Role of de­vel­op­ment fi­nance in­sti­tu­tions to Africa’s growth

Chronicle (Zimbabwe) - - Opinion - Eras­tus Mwen­cha

THIS is an ex­cit­ing time for Africa. Since the be­gin­ning of the 2000s, Africa’s growth rate has more than dou­bled from just above 2 per­cent in 1980s and 1990s to above 5 per­cent be­tween 2001 and 2014. This eco­nomic per­for­mance was favoured by an in­creased do­mes­tic and in­ter­na­tional de­mand; high com­mod­ity prices, pub­lic in­vest­ments in in­fra­struc­ture; tighter trade and in­vest­ment link­ages with emerg­ing economies such as China and im­prov­ing global eco­nomic and con­ti­nen­tal busi­ness en­vi­ron­ment.

But to­day, the sit­u­a­tion has dra­mat­i­cally changed. Most of African coun­tries are con­fronted by dif­fi­cul­ties re­lated to the sharp de­cline of com­mod­ity prices, par­tic­u­larly oil and met­als with an im­pact on rev­enues. In ad­di­tion, China’s growth slow­down to be­low 7 per­cent and its tran­si­tion from in­vest­ment and ex­port of in­dus­trial goods to­wards con­sump­tion and ser­vice has also heav­ily im­pacted Africa’s eco­nomic per­for­mance. Fur­ther, cli­mate change in the form of se­vere drought and floods have af­fected elec­tric­ity gen­er­a­tion and food se­cu­rity.

De­spite these eco­nomic head­winds, Africa is still the sec­ond fastest grow­ing eco­nomic zone, with an eco­nomic growth rate es­ti­mated above 5 per­cent in 2016. This es­ti­ma­tion by the African De­vel­op­ment Bank places the con­ti­nent above the global av­er­age of 3.2 per­cent and the es­ti­mated 1.7 per­cent and 2 per­cent for the Eu­ro­zone and the US re­spec­tively. The con­ti­nent is also still post­ing good per­for­mance in terms of at­trac­tive­ness for for­eign di­rect in­vest­ments in­flows es­ti­mated to reach $55-60 bil­lion in 2016. On a re­gional note, al­though in­tra-African cross-bor­der in­vest­ments have risen, they only ac­count for 19 per­cent of to­tal in­vest­ment to Africa and 12 per­cent of Africa to­tal for­eign in­vest­ment com­pared to 33 per­cent in Asia.

On the so­cial front, Africa has made steady progress in ad­dress­ing key so­cio-eco­nomic chal­lenges. In many coun­tries, the in­ci­dence of ex­treme poverty has de­clined. At­tend­ing pri­mary school has be­come the norm, with most coun­tries hav­ing achieved univer­sal pri­mary en­rol­ment (above 90 per­cent). Nearly one half of African coun­tries have achieved gen­der par­ity in pri­mary school. Health has also seen ma­jor gains: un­der-five mor­tal­ity de­clined from 146 deaths per 1 000 live births in 1990 to 90 deaths in 2011, a 38 per­cent de­crease. Sim­i­larly, the ma­ter­nal mor­tal­ity ra­tio fell from 745 deaths per 100 000 live births in 1990 to 429 in 2010, a 42 per­cent de­crease.

But Africa’s growth episode has not been suf­fi­ciently in­clu­sive and di­verse be­cause it is still mainly based on nat­u­ral re­sources ex­ploita­tion and ex­port with­out added value, and there­fore no op­por­tu­nity to max­imise the share of wealth drawn from its vast raw ma­te­ri­als for Africans. It is in this con­text of seek­ing in­clu­sive and sus­tain­able growth that the African Union has re­sponded by de­vel­op­ing Agenda 2063 for the “Africa We Want”.

Agenda 2063, which em­beds the global Sus­tain­able De­vel­op­ment Goals (SDGs), is a for­ward-look­ing vi­sion that projects Africa over the next five decades con­sid­er­ing it as “an in­te­grated and pros­per­ous con­ti­nent, where growth is in­clu­sive; a con­ti­nent at peace with him­self, play­ing an ac­tive role on the global scene."

