African countries, including Nigeria, are losing an estimated $74.5 billion every year because of credit ratings that the United Nations says fail to properly reflect the continent’s economic realities.
The UN Office of the Special Adviser on Africa disclosed the figure ahead of the formal launch of the Africa Credit Rating Agency (AfCRA) in Port Louis, Mauritius.
The new agency is expected to provide independent credit assessments of African sovereign governments, sub-national entities, companies and institutions, with a focus on economic conditions within the continent.
The United Nations said the high financial cost reflects a gap between Africa’s actual record on sovereign debt and how international markets perceive its risk.
“Africa’s actual default rate is far lower than what its credit ratings imply, yet the continent pays the highest cost of capital in the world,” the UN said.
According to the organisation, ratings that do not adequately account for African economic conditions cost the continent about $74.5 billion annually through higher borrowing costs and reduced access to financing.
“That is a tax on Africa’s development, paid for no good reason,” the UN said.
Nigeria Raises Concerns Over Borrowing Costs
The issue is particularly significant for Nigeria, which has repeatedly challenged what it considers excessive risk premiums placed on African countries when they borrow internationally.
At a special ECOSOC meeting on credit ratings in March, Nigeria compared its borrowing costs with those of an unnamed heavily indebted European country.
Nigeria pointed out that its debt-to-GDP ratio was considerably lower, the country had never defaulted on its sovereign debt and it maintained stronger foreign reserves.
Despite this, Nigeria said its recent dollar-denominated sovereign bonds attracted yields of between 8.6 and 9.1 per cent.
The European country, by comparison, was able to borrow at rates of about 3.9 to 4.0 per cent, according to Nigeria.
Nigeria also questioned why banks and businesses operating profitably within African economies can succeed while the sovereign countries where they operate are frequently rated below investment grade.
The country argued that international rating agencies should engage more extensively with domestic investors and other local economic players instead of relying heavily on assumptions generated outside the continent.
Nigeria further raised concerns about the limited physical presence of major international rating agencies across Africa, saying this could affect their understanding of local economic conditions.
New Agency to Focus on African Realities
The UN said AfCRA is designed to address some of these information and methodology gaps by producing assessments based more heavily on African data, expertise and economic circumstances.
The agency is expected to consider factors that conventional credit assessments may not fully capture, including the size of informal economies as well as countries’ vulnerabilities and resilience.
It is also expected to provide better market intelligence and challenge long-standing perceptions that may contribute to an inflated assessment of African sovereign risk.
The African Union said AfCRA will not seek to replace existing global credit rating agencies but will operate alongside them.
According to the AU, the agency will be independent, privately driven and self-funded. Governments will not be allowed to own shares in it, a measure intended to protect its credibility and independence.
Push to Reform Africa’s Financial System
The launch comes after years of complaints from African governments that conventional sovereign ratings contribute to higher borrowing costs and leave countries with less money to invest in development.
The UN Economic Commission for Africa said AfCRA forms part of wider efforts to reform the continent’s financial architecture, strengthen domestic capital markets and lower the cost of financing.
The African Union also said the agency could give Africa a stronger voice in global financial discussions while encouraging more evidence-based assessments of the continent’s economies.
Source: NAN
