Blended finance to relieve African debt risk

By Song Wei Source:Global Times Published: 2020/1/12 20:28:40

Illustration: Luo Xuan/GT

In the beginning of 2020, Chinese State Councilor and Foreign Minister Wang Yi started his visit to Africa - a tradition maintained for 30 years. The move has underscored an ever-stronger China-Africa friendship over time. Amid widespread protectionism and unilateralism, China is a determined supporter of Africa's development. 

The US has been trying to get in between China and Africa by manipulating public opinion and smearing China. But when Africa needs capital to back its industrialization and modernization, Western countries with rising populism are shrinking their foreign assistance and setting development agendas with a utilitarian view. 

Developing countries, including those in Africa, have pinned more hope for China, connecting their domestic agenda to the Belt and Road Initiative (BRI). However, international opinion has painted the preferential loan China offered to developing countries in a bad light, such as it being "debt diplomacy," or a "debt trap."

Although the smears do not hold water, they reflect the international fundraising risk and pressure that African countries face. Innovating China's fundraising model in Africa and expanding blended financing can help assuage borrowers' risks. It could help push forward China-Africa developmental cooperation. 

Blended financing is not a brand new concept. It is a financing model promoted by the Organization for Economic Cooperation and Development's Development Assistance Committee to make developing assistance projects more sustainable.

The Official Development Assistance has been declining in recent years. To counter the challenge, blended financing has become a necessary strategic tool to mobilize other funds worldwide and help developing countries achieve development goals.

The utilization of blended financing has shown the following characteristics: First, blended finance is adopted to support the United Nations' sustainable development goals, especially in terms of poverty alleviation, economic development, climate change and gender equality. 

Second, government donors have three major ways to conduct cooperation with private sectors: mobilizing public non-preferential funds to jointly finance private projects, mobilizing commercial investors' extra funds to support private projects, and directly providing financing support to those projects. 

Third, blended financing is adopting more currencies in recipient countries, enhancing cooperation with local financial sectors to help the sustainable development of financial markets in developing countries. 

Using local currency is key for the emerging capital markets in Africa, which lack liquidity, a long-term yield curve and government bonds. Development financing and local fund mixing can help develop local capital markets, which is vital to long-standing economic stability and growth. 

Blended finance can offer more accurate and prudent evaluation on risk and benefit. The choice of investment strategies is the most important factor when deciding whether blended financing can be successful. The management agencies involved tend to balance development goals and business interest, satisfying investors expectations on returns and risk preferences.

For China's foreign assistance, blended financing can enlarge the scale and scope of the assistance, reduce recipients' debt burdens, and facilitate the financial connectivity of the BRI. 

Three issues should be made aware of: First, innovating developmental financing tools to mobilize more commercial funds. The Chinese government needs to provide more diversified choices according to risk and interest allocation. 

Second, financial assistance should play a direct role, since the priority of development projects is to help recipient countries develop instead of gaining commercial profits. In this context, efforts should be made in lowering risks for commercial funds.

Third, the recipient countries should be actively participating in the process. The involvement of recipients is key to keep the development projects sustainable. China needs to explore ways to better cooperate with recipient countries in terms of financing when making its foreign assistance policy. 

China-Africa development cooperation is facing an unprecedented change. Following the trend and innovating are crucial to maintaining political and economic stability on the African continent and boosting the development of African countries. The Chinese government should encourage and guide financial institutions to better estimate risk and benefits, and accurately design financing plans to mobilize commercial capital to jointly help Africa's development, share development dividends, and rejuvenate China-Africa cooperation. 

The author is an associate research fellow at the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce.


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