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Compact with Africa: Linking Policy Reforms with Private Investment

Omowunmi Ladipo's picture
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The G20, World Bank Group, International Monetary Fund, and African Development Bank are partnering in a new way to stimulate private investment in Africa

Highlights

  • The Compact with Africa brings together the G20, the World Bank Group, International Monetary Fund, and the African Development Bank to spark greater private investment in Africa
  • Compact countries are Benin, Côte d'Ivoire, Egypt, Ethiopia, Ghana, Guinea, Morocco, Rwanda, Senegal, Togo and Tunisia.
  • The first Compact Monitoring Report shows significant progress implementing macroeconomic reforms, with more work needed to improve business environments and deepen financing frameworks.

Over the past year, many of my colleagues in international development have been asking about the G20 Compact with Africa: What exactly is it? What’s in it for African countries? How is it different from what we’re already doing? How does it complement or further the World Bank Group’s ongoing work?

Their curiosity reflects a growing awareness of the role the private sector must play in helping Africa achieve its development goals. The G20, in addition to its high-profile summits and communiques, undertakes some really important work through several “tracks,” including the finance track consisting of G20 finance ministers and central bank governors. It was via the finance track that the Compact was launched in March 2017 under the German Presidency of the G20. It focuses on macro-financial issues that are foundational for enhancing infrastructure financing and for increasing private investment in developing countries.

The basic premise of the Compact is that macroeconomic stability, an investor-friendly business environment, and effective financial sector intermediation are necessary conditions to spur private investment. Through improvements under these three “pillars,” the Compact seeks to catalyze increased private sector investment in Compact countries and to strengthen links between G20 initiatives, international organizations, and African countries. Under the Compact:

  • African countries commit to identify needed improvements under the three Compact pillars and to undertake relevant reforms. Many are addressing issues such as domestic revenue mobilization, Doing Business reforms, and easing constraints to SME financing.
  • The “International Organizations”—the World Bank Group, International Monetary Fund, and African Development Bank—agree to coordinate more closely, step up technical assistance to implement the identified reforms and increase support for infrastructure project preparation.
  • G20 members commit to encouraging their investors and companies to invest in Compact countries.
  • Compact teams in each country are the glue holding all this together. They are led by the country representatives of the international organizations and include senior government officials from finance, trade, and investment ministries.
  • A reform matrix developed by each Compact team prioritizes reforms that Compact partners commit to collectively addressing through a multi-year approach.

During the Spring Meetings, the Bank Group presented the first Compact Monitoring Report to the G20 finance ministers. During this first year, Compact countries made significant progress implementing macroeconomic reforms, with more work needed on business reforms and financial sector deepening. They also have produced brochures making the case for private investment. The report urged Compact countries to undertake more focused diagnostics of sector-specific business constraints and to better prioritize needed reforms. We also recommended that the G20 work more intensively with their private sectors to generate interest about, and eventually investment in, Compact countries.

Three significant features of the Compact separate it from past practice:

  • It is a long-term initiative that reinforces the Bank Group’s Maximizing Finance for Development objectives. Typical Bank Group operations support countries through relatively short-duration investment or development policy operations. By encouraging a constant renewal of reform priorities as country circumstances evolve, the Compact’s open-ended approach makes it easier to sustain attention to institutional reforms over the decade and a half that research tells us is needed for sustainability. The reform matrix therefore offers the Bank Group an additional pathway to supporting reforms.
  • It provides for mutual accountability, continuous check-ins, monitoring, and transparency. Reform matrices are published on the Compact website. Virtual meetings of all the Compact teams and the G20 are held at least quarterly. And there is formal biannual monitoring. All this serves to build confidence about the investment readiness of Compact countries, even in smaller countries seldom mentioned in conversations about African investment.
  • It encompasses the entire continent. Africa initiatives have tended to segment the continent—Arab from Sub-Saharan, Francophone from Anglophone and so on. The Compact embraces Africa in a single initiative, creating conditions for multiple growth poles on the continent centered not just on South Africa in the south but also on countries like Morocco in the north. In this respect the Compact aligns with the ambitions of the recently announced African Continental Free Trade Area and the findings of De-fragmenting Africa that point to enormous opportunities for increased cross-border trade in Africa including in food products and basic manufactures—priority areas for several Compact countries.

The Compact with Africa underscores the idea that development is a joint effort with obligations, commitments, and contributions shared across developing countries, development organizations, and, increasingly, the private sector. In this it is consistent with the pathways now widely understood to be necessary to the achievement of both the Sustainable Development Goals and the Bank Group’s twin goals of eliminating extreme poverty and boosting shared prosperity.

Representatives of International Organizations participating in the Compact with Africa present findings of the first Compact Monitoring Report to the G20 Africa Advisory Group. From left: Omowunmi Ladipo, Adviser, Equitable Growth, Finance and Institutions (EFI), World Bank Group; Hans Peter Lankes, Vice President, Economics and Private Sector Development, IFC; Sean Nolan, Deputy Director of Strategy, Policy and Review, IMF; Kapil Kapoor, Acting Vice President for Sector Operations, AfDB.