Inaccurate and context-poor sovereign credit ratings are costing African countries an estimated $74.5 billion annually through higher borrowing costs and lost financing, according to the United Nations.
The UN Office of the Special Adviser on Africa disclosed this ahead of the formal launch of the Africa Credit Rating Agency (AfCRA) in Port Louis, Mauritius, on Wednesday.
The UN said Africa faces a significant development penalty because prevailing credit ratings may not fully reflect the continent’s economic realities and sovereign default record.
“Africa’s actual default rate is far lower than what its credit ratings imply, yet the continent pays the highest cost of capital in the world,” the UN said.
It described the estimated $74.5 billion annual cost as a “tax on Africa’s development”.
The issue is particularly relevant to Nigeria, which has repeatedly raised concerns over the risk premiums attached to African sovereign borrowing.
At an ECOSOC special meeting on credit ratings in March, Nigeria compared its borrowing costs with those of an unnamed highly indebted European economy.
Nigeria said its debt-to-GDP ratio was considerably lower, it had never defaulted on sovereign debt and had stronger foreign reserves.
Despite this, the country said its recent dollar-denominated sovereign bonds carried yields of between 8.6 per cent and 9.1 per cent.
The European country, by comparison, was said to have borrowed at about 3.9 per cent to 4 per cent.
Nigeria also questioned why profitable banks and businesses could operate successfully within African economies while their sovereigns remained below investment grade.
It argued that international credit rating agencies should engage more deeply with domestic investors and economic actors rather than rely largely on externally generated assumptions.
Nigeria further raised concerns about the limited physical presence of major global rating agencies across Africa, saying this could limit their understanding of local economic conditions.
AfCRA is expected to provide independent, Africa-focused credit assessments of sovereigns, sub-sovereigns, companies and institutions.
The agency aims to address information and methodology gaps through assessments based on African data, expertise and economic conditions.
It is expected to give greater consideration to factors that conventional ratings may inadequately capture, including informal-sector activity, economic vulnerability and resilience.
The African Union said AfCRA would complement rather than replace existing international credit rating agencies.
The agency is expected to operate independently, be private-sector driven and self-funded, with governments barred from owning shares to protect its credibility.
The launch follows years of concerns among African governments that conventional sovereign credit ratings contribute to higher borrowing costs and restrict fiscal space for development.
For African economies, improving the accuracy and credibility of sovereign risk assessments could help reduce financing costs, broaden access to capital and create additional fiscal space for development spending.