Over the past few decades, market-based finance has become central to the global financial system. Huge volumes of financial instruments are traded daily. To improve access to global financial markets for African countries, the United Nations Economic Commission for Africa (ECA) – in cooperation with the asset management firm PIMCO – has proposed setting up a Liquidity and Sustainability Facility (LSF). This is designed to create a Special Purpose Vehicle to subsidise private sector investment in African sovereign debt. The LSF would be financed by official development assistance (ODA), multilateral development banks and/or by the central banks of members of the Organisation for Economic Co-operation and Development (OECD).

The LSF proposal comes at a time when several African countries are desperate to get access to finance to respond to the humanitarian, social and economic crisis triggered by the Covid-19 pandemic. It is presented as a viable alternative to debt restructuring that would accommodate the reluctance of many African countries to endanger market access by joining initiatives such as the Debt Service Suspension Initiative (DSSI), launched by the Group of 20 (G20) and the Paris Club in 2020. These initiatives have so far proved to be insufficient when it comes to addressing existing debt problems. […]

The aim of this paper is to contribute to an informed dialogue on the most appropriate forms of development finance. In view of the critical debt situation of African countries in the wake of the Covid-19 crisis, and of the longer-term ambition to deliver on the Sustainable Development Goals and the Paris Agreement, this discussion is more vital than ever.