Agenda 2063 re­flects the as­pi­ra­tions of the en­tire African con­ti­nent; a pros­per­ous con­ti­nent with high-qual­ity growth that cre­ates more em­ploy­ment op­por­tu­ni­ties for all, es­pe­cially women and youth. In this vi­sion, sound poli­cies, bet­ter in­fra­struc­ture and en­ergy will drive Africa’s trans­for­ma­tion by im­prov­ing the con­di­tions for pri­vate sec­tor de­vel­op­ment and by boost­ing in­vest­ment, en­trepreneur­ship and mi­cro, small and medium en­ter­prises.

In the con­text of Agenda 2063, trans­for­ma­tion means diver­si­fy­ing the sources of eco­nomic growth and op­por­tu­nity in a way that pro­motes higher pro­duc­tiv­ity, re­sult­ing in sus­tained and in­clu­sive eco­nomic growth. It also means sup­port­ing the de­vel­op­ment of in­dus­tries that in­crease the im­pact of the ex­ist­ing sources of com­par­a­tive ad­van­tage and en­hance Africa’s global com­pet­i­tive po­si­tion.

Achiev­ing Agenda 2063 and its flag­ship pro­grammes will re­quire a col­lec­tive ef­fort by all African stake­hold­ers and to that end, the role of African de­vel­op­ment fi­nance in­sti­tu­tions can­not be overem­pha­sised. Un­der Agenda 2063, we see de­vel­op­ment fi­nance in­sti­tu­tions (DFIs) as pow­er­ful in­sti­tu­tions that can in­vest in sus­tain­able pri­vate sec­tor projects with the twofold ob­jec­tive of spurring so­cio-eco­nomic trans­for­ma­tion and de­vel­op­ment in African coun­tries while them­selves re­main­ing fi­nan­cially vi­able. These fi­nan­cial in­sti­tu­tions will be in­stru­men­tal in the sus­tain­able fi­nanc­ing of con­ti­nen­tal projects in agri­cul­ture, agribusiness and in­dus­try, in­fra­struc­ture and en­ergy in the per­spec­tive of un­leash­ing the de­vel­op­ment po­ten­tial of the African pri­vate sec­tor.

On the in­fra­struc­ture side, of the $93 bil­lion per year the World Bank es­ti­mates that Africa needs to in­vest to close its in­fra­struc­ture gap, just un­der half is cur­rently fi­nanced, with ma­jor sources be­ing African govern­ments, mul­ti­lat­eral and bi­lat­eral sources of fi­nance, Of­fi­cial De­vel­op­ment As­sis­tance (ODA) and the pri­vate sec­tor. Ac­cord­ing to the Africa In­fra­struc­ture Coun­try Di­ag­nos­tics (AICD), these sources to­gether con­trib­ute ap­prox­i­mately $45 bil­lion per an­num, leav­ing a gap of about $48 bil­lion per an­num to be fi­nanced.

With re­gard to en­ergy, it is es­ti­mated that the lack of en­ergy com­bined with lack of in­fra­struc­ture holds back Africa’s growth by two per­cent each year and con­sti­tute a ma­jor con­straint to do­ing busi­ness.

In that con­ti­nen­tal in­ter­play, de­vel­op­ment fi­nance in­sti­tu­tions have an im­por­tant role to play to help re­duce the in­fra­struc­ture gap and solve the power prob­lem. Ad­dress­ing these two chal­lenges will open great op­por­tu­ni­ties for agri­cul­ture de­vel­op­ment and in­dus­tri­al­i­sa­tion through a shift­ing of labour from lower to higher pro­duc­tiv­ity sec­tors.

But how can DFI’s con­trib­ute to the achieve­ment of these goals?

There is an im­per­a­tive need to re­visit the role of African de­vel­op­ment fi­nance in­sti­tu­tions with a view to re­in­force their de­vel­op­ment po­ten­tial and ad­dress their poor per­for­mance recorded over the last decade. In fact, over the last decade, African de­vel­op­ment fi­nance in­sti­tu­tions have shown low lev­els of prof­itabil­ity, with an es­ti­mated 2.4 per­cent re­turn on av­er­age as­sets, and a high level of loan im­pair­ment, with a 15.8 per­cent of im­pair­ment loans to gross loans.

To avoid the rep­e­ti­tion of this dis­ap­point­ing per­for­mance of African de­vel­op­ment banks, let me un­der­line pol­icy ac­tions that can help de­vel­op­ment fi­nance in­sti­tu­tions re­main rel­e­vant part­ners in achiev­ing so­cio-eco­nomic trans­for­ma­tion in Africa.

