Why an African Monetary Fund is a good idea and how to make it work

African Union (AU) leaders will gather in Niger on July 7 for a special summit to discuss African Continental Free Trade AreaThey will be crucial moment The African continent. Many African countries are struggling with uneven growth and rising debt. All face an uncertain global environment and need the boost that closer, more dynamic trade relations on the continent would provide.

We believe that AU leaders should also use this meeting to renew efforts to create a African Monetary FundThis will be used to encourage African countries to participate more actively in regional trade by providing them with management risk Associated with closer regional integration and expanding intraregional trade.

Over the past 10 years, most regions have developed Regional arrangements This would complement the help the IMF provides to countries facing balance of payments problems. Ten years ago, $100 billion was available through these regional funds. Today, more than $900 billion Africa is currently the most prominent gap The Evolving Global Financial Safety Net.

In 2014, African leaders signed a treaty to establish the fund. Unfortunately, progress towards establishing the fund has stalled. To date, 11 AU member states have signed the treaty but have not yet ratified it. Fifteen member states must sign and ratify the fund’s charter before the fund can become operational. Once operational, the fund will have a capital subscription of up to $22.64 billion and the ability to lend to member states up to twice their contribution to the fund’s capital.

Managing the chain reaction

The free trade area provides countries with new growth and employment opportunities. However, by strengthening economic ties between African countries, it may also increase the risk of economic problems in one country spreading and having a strong negative impact on growth, trade, investment and employment in other countries. For example, both positive and negative developments in the US economy will have a huge impact on Canada and Mexico.

read more:
Much work remains to be done to make the new African Free Trade Area a success

To mitigate these effects, participants in other regional trade arrangements have established regional financial arrangements to provide financial support to their member countries to cope with balance of payments crises.

this evidence This suggests that when countries have access to this type of financial support, they are less likely to take actions that hinder intraregional trade flows. For exampleThe Latin American Reserve Fund provides financial support to its member countries during balance of payments crises, helping recipient countries maintain their intraregional trade arrangements. This in turn reduces the risk that problems in a recipient country could trigger a crisis in a neighboring country.

The fact that not enough countries have signed and ratified the African Monetary Fund Treaty is an embarrassing challenge to the credibility of the AU’s efforts to promote a more integrated, dynamic, sustainable and equitable African economy. These efforts have been going on for more than 40 years. Measures taken in this process include the former Organization of African Unity’s Lagos Action Plan on Economic Development in Africa. Signed in 1980 and the Abuja Treaty Signed in 1991.

in a Policy Briefs In a report published by the University of Pretoria’s Centre for Human Rights and Boston University’s Global Development Policy Center, we propose three concrete steps to advance the fund.

action plan

First, the establishment of the fund must be explicitly tied to the success of the free trade area. AU leaders can do this by: As has happened in other regions, the existence of a regional financial arrangement would support efforts to boost intra-African trade. It would help participating countries mitigate the balance of payments challenges that greater regional integration could bring.

Moreover, by providing financial support to its member countries quickly, the Fund can buy them more time to negotiate larger support packages with richer institutions such as the IMF. In this regard, it is worth noting that eight countries among the AU member states (Cape Verde, Comoros, Djibouti, Eritrea, Guinea-Bissau, Sao Tome and Principe, Seychelles and Somalia) will be able to borrow more resources from the African Monetary Fund than from the IMF.

Second, one of the AU member states should become the fund’s champion. This country would be the first to sign and ratify the fund’s treaty. It would lobby other AU member states to ratify the AMF. It would advocate for the AU to restructure the steering committee established in the treaty and provide it with adequate resources. Since Cameroon is the designated host country for the AMF’s headquarters, it has an incentive to become the institution’s champion.

Finally, the Steering Committee should develop a plan to overcome the region’s significant resource constraints. This will require balancing the need for the Fund to have sufficient resources to ensure its credibility with the limited capacity of some countries to contribute. This could be addressed by negotiating an arrangement whereby wealthier regional countries and institutions contribute a disproportionate amount of capital up front.

These additional contributions would be compensated after poorer countries pay their capital. Significantly, the AMF Board has the power to extend the period for a country to pay its capital up to eight years. To further incentivize small and medium-sized members to pay their capital, they should be allowed to treat their capital contributions as part of their international reserves. Such an arrangement is not unprecedented and has been used effectively in South America. These measures would make the implementation of the plan more feasible.

For decades, Africa has been working to overcome major challenges that have prevented intraregional trade from flourishing. The free trade area agreement is the latest in these efforts. The credibility of the continent’s leaders and institutions will be affected by its success or failure. The establishment of an African Monetary Fund would demonstrate the continent’s resolve to promote intraregional trade and development.

Hadiza Gagara Dagah is a co-author of this policy brief. Launch of the African Monetary Fund this article is based on this.