Financing Africa's Future

Bold international cooperation is essential to break Africa's debt cycle and unlock sustainable development.

Africa's debt is rising roughly four times faster than its economic growth, jumping 10 percentage points from 2010 to constitute 29% of gross domestic product (GDP) by 2022.

This alarming trajectory demands a rethink of how international partnerships could better support the continent's progress towards the United Nations Sustainable Development Goals (SDGs) by 2030. As the global balance of power shifts, Africa's demographic dividend and resource wealth position it as pivotal in shaping a fair and inclusive multipolar world.

The Organisation for Economic Co-operation and Development (OECD) says a debt threshold range of 70%-90% of GDP is appropriate for high-income countries such as the United States (US) and Japan, and 30%-50% for emerging economies, including Africa's 46 low- and lower-middle-income economies.

It says a prudent debt target should average 15 percentage points below the debt threshold since exogenous events, like COVID-19 or Russia's invasion of Ukraine, could push up interest rates. So most African countries can only sustain debt levels of 15%-35% of GDP, it says.

Many African countries have consistently exceeded these levels due to high borrowing costs, currency volatility and slow growth. United Nations Trade and Development says African countries face financing costs averaging 8.5 percentage points higher than the US rate. Some nations, like Tunisia and Nigeria, are effectively shut out of financial markets due to prohibitive costs.

Africa's infrastructure financing gap is immense, with growing demands for schools, hospitals and transport systems driven by population growth. Domestic revenue mobilisation remains low, leaving many countries reliant on external borrowing.

Although tax revenue mobilisation performance varies widely across African countries, Africa's average tax-to-GDP ratio of 16.5% is lower than other regions, such as Asia and the Pacific (19.1%) and Latin America and the Caribbean (21.9%). It is 33.5% in OECD countries.

Government expenditure is often also unproductive, reflected in the low measure of government effectiveness as measured by the World Bank, and high corruption levels shown in Transparency International data and others.

Trapped on the horns of a dilemma that needs significant government expenditure to fund its development, and unable to fund that domestically, Africa increasingly turns to private creditors and China instead of concessional financing from international financial institutions (IFIs). The latter often involve cumbersome conditions.

This conundrum requires several responses, starting with improving the quality of domestic governance and extending all the way to restructuring voting rights within the IFIs.

Africans must be able to afford much higher debt levels (at least 50%-60% of GDP), which must be available at low, concessional rates - meaning someone, somewhere, needs to offset the additional risk premium.

Who will grasp this nettle? How can we engineer a common approach to Africa's development dilemma that includes China, the West, private bondholders and development banks?

To some degree financial engineering could be used 'to contain a surge in borrowing costs without taking on more debt from official lenders,' notes the Financial Times. For example, recently the World Bank announced it would underwrite a loan to Côte d'Ivoire to replace costly bonds.

Through this 'debt for development' swap, the country will use cheap financing to back close to €400 million in bonds that will be up for repayment in the next few years and put the savings into public spending.

Africa's development pathway requires bold international cooperation that acknowledges the continent's unique challenges and opportunities in a multipolar world. An international partnership framework must be built on principles of mutual accountability, transparency, sustainability, and equitable risk-sharing between all creditors and debtors.

Three key strategies could add to a visionary global framework. The first is to restructure IFIs. Africa's voice must be amplified in decision-making processes at the International Monetary Fund, World Bank, and other multilateral lenders. Voting rights should be revised to reflect Africa's growing significance and ensure that risk assessments by agencies like Moody's, Standard & Poor's and Fitch are objective, rational and unbiased.

A dedicated African sovereign rating agency could address some of these concerns. Western companies and countries would probably continue relying on information from agencies they know and trust - but perhaps using a spread of agencies could be negotiated. IFIs must also scale up concessional financing for Africa, offering loans at lower rates to enable sustainable borrowing.

A second strategy would involve establishing a global compact on Africa's development, endorsed by leading economies and regional organisations like the African Union, to mobilise funding for critical infrastructure projects.

This compact should involve a mix of grants, concessional loans and private-sector investment guarantees, with clear accountability mechanisms. Development aid could help subsidise the risk premiums associated with lending to African economies and investments in projects in Africa.

Partnerships must also tap into Africa's diaspora through innovative tools like diaspora bonds to fund critical development projects. Annual remittance flows to Africa have already exceeded aid by more than US$50 billion.

Third, economic diversification and value addition should be promoted. International partnerships should prioritise support for Africa's transition from commodity exports to value-added industries. This includes investments in technology transfer, capacity building and market access initiatives to ensure that Africa captures greater value from global trade.

Single-commodity-based economies are vulnerable to price swings. Yet, today, Africa is more commodity-dependent than ever, and the quality of governance is declining. Regional agreements like the African Continental Free Trade Area should be fully implemented to strengthen intra-African trade.

Close Sign up for free AllAfrica Newsletters

Get the latest in African news delivered straight to your inbox

Top HeadlinesAfricaInternational OrganisationsDebt Submit

By submitting above, you agree to our privacy policy.

Success!

Almost finished...

We need to confirm your email address.

To complete the process, please follow the instructions in the email we just sent you.

Error! Error!

There was a problem processing your submission. Please try again later.

_ready.push(function($) { if ( ! loadjs.isDefined( 'newsletter-signup-assets' ) ) { loadjs( ["https://cdn01.allafrica.com/static/js/jquery/jquery.serialize-object.min.js?v=2024120400","https://cdn05.allafrica.com/static/js/newsletter-signup.min.js?v=2024120400","https://cdn05.allafrica.com/static/css/newsletter-signup.min.css?v=2024120400"], 'newsletter-signup-assets', { async: true, }); } // the newsletter widget calls storageAllowed(), which is imported with // the cmp bundle. passing an array of bundle names to loadjs triggers // the callback only after all of the listed bundles have fired. loadjs.ready( [ 'cmp', 'js-cookie', 'events', 'newsletter-signup-assets' ], function() { $('.newsletter-signup.inread.collapse.w-background.w-background-color.blue').newsletterInRead({ maxShowCount: 10, maxCloseCount: 3, maxSuccessCount: 1, }); }); });

Achieving the SDGs by 2030 - and setting the stage for Africa's Agenda 2063 - requires transformative action. Beyond financing, Africa's success hinges on fiscal discipline, political stability and enhanced domestic governance. However, immediate relief lies in creating equitable international partnerships that address the continent's specific needs.

Using the International Futures forecasting platform, our forecasts show that Africa's average economic growth rate for the next 10 years is a measly 4.2%. Since the continent's population is expected to grow at 2.4%, this translates into GDP per capita growth at less than 1% a year. This implies that by 2030, 454 million Africans (26% of Africa's population) will still live in extreme poverty.

Africa's prosperity benefits everyone, and the current prospects of a growing divide between Africa's and income averages elsewhere will eventually threaten global stability and prosperity. It will accelerate climate change, given the inevitable increases in the continent's carbon emissions that will accompany economic growth.

A prosperous and stable Africa would contribute to global security, reduce irregular migration and expand trade opportunities, benefitting the entire world.

This article was first published in the Africa Tomorrow blog of the ISS' African Futures and Innovation programme.

Jakkie Cilliers, Head, African Futures and Innovation, ISS Pretoria

Read the original article on ISS.

Financing Africa's Future

Financing Africa's Future

Financing Africa's Future

Financing Africa's Future

Financing Africa's Future