The US should ask more of the African Development Bank before considering a capital increase
By Dan Runde | JUNE 10, 2019
The African Development Bank (AfDB) leadership is seeking its seventh capital increase; the last capital increase was approved by the governors of the bank in 2010. The rumor is that they want a new one that will triple the capital. The continent of Africa is changing rapidly, and a capital increase should at least be considered, but only under certain conditions. Today, many countries in Africa have a growing middle class, increased urbanization, and a growing number are democracies. The AfDB is a trusted advisor and will continue to be a critical partner in the region to address ongoing challenges, and in order to do so better, the AfDB needs to respond to legitimate critiques from its shareholders.
The AfDB provided $8.8 billion in loans and other assistance in 2017 serving countries in sub-Saharan Africa, a region of 1 billion people. In contrast, the Asian Development Bank (ADB) provided $28.8 billion in loans and other assistance in 2017 serving a region of over 4.5 billion people, and the Inter-American Development Bank (IDB) provided $13.5 billion in 2017 to Latin America and the Caribbean, a region that consists of 644 million. In justifying a capital increase, the argument the AfDB will make is that they work with much less than the IDB and ADB – which is true. Nevertheless, asking shareholders for more money means they will need to put their best foot forward.
It does not help that the AfDB has chosen to have its annual meetings in Malabo, Equatorial Guinea on June 11 – June 14. Anyone who has read the classic book “Tropical Gangsters,” would recognize that the government of Equatorial Guinea is probably one of the most corrupt in the world. Other MDBs often choose largely democratic governments and reforming governments for meetings like these, so the timing and selection of Equatorial Guinea is not good.
In addition to a changed Africa and hosting the annual meetings in Malabo, the President of the AfDB, Dr. Akinwumi Adesina, is up for reelection next year. One must assume this is on the leadership’s mind and that President Adesina wants to get this increase done before his reelection.
However, shareholders are going to need to ask some serious questions. The U.S., as a major donor, does not have the same vote and influence in the AfDB as in other multilateral development banks (MDBs). The U.S. and other large contributors that are nonregional shareholders do not get as much voice and vote for the money they contribute. At the World Bank, the U.S. has 15.7 percent of voting power and a de facto veto, and the U.S. does not hold a similar veto power in the AfDB. The U.S. has 12.7 percent of voting power at the Asian Development Bank and 30 percent of voting power at the IDB, yet only has 6.649 percent of voting power at the AfDB.
Regional development banks operate better when they follow the “golden rule,” which is: Whoever has the gold makes the rules. Unfortunately that is not the case in the AfDB. Instead the institution is largely controlled by regional members (the borrowers) which have 58.89 percent of voting power. This limited accountability of the donors in the AfDB creates structural tensions that will continue to exist as long as the current distribution of voting power is not addressed.
There are clear arguments in favor of a capital increase. One argument is that Africa is going to have a great future and the AfDB should be a part of it. That is true. But the AfDB needs to stop spreading itself so thin and focus on a few things to be effective. It spends too little money on lots of things to be effective. It has a new strategy which helps focus the AfDB, but it will need to focus its spending on a handful of priorities the way that the Asian Develoment Bank has done.
The second argument is that the AfDB offers a non-China-led alternative to engagement in Africa. It’s also true that Africa needs to be seen as an economic opportunity and not a charity case, and the AfDB can help with reframing Africa as a tremendous economic opportunity.
There are several questions the U.S. and other shareholders should ask the AfDB regarding the quality of its management when they seek a capital increase. First, is the AfDB management demonstrating a willingness to run the organization as effectively as possible? Second, is the leadership senior staff recruitments reflecting the full breadth of the membership of the AfDB and not just one country (e.g.Nigeria)? Third, why is the AfDB seeking a capital increase less than 10 years after the last one and what are investors like the U.S. going to get from this in return?
Fourth, and most importantly, why are the AfDB and World Bank not doing joint planning and organizing their 3-5 years planning cycles at the exact same time?
A requirement for a capital increase should be a memorandum of understanding between the AfDB and the World Bank to align their planning cycles in every country in Africa, so if the World Bank starts January 1 so will the AfDB, then ending 5 years later. The AfDB should coordinate with others to avoid duplicative activities so as to have a better division of labor.
The AfDB set its strategic and operational priorities through 2022, these priorities (known as the “High 5 Priorities”) are light up and power Africa, feed Africa, industrialize Africa, integrate Africa, and improve the quality of life for the people of Africa. Many African countries may be more receptive to advisory services on issues related to conflict and violence.
The U.S. ought to push harder on the AfDB to address issues of weak governance, corruption, and an unstable rule-of-law. On a related note, the AfDB does and should provide more legal expertise and training to help countries negotiate contracts and commercial transactions as a way to build capacity and ensure unfair deals do not happen.
The AfDB should also focus on reliable over renewable energies. Several bilateral and multilateral institutions have decided to focus their resources on investing only in green funds and renewable energies, which has put pressure on the AfDB to shift its entire energy portfolio to renewable energies. Renewables have a role to play but the energy mix of Africa is going to require large amounts of other forms of energy to meet the enormous and growing demand of countries in Africa.
Seeking a capital increase is a legitimate conversation, but there are also legitimate critiques. During the annual meeting, the U.S. and others should seek answers from the AfDB leadership.
Daniel Runde is a senior vice president and William A. Schreyer chair in Global Analysis at the Center for Strategic and International Studies. He previously worked for the U.S. Agency for International Development, the World Bank Group, and in investment banking, with experience in Africa, Asia, Europe, Latin America, and the Middle East.