Role of development finance institutions to Africa’s growth
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