The 17th AAV Dialogue focused on the cost of capital and its implications for African countries, particularly in the context of upcoming global financial meetings such as the South African presidency of the G20 and the African Development Bank Annual Meetings. Joining the dialogue were David McNair, Executive Director for Global Policy at the ONE Campaign; Joseph Motola, Head of the Economic Resilience and Inclusion Program at the South African Institute of International Affairs (SAIIA); and Ishac Diwan, Director of Research at the Finance for Development Lab. Each participant offered valuable insights and perspectives on addressing the cost of capital challenge.
In Partnership with :
The first speaker outlined the overall context behind the establishment of the “Cost of Capital Commission”. He emphasized the need to address the high borrowing costs for African nations, noting that governments often pay up to five times more to borrow from capital markets than through concessional loans from institutions like the World Bank. While many African countries do not have excessive debt, they are burdened by prohibitively expensive debt, which hampers the investment needed to address demographic trends and to facilitate the energy transition. The guest also traced back the origins of the cost of capital commission idea back to discussions involving experts like Amadou Hott, former Minister of Finance of Senegal and Carlos Lopez, former Executive Secretary of the UN Economic Commission for Africa (UNECA). Additionally, he pointed out the fragmented nature of current conversations and proposed a coordinated, time-bound agenda modelled after the successful capital adequacy framework agenda undertaken during Indonesia's G20 presidency.
The proposed commission would have focused on structured dialogues with credit rating agencies, improving methodologies, addressing risk perceptions, and reforming elements of the Basel III framework that inhibit private investment in emerging markets. The political dynamics are important as there was initial endorsement from South Africa's presidency for the Commission, though skepticism remained from the Treasury. This proposal then evolved into the African Expert Panel, chaired by Trevor Manuel, the former Finance Minister of South Africa, with a broader mandate that extends beyond the cost of capital to include debt vulnerabilities and SDG financing. A key deliverable of the commission will be clear communication regarding the distortions in risk perceptions and an actionable roadmap to address structural drivers of high borrowing costs. Three primary key areas of focus were highlighted:
- Improving data visibility and granularity for credit rating agencies;
- Addressing biases in credit ratings; and
- Advocating for reforms to reduce capital charges on investments in emerging markets.
How is this intention reflected in the expert panel’s activities under the South African G20 presidency?
The panel aims to produce a high-level report with recommendations for the G20 Leaders’ Summit in November 2025 and has already begun its work, with terms of reference published in March 2025.
The panel is working on several technical papers that will feed into its main output—a standalone high-level report, whose recommendations will be shared at the August Finance Ministers and Central Bank Governors meeting, before informing the G20 Leaders’ Summit. Two main components were identified:
- Domestic Component: Countries need to address fiscal space, domestic capital markets, and resource mobilization to reduce borrowing costs. Indeed, domestic borrowing costs are very high in many African countries, with interest rates on government bonds often in the mid-teens or higher. There is a need for deeper domestic capital markets to reduce reliance on external borrowing and alleviate fiscal pressures by improving domestic resources mobilization.
- International Component: Structural reforms to the global financial architecture are necessary to address high borrowing costs driven by international factors. In this second component, a key message was that many African governments lack the capacity and infrastructure to effectively engage with credit rating agencies: their engagement is often ad hoc, with only one or two individuals handling discussions, often without the expertise or resources to influence risk perceptions effectively. Governments need to invest in capacity-building to better engage with credit rating agencies and international financial institutions.
Finally, a presentation of the initial findings sought to explain one of the causes of the high cost of capital, focusing on Eurobond rates and spreads for African countries. Spreads across countries and over time are highly volatile. Recent shocks have magnified both the level and variations across countries. Governments can effectively lower spreads: Côte d’Ivoire, for example, managed to reduce its costs, while others, like Kenya and Senegal, struggled to do so.
The presentation highlighted the factors influencing spreads, noting that: i) IMF and World Bank programs can reduce spreads by about 50 basis points, with IMF programs affecting short-term rates and World Bank programs influencing long-term rates; ii) higher exposure to Chinese debt correlates with higher Eurobond spreads, as markets perceive these countries as riskier due to China's withdrawal of net transfers; and iii) while higher net transfers from MDBs reduce spreads, the accumulation of MDB debt stock increases spreads due to reduced flexibility in debt structures.
The illiquidity of markets and the lack of mechanisms to prevent capital flight and leakage of MDB resources are concerning. A priority is to ensure that MDB resources stay within countries rather than leaking out to repay private creditors. The presentation also pointed out the structural issues in global financial architecture, including the lack of coordination among private creditors and the discriminatory practices of credit rating agencies, which disproportionately penalize poorer countries.
Key Points of Discussion:
- 1. High Cost of Capital: African countries face significantly higher borrowing costs compared to other regions, with spreads on Eurobonds often exceeding 500 basis points above U.S. Treasury rates. Domestic borrowing costs are also very high in many African countries, with interest rates on government bonds often in the mid-teens or higher. This places significant fiscal pressure on governments and crowds out private sector investment. Deeper domestic capital markets are needed to reduce reliance on external borrowing and alleviate fiscal pressures.
- 2. Determinants of Borrowing Costs: i) IMF and World Bank Programs can reduce spreads by about 50 basis points, but their impact varies depending on the program's focus (short-term vs. long-term rates). ii) Higher exposure to Chinese debt correlates with higher spreads, as markets perceive these countries as riskier due to China's withdrawal of net transfers. iii) While higher net transfers from MDBs reduce spreads, the accumulation of MDB debt stock increases spreads due to reduced flexibility in debt structures.
- 3. The African risk premium (perceived higher risk for African countries) contributes to elevated borrowing costs, driven by biased methodologies of credit rating agencies. Credit rating agencies often rely on synthetic data or subjective assessments due to limited commercial incentives to invest in African markets. Governments need to engage more effectively with credit rating agencies, providing clear, frequent, and granular data to influence risk perceptions. Many African governments lack dedicated teams or expertise to engage effectively with credit rating agencies, leading to missed opportunities to influence risk perceptions. Only South Africa has a dedicated team within its Ministry of Finance for engagement with credit rating agencies.
- 4. IMF and World Bank Lending: The IMF and World Bank continue lending to countries facing liquidity constraints. However, much of this funding leaks out to repay private creditors and China, reducing its developmental impact. Countries in the "grey zone" (illiquid but solvent) face significant challenges, as multilateral flows often fail to stick within the country. Capital flight remains a major challenge, exacerbating liquidity constraints and reducing available resources for development.
- 5. Messaging Contradictions: There is a tension between reducing risk perceptions to lower borrowing costs and advocating for debt relief, which may signal a higher risk to investors. Clear communication is needed to distinguish between liquidity issues, solvency issues, and structural drivers of borrowing costs. Policymakers need simple, actionable recommendations to address borrowing costs, debt vulnerabilities, and structural challenges.
- 6. Technical Advisory Support: There is insufficient integration of technical advice from the World Bank, the IMF, and the African Development Bank into government strategies. Governments often lack the capacity to implement recommendations effectively.
- 7. Opportunities for Collaboration: Think tanks and civil society organizations can play a role in advancing research, capacity-building, and advocacy to address the cost of capital issues. Alternative approaches, such as expert reviews sanctioned by multiple countries, could help sustain momentum beyond the G20 presidency transition.