UNECA unveils facility to subsidize private investment in African sovereign debt

The United Nations Economic Commission for Africa (UNECA) has unveiled a new initiative aimed at addressing the challenges faced by African countries in attracting private sector investments. The Liquidity and Sustainability Facility (LSF) is a groundbreaking program designed to create a Special Purpose Vehicle to subsidize private sector investment in African sovereign debt. Dr. Vera Songwe, the Executive Secretary of UNECA, recently appeared on CNBC Africa to discuss the significance of this facility and its potential impact on the continent's economic landscape. Dr. Songwe emphasized the importance of addressing the perception of risk associated with investing in Africa. She highlighted the need for better communication to showcase the continent's readiness to receive foreign direct investment. Despite the global decline in foreign direct investment post-COVID, Africa continues to lag behind other regions in attracting investment, receiving only about 1% of the world's total foreign direct investment. The key goal of the liquidity and sustainability facility is to provide African countries with increased access to capital and liquidity to navigate the current economic challenges and foster growth. Dr. Songwe stressed the importance of leveraging this facility to support infrastructure development, such as roads and telecommunications, under the African Continental Free Trade Area Agreement. By reducing borrowing costs and encouraging capital influx at lower rates, the facility aims to benefit both sovereigns and private sector entities, particularly small and medium enterprises. One of the primary benefits of the program is the potential to lower borrowing costs for African economies borrowing from the Euro-bond market. Dr. Songwe highlighted the significant disparity in borrowing costs between African countries and their European counterparts, emphasizing the need to level the playing field and attract more investments to the continent. By establishing a mechanism for investors to recycle their resources through the repo market, the facility creates a win-win situation that promotes sustained investment in Africa. Addressing concerns about solvency challenges faced by African countries, Dr. Songwe underscored the importance of addressing liquidity issues to prevent solvency crises. By injecting liquidity into the economy, countries can avoid escalating debt distress and maintain financial stability. The initiative aligns with global efforts, such as the debt service suspension initiative, to provide breathing space for countries facing fiscal pressures. In addition to the liquidity and sustainability facility, UNECA is actively engaged in advocating for increased Special Drawing Rights (SDRs) allocations to African economies. Dr. Songwe highlighted the need for equitable distribution of SDRs, with African countries currently receiving only a small fraction of the total allocation. Collaboration with G20 economies and strategic engagement with key stakeholders are essential to secure additional resources and support for the region. As UNECA continues to drive initiatives aimed at bolstering economic resilience and promoting sustainable investments in Africa, the liquidity and sustainability facility stands out as a critical tool to address the challenges hindering private sector participation. By fostering a conducive environment for investment and leveraging innovative financial mechanisms, the program holds the potential to reshape Africa's economic landscape and pave the way for sustainable growth and development.