Reform the way African countries are rated

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To do business or invest in Africa, perceptions and risk obviously increase the cost of capital. We need to reform the way African countries are rated, and we sort of need to look at the tools or the parameters that frame this model.

Chipokota Mwanawasa
Policy Advisor to the President and Deputy Head of the Presidential Delivery Unit Government of Zambia

One of the biggest challenges facing sustainable development on the African continent today is what Brookings refers to as the high price of ‘perception premiums’, where the focus on conflict, corruption and poverty heightens risk perception, raising interest on sovereign debt, authors say.

According to the William Davidson Institute, African countries’ growing middle class, and markets, demographic advantages, and ongoing digital transformation, point to a continent  growing in importance economically and geopolitically. However, despite the continent´s improving macroeconomic fundamentals and promising growth prospects from individual countries, knowledge about opportunities on the continent is limited. 

CNBC Africa cites risk perception as a key contributor to the continent’s estimated $200 billion trade and investment financing gap, while a 2023 UNCTAD report notes that FDI flows to Africa had dipped to $45 billion in 2022 from $80 billion in 2021. 

‘Perception premiums’ impacts range from limiting access to long-term financing, and potentially worsening liquidity constraints, making it hard for African countries to get out of debt-distress. In Sub-Saharan Africa (SSA), policy makers often point to mispricing of their sovereign debt due to perceived risk by international investors.

Leaders who are already addressing this problem include the IMF Managing Director Kristalina Georgieva who remarked that “a great deal of attention needs to concentrate on reducing the perceived and real risk for investing in Africa, so we can see this huge availability of financing for the rest of the world trickle down into Africa.”  French President Emmanuel Macron has called for “fairer financing rules for African economies,” and hosted a summit on the financing of African economies. 

In order for Africa´s necessary economic transformation and effective integration into the global economy, strong commitment by and effective coordination among stakeholders will be critical to achieve inclusive and affordable development financing.