionally split along regional lines. This time around, there are a fair few West African candidates that will split the regional vote. The Francophone vote will be key since it has historically exerted significant power at the institution. The voting intention of the SADC bloc is unclear since South Africa has fielded a weak candidate.”
He adds: “In sum, given the complex, back-door nature of the voting – inter- and intra-regional horse-trading and coalitions between 53 regional shareholders [and 25 non-regional shareholders] – the end-result is difficult to second-guess.”
The leadership battle, consisting of eight knock-out rounds, concludes on the occasion of the end-May board of governors’ annual meeting in Abidjan.
The AfDB benefits from its status as the only majority African-owned multilateral dedicated to the continent, with non-regional shareholding capped at 40%.
Chinese capital
Last May, the People’s Bank of China announced a $2 billion partnership with the AfDB with the stated aim of using its policy framework and technical expertise to funnel Chinese capital into the continent.
This was widely interpreted as a response to criticism of China’s traditional strategy of bilateral “infrastructure-for-resources” deals with African governments, seen as lacking transparency and principally benefiting Chinese construction companies.
Asked how African governments can increase leverage over trading partners, Adesina says, without referring to the Sino-African partnership specifically: “There is a need to ensure that when all this infra financing gets done that everyone plays by the same rules and abides by the same environmental and social safeguards.
“We also need to make sure we don’t displace jobs, that we create jobs, and we don’t disrupt communities.”
Asked whether new multilateral institutions, such as the Chinese-led Asian Infrastructure Investment Bank and the budding Brics development bank, threatens to undermine the relevance of the AfDB, Adesina says: “The AfDB can be an instrument of financial and capacity-building intermediation and an investor in itself with new partners.”
In other comments, while other multilaterals, such as the World Bank, are centralizing bureaucracy, Adesina says he would further decentralize power at the AfDB, citing how the Ebola crisis highlighted the benefits of fast-tracking financial- and policy-decision-making by empowering local stakeholders.