Can Africa fund its own growth?

Mo­bi­liz­ing do­mes­tic re­sources is a key source of fi­nance

Africa Renewal - - CONTENTS - By Ton­der­ayi Muk­eredzi

De­spite wit­ness­ing ex­cep­tional growth in de­vel­op­ment fi­nance in re­cent years, Africa is still faced with the ar­du­ous task of mo­bi­liz­ing ad­e­quate re­sources to fund its growth and fu­ture trans­for­ma­tion agenda. Given the paucity of ex­ter­nal de­vel­op­ment as­sis­tance, and low com­mod­ity prices for its goods and ser­vices, Africa has awak­ened to the fact that it must rely on its own fi­nan­cial re­sources for sus­tain­able de­vel­op­ment.

One of the lead­ing pan-African bod­ies, the United Na­tions Eco­nomic Com­mis­sion for Africa ( ECA), says in­fra­struc­ture de­vel­op­ment in Africa has the po­ten­tial to raise gross do­mes­tic prod­uct (GDP) by 2% and de­velop the back­bone for rapid in­dus­tri­al­iza­tion, which in turn could boost the ca­pac­ity of the con­ti­nent to gen­er­ate more do­mes­tic re­sources.

In its In­no­va­tive Fi­nanc­ing for the Eco­nomic Trans­for­ma­tion of Africa re­port, pub­lished in March 2015, ECA reck­ons that Africa’s cur­rent in­fra­struc­ture needs stand at a whop­ping $93 bil­lion an­nu­ally, out of which $45 bil­lion is mo­bilised, leav­ing an an­nual deficit of al­most $50 bil­lion.

Thus, as Côte d’Ivoire’s Pres­i­dent Alas­sane Ou­at­tara aptly put it, Africa’s great­est chal­lenge is en­sur­ing that its trans­for­ma­tion is bol­stered by suf­fi­cient and in­no­va­tive sources of fund­ing.

“One so­lu­tion would be to speed up the de­vel­op­ment of our fi­nan­cial mar­kets with a view to spark­ing the trans­for­ma­tion of African economies,” Pres­i­dent Ou­at­tara told the Ninth African De­vel­op­ment Fo­rum in Morocco last year. “To do so, we must come up with in­no­va­tive fi­nan­cial prod­ucts and set up ef­fec­tive na­tional and re­gional fi­nan­cial in­sti­tu­tions and ser­vices.”

While Africa is fully cog­nisant of the sig­nif­i­cant strides it has made since the Mon­ter­rey Con­sen­sus in March 2002 in mo­bi­liz­ing fi­nan­cial and tech­ni­cal re­sources for de­vel­op­ment, it con­tends that there is a huge gap.

“Cur­rent pol­icy, fi­nanc­ing and in­vest­ment pat­terns are not de­liv­er­ing the fu­ture we want. There are enor­mous un­met fi­nanc­ing needs for sus­tain­able de­vel­op­ment. Es­ti­mates vary due to the com­plex­i­ties of quan­ti­fy­ing needs, but con­sis­tently point to a sig­nif­i­cant fi­nanc­ing short­fall,” African heads of state and gov­ern­ments af­firmed in a zero draft of the out­come doc­u­ment of the Third Fi­nanc­ing for De­vel­op­ment ( FfD) Con­fer­ence, to be held in Ad­dis Ababa, Ethiopia, in July.

What are the op­tions?

De­vel­op­ment an­a­lysts say Africa has re­al­ized that tra­di­tional sources of de­vel­op­ment fi­nance, such as of­fi­cial de­vel­op­ment as­sis­tance and for­eign di­rect in­vest­ment, which have buoyed the con­ti­nent’s de­vel­op­ment ef­forts over the years, are not sus­tain­able and can­not be re­lied upon as its main sources of fund­ing, as was shown dur­ing the 2007–2008 global fi­nan­cial cri­sis.

Oswell Binha, pres­i­dent of the As­so­ci­a­tion of SADC (South­ern African De­vel­op­ment Com­mu­nity) Cham­bers of Com­merce and In­dus­try, says Africa can cre­ate a $2 tril­lion dol­lar econ­omy if it can sim­plify rules that gov­ern trade and do­mes­tic in­vest­ment. “When you look at the thread of World Trade Or­gan­i­sa­tion and eco­nomic part­ner­ship dis­cus­sions around the con­ti­nent, Africa has re­alised that in­tra-Africa trade is a se­ri­ous op­por­tu­nity from which to raise in­ter­nal re­sources,” Binha told Africa Re­newal.

Ma­teus Ma­gala, African De­vel­op­ment Bank (AfDB) res­i­dent rep­re­sen­ta­tive in Zim­babwe, says Africa has the great­est in­vest­ment po­ten­tial of all fron­tier mar­kets glob­ally.

