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Several African nations, including Nigeria, have announced plans to create a continental credit rating agency to address perceived biases in ratings from major Western agencies like S&P Global Ratings, Fitch Ratings, and Moody’s. This initiative was unveiled during the “Debt Management Forum for Africa” and the inaugural policy dialogue titled “Making Debt Work for Africa: Policies, Practices, and Options,” organized by the African Development Bank (AfDB) in Abuja.
Addressing Bias in Western Credit Ratings
Prof. Kevin Urama, Vice President and Chief Economist at the African Development Bank Group, emphasized that the new African credit rating agency aims to counterbalance the perceived unfair treatment of the continent by Western agencies.
“Africa’s credit ratings often reflect an imbalance caused by asymmetric information,” Urama noted. He explained that global rating agencies often rely on incomplete or outdated data and subjective perceptions, which may unfairly impact African economies.
Urama highlighted that patterns such as political instability, corruption, and limited investor exit guarantees contribute to the continent’s negative ratings. By establishing an African credit rating agency, he believes the continent can foster more accurate assessments and improve the transparency and engagement between rating agencies and African nations.
Enhancing Transparency and Building Trust
The proposed agency will also challenge existing ratings through a “counterfactual” approach, allowing for the reconciliation of methodologies and data sources between Western and African agencies. Urama noted, “If a Western agency assigns a B- rating and the African agency assigns AAA, both must explain and reconcile their methodologies.”
This transparency could improve Africa’s economic reputation while helping countries better understand the factors influencing their creditworthiness.
Criticism of Current Practices
Patience Oniha, Director-General of Nigeria’s Debt Management Office (DMO), echoed concerns about Western agencies. She criticized the short feedback periods given to countries for responding to reports, sometimes as brief as 24 hours.
“Rating agencies often compile data from various sources, including the IMF and World Bank, without providing adequate time for thorough review and response,” Oniha said. She called for regulatory changes to allow for more flexibility and additional analysis.
Broader Implications
The initiative comes in the wake of controversies surrounding Western agencies’ methodologies. For example, Nigeria previously criticized Moody’s for downgrading nine Nigerian banks despite efforts by the Federal Government to stabilize the economy. Zainab Ahmed, the former Minister of Finance, Budget, and National Planning, remarked, “These external agencies lack a full understanding of Nigeria’s domestic environment.”
Subjectivity in Sovereign Ratings
Prof. Daniel Cash, an Associate Professor in Law at Aston University, noted that sovereign credit ratings often incorporate subjective elements, such as a nation’s willingness to repay debts. While rating agencies argue that such discretion is necessary, Cash highlighted that it remains a contentious issue in developing economies facing debt crises.
A Step Toward Financial Independence
The establishment of a continental credit rating agency marks a significant step toward financial independence for African nations. It provides an opportunity to reshape global perceptions, improve economic transparency, and foster sustainable growth across the continent.
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