First, there is need to cre­ate an en­abling busi­ness and reg­u­la­tory en­vi­ron­ment for the at­trac­tion of both for­eign di­rect in­vest­ment and the scal­ing up of cross-bor­der in­vest­ments. Cre­at­ing an en­abling en­vi­ron­ment will sig­nif­i­cantly con­trib­ute to de-risk­ing in­vest­ments in crit­i­cal sec­tors of in­fra­struc­ture, en­ergy and agribusiness for African trans­for­ma­tion if the con­ti­nent is to reach the level of 33 per­cent of in­tra-re­gional for­eign in­vest­ments recorded by Asia. Achiev­ing this will re­quire pol­icy in­ter­ven­tions to strengthen macroe­co­nomic sta­bil­ity and pro­mote in­sti­tu­tional, reg­u­la­tory and le­gal re­forms that favour good gov­er­nance and ac­count­abil­ity to avoid mi­croe­co­nomic dis­tor­tions. DFIs should there­fore be in­te­grated into the fi­nan­cial sys­tem to deepen fi­nan­cial in­clu­sion and op­er­ate along com­mer­cial lines with a flex­i­ble man­date to take ad­van­tage of the new dy­nam­ics.

Sec­ond, gov­ern­ment in­ter­ven­tion should sup­port rather than dis­tort in­cen­tives for the pri­vate sec­tor. To that end, our ef­forts should un­lock the trans­for­ma­tive po­ten­tial of the pri­vate sec­tor through in­creased ac­cess to fi­nance and deep­en­ing of fi­nan­cial in­clu­sion. Par­tic­u­lar at­ten­tion should be placed on length­en­ing fi­nan­cial con­tracts by pro­vid­ing a trad­ing plat­form for the ex­pan­sion of African cap­i­tal mar­kets.

Third, gov­ern­ment should also put in place ar­range­ments for de­vel­op­ment fi­nan­cial in­sti­tu­tions to be as­sessed on a reg­u­lar ba­sis against an agreed set of fi­nan­cial and so­cial de­vel­op­ment ob­jec­tives. As gov­er­nance in all its di­men­sions, rang­ing from po­lit­i­cal sta­bil­ity and ac­count­abil­ity in the con­trol as­sets to the rule of law, has been a con­tin­u­ous chal­lenge over the last few decades, there is now an ur­gent need to strengthen fi­nan­cial sta­bil­ity and to fight against il­licit fi­nan­cial flows to sig­nif­i­cantly re­duce the risks per­ceived by in­vestors. De-risk­ing the African fi­nan­cial sys­tem will, I am con­vinced, at­tract more for­eign in­vestors and scale up re­gional cross­bor­der in­vest­ments for Africa’s trans­for­ma­tion.

Fourth, gov­ern­ment should cap­i­talise de­vel­op­ment banks ad­e­quately to al­low them to play a more proac­tive role in fi­nanc­ing Africa’s so­cio-eco­nomic trans­for­ma­tion.

Fifth, rather than con­cen­trat­ing on na­tional pri­or­i­ties, de­vel­op­ment banks should op­er­ate in a re­gional base. This will be of great im­por­tance to find op­ti­mal so­lu­tions to re­gional chal­lenges and fast-track Africa’s in­te­gra­tion agenda as en­cap­su­lated in the Abuja Treaty. Co-fi­nanc­ing, by form­ing con­sor­tia, will sig­nif­i­cantly con­trib­ute to en­hanc­ing im­ple­men­ta­tion of cross-bor­der projects.

In con­clu­sion, let me reem­pha­sise that to achieve Agenda in 2063, de­vel­op­ment fi­nance in­sti­tu­tions are rel­e­vant ac­tors and in­vestors in sus­tain­able agri­cul­tural and in­dus­trial pro­duc­tion if we are to meet the chal­lenge of struc­tural trans­for­ma­tion. And through in­no­va­tion and in­vest­ment in in­fra­struc­ture, en­ergy and re­source-ef­fi­cient so­lu­tions, de­vel­op­ment fi­nance in­sti­tu­tions will have a ma­jor role in spurring in­clu­sive eco­nomic growth.

The writer is Deputy Chair­per­son African Union Com­mis­sion. — African Ex­ec­u­tive

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