“These in­clude sov­er­eign wealth funds, pen­sion funds, for­eign re­serves and re­mit­tances, among oth­ers. In ad­di­tion, the con­ti­nent has sub­stan­tial nat­u­ral re­sources and coun­tries with ex­trac­tive in­dus­tries can tap into this im­por­tant source of rev­enue,” Ma­gala said in an in­ter­view with Africa Re­newal.

He noted that with po­lit­i­cal de­ter­mi­na­tion and lead­er­ship to cre­ate ap­pro­pri­ate gov­er­nance mech­a­nisms, Africa’s ex­trac­tive rev­enues could drive the con­ti­nent’s trans­for­ma­tion by en­abling it to in­vest in com­pet­i­tive­ness, diver­si­fi­ca­tion and ef­fi­cient and sus­tain­able use of re­sources.

At an African Group Per­spec­tive Con­fer­ence on FfD in March, stake­hold­ers said they were com­mit­ted to fund­ing sus­tain­able de­vel­op­ment by mo­bi­liz­ing do­mes­tic re­sources, clamp­ing down on cor­rup­tion and il­licit fi­nan­cial flows (IFFs) and ad­dress­ing is­sues sur­round­ing good gov­er­nance.

“To fi­nance its de­vel­op­ment pri­or­i­ties, Africa has de­vel­oped a fi­nanc­ing frame­work that pri­ori­tises do­mes­tic re­source mo­bi­liza­tion and trade as main sources of fi­nanc­ing struc­tural trans­for­ma­tion and sus­tain­able de­vel­op­ment, with a fo­cus on in­fra­struc­ture, hu­man cap­i­tal and sus­tain­able agri­cul­ture, which is es­sen­tial for achiev­ing African Sus­tain­able De­vel­op­ment Goals [SDGs],” Adam El­hi­raika, the di­rec­tor of macroe­co­nomic pol­icy at the ECA, said at a re­cent re­gional meet­ing in Ad­dis Ababa.

ECA says Africa’s re­source po­ten­tial is enor­mous. The con­ti­nent can sup­port, de­velop and im­ple­ment vi­able do­mes­tic fi­nance in­stru­ments such as fi­nan­cial flows from se­cu­ri­tiz­ing re­mit­tances, earn­ings from min­er­als and min­eral fu­els, in­ter­na­tional re­serves held by cen­tral banks and the grow­ing mar­ket­place for pri­vate eq­uity funds.

This is bol­stered by ev­i­dence from the New Part­ner­ship for Africa’s De­vel­op­ment ( NEPAD) and other sources, which show that African coun­tries raise more than $527.3 bil­lion an­nu­ally from do­mes­tic taxes, com­pared to $73.7 bil­lion re­ceived in pri­vate flows and $51.4 bil­lion in of­fi­cial de­vel­op­ment as­sis­tance.

Mr. Ma­gala says $550 bil­lion can be raised from of­fi­cial for­eign re­serves, $200 bil­lion from pen­sion funds, $150 bil­lion from sov­er­eign wealth funds, $50 bil­lion from for­eign di­rect in­vest­ments, $60 bil­lion from re­mit­tances and $20 tril­lion from mon­e­tiz­ing nat­u­ral re­sources.

Do­mes­tic sav­ings

Car­bon-fi­nance mech­a­nisms can also be ex­plored in greater depth for the im­ple­men­ta­tion of some of the con­ti­nent’s projects. A num­ber of African coun­tries are con­sid­er­ing car­bon tax­a­tion as a form of mo­bi­liz­ing ad­di­tional fi­nan­cial re­sources and tack­ling the chal­lenges posed by cli­mate change.

How­ever, the ECA says that com­pared to do­mes­tic sav­ings in other de­vel­op­ing re­gions, those in Africa re­main low largely due to an un­banked pop­u­la­tion, though the po­ten­tial ex­ists if the in­for­mal sec­tor’s re­sources are tapped and the sec­tor is given in­cen­tives to use for­mal bank­ing ser­vices. Africa’s sav­ingsto-GDP was about 22% be­tween 2005 and 2010, com­pared to 46% in East Asia and the Pa­cific and 30% for mid­dle-in­come coun­tries.

Mr. Binha says African gov­ern­ments should also foster an en­vi­ron­ment for high­level public-pri­vate sec­tor con­sul­ta­tions, con­sid­er­ing that the pri­vate sec­tor has so far played a lim­ited role in im­ple­ment­ing Africa’s de­vel­op­ment. “En­gag­ing with the pri­vate sec­tor gen­uinely in­creases in­vest­ments in­ter­nally and also be­comes an ef­fec­tive means of at­tract­ing ex­ter­nal in­vest­ment. There is no rap­port be­tween gov­ern­ments and the pri­vate sec­tor. There is a them-and-us syn­drome,” notes Mr. Binha.

The ECA es­ti­mates the pri­vate eq­uity mar­ket in Africa to be worth about $30 bil­lion. In 2011 alone, pri­vate eq­uity firms raised $1.5 bil­lion for busi­ness in Africa.

Re­duc­ing the cost of re­mit­tances

While re­mit­tances have in­creased, av­er­ag­ing $21.8 bil­lion over the past decade, with coun­tries such as Nige­ria and Sene­gal re­ceiv­ing about 10% of their GDP in re­mit­tances, ex­perts say the cost of send­ing re­mit­tances to Africa has re­mained the high­est in the world, with the cost of trans­fers within Africa even higher. For re­mit­tances to have an im­pact, they must be made cheaper and used ef­fec­tively to spur de­vel­op­ment.

Some­times tough anti–money laun­der­ing laws and counter-sur­veil­lance reg­u­la­tions meant to com­bat fi­nan­cial ter­ror­ism can sti­fle re­mit­tances, thereby negat­ing the con­ti­nent’s progress. This re­cently hap­pened when US banks plugged re­mit­tance ser­vices to So­ma­lia.

Cur­tail­ing IFFs re­mains a ma­jor chal­lenge that Africa must vig­or­ously un­der­take. Such out­flows from Africa may have been as high as $854 bil­lion be­tween 1970 and 2008, which amounts to an an­nual av­er­age of close to $22 bil­lion in lost fi­nances—more than half of it com­ing from the ex­trac­tive in­dus­tries sec­tor. The do­mes­tic re­source mo­bi­liza­tion ef­fort will re­ceive a sig­nif­i­cant boost if IFFs from the con­ti­nent are cur­tailed.

Sev­eral pol­icy op­tions have been sug­gested to stem the flows, such as rais­ing aware­ness and shar­ing best prac­tices among African pol­i­cy­mak­ers and other stake­hold­ers on the mag­ni­tude and de­vel­op­ment im­pact of the IFFs.

Some of the key ini­tia­tives taken so far in­clude African Union fi­nance min­is­ters’ set­ting up the High Level Panel on Il­licit Fi­nan­cial Flows from Africa, and the es­tab­lish­ment of re­gional ini­tia­tives such as the African Re­gional Anti-Cor­rup­tion Pro­gramme (2011–2016) and the African Tax Ad­min­is­tra­tive Fo­rum.

Mr. Binha says Africa’s big­gest chal­lenges are con­fi­dence, the un­favourable pol­icy ma­trix, the rigidi­ties of do­mes­tic trade and in­tra-trade and dif­fer­ences across na­tions. “Con­fi­dence is a huge de­ter­rent to at­tract­ing sus­tain­able, de­pend­able and cred­i­ble in­ter­nal in­vest­ment. African states have to cre­ate a dash­board around which there is proper gov­er­nance, ac­count­abil­ity and de­pend­abil­ity with in­vestors. The po­ten­tial is there but Africa has to first clearly de­fine its pri­or­i­ties in Agenda 2063, their cost and the mech­a­nisms to meet them,” added Mr. Binha. Agenda 2063 is the African Union’s eco­nomic de­vel­op­ment blue­print for the 50 years fol­low­ing 2013, when it was adopted.

Main­tain­ing growth

Ac­cord­ing to the World Bank, to raise enough funds from do­mes­tic sources, Africa will need to grow at a rate of 5% of GDP for the next two decades. The bank fore­casts that eco­nomic growth for African coun­tries will slow to 4.0% in 2015 from 4.5% in 2014, a down­turn that largely re­flects the sharp fall in global prices for oil and other key com­modi­ties.

The World Bank’s chief economist, Fran­cisco Fer­reira, told African fi­nance min­is­ters and cen­tral banks chiefs dur­ing a re­cent spring (April) meet­ing in Washington, DC, that the forecast was be­low the 4.4% av­er­age an­nual growth rate of the past two decades and well short of Africa’s peak growth rates of 6.4% in 2002–2008. Although the boom is over, Fer­reira noted, the “Africa Ris­ing” phe­nom­e­non pre­dated the boom and should be able to out­live it.

In­no­va­tive do­mes­tic fi­nanc­ing mech­a­nisms such as Africa50, launched by the AfDB last year, are there­fore ex­pected to lead or com­ple­ment other ex­ter­nal re­sources and new fi­nanc­ing forces like the BRICS coun­tries ( Brazil, Rus­sia, In­dia, China and South Africa) to achieve Africa’s am­bi­tious de­vel­op­ment needs.

Reuters/T. Negeri

A par­tial view of Ethiopia’s Grand Re­nais­sance Dam un­der con­struc­tion.

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