The global economy has experienced several recessions since 1870. The Covid-19 recession is set to be the deepest since the Second World War-induced one in 1945-46. It is more than twice as deep as the recession associated with the 2007-09 global financial crisis.
However, Covid-19 did not create the development finance challenge in Africa. It only exacerbated it. Before the pandemic, the African Development Bank (AfDB) estimated that Africa’s infrastructure investment needs alone ranged from $130bn to $170bn per year, meaning that the total financing gap was between $68bn and $108bn annually. Debt vulnerabilities were on the rise and several African countries faced significant fiscal challenges before the pandemic.
Covid-19 has clearly exacerbated the challenges of financing the 2030 sustainable development goals (SDGs), the 2015 Paris Climate Agreement, Africa’s Agenda 2063, and national development goals. Africa’s fiscal deficits doubled in 2020 – rising to a historical high of 8.4% of GDP. Government revenues declined on average by 10 to 15% in 2020 across sub-Saharan Africa. Currently, Africa’s public debt is estimated at $546bn. This is about one-quarter of the continent’s GDP and higher than its annual government revenues ($501bn). Some 18% of this is used to service debt. The debt-to-GDP ratio is likely to rise by 10 to 15% in the short to medium term, further squeezing the fiscal space.
The pandemic has also impacted other sources of development finance inflows. Compared to 2019, in 2020, FDI, overseas development assistance and portfolio investments to Africa declined by 15.6% (from $47.1bn to $39.8bn), 10% (from $52.9bn to $47.6bn), and 212% (from a net inflow of $14.3bn to a net outflow of $16bn), respectively. Access to international capital markets also decreased with the widening of spreads on African sovereign bond yields. This was because of investors’ greater perception of risks and capital flight from Africa – estimated at over $90bn in 2020.
Today, African countries are left with very little financing infrastructure and social expenditure needed to cushion the impacts of the pandemic. The AfDB estimates that African governments will need some $484bn within the next three years to address the socio-economic impacts of the pandemic and support economic recovery.
Africa’s real GDP growth is expected to rebound to an average of 3.4% in 2021. This is good. However, about 30m Africans were already pushed into extreme poverty in 2020 and some businesses are now permanently closed. There is rising long-term unemployment, consumer price inflation, and a significant disruption in human capital formation for millions of African children. Therefore, the long-term structural impacts of the pandemic may outweigh its short-term fiscal impacts. In addition, the impacts of other exogenous events such as global climate change and security expenditures might further worsen the credit ratings of countries, and hence increase the cost of capital.
Many argue that the entire financing ecosystem of African economies should be rethought. This includes rethinking from a legal perspective, to facilitate private sector financing, strengthen property rights, provide access to guarantees for micro, small, and medium-sized enterprises, and produce innovative and inclusive models that can make more low-cost financing available for low-income countries.
What should be done?
The availability of capital to invest in businesses, technologies and industrial production defines the winners and losers in post-crisis periods.
The Covid-19 pandemic has exposed the limitations of the current global cooperation systems in several ways. There has been an unprecedented easing of fiscal policy by the developed countries to rescue their economies as vaccine inequality lingers. This casts doubts on the collective resolve of the global community to work together in times of crisis, even when it is for the common good of all stakeholders. In addition to the paltry levels of vaccination rates in developing countries, rising debt and state-contingent liabilities continue to create triangles of disaster for developing countries post-pandemic.
Different actors in the global economic system must urgently play their roles to ensure a more sustainable recovery and long-term stabilisation of the global economy, rather than focus on individual country goals alone.
African governments must re-focus on improving macro-economic governance, transparency, and accountability in the mobilisation and management of public finances. This includes curbing illicit finance flows, consolidating, deepening and de-risking domestic capital and financial markets, and promoting and deepening economic diversification.
Countries can enhance domestic revenue mobilisation and utilisationby applying policies that encourage domestic savings, prudent investment of sovereign wealth funds, insurance funds, pension funds, and securitising remittances for investments in the real sectors of national competitive advantages. African countries must also invest in digitisation and modern technologies that enhance transparency, accountability and value chain development in key export sectors. Other relevant simple measures include implementing integrated tax administration systems and single revenue accounts, digitising tax administration systems, and devolving powers for revenue collection and administration to local authorities.
Policies to consolidate, deepen and de-risk domestic capital and financial markets are crucial. African governments should leverage the African Continental Free Trade Area to push for market consolidation and deepen capital and financial markets to create economies of scale. Governments must take a lead in creating policy stability, the rule of law, transparency, and accountability to make their countries attractive destinations for development finance. There is no lack of finance in our world today. Absorptive capacity is the challenge. This can be built and nurtured at national and sub-national levels.
Multilateral and development finance institutionsshould increase concessional and non-concessional development financing available to developing countries. It is important that they support countries in the use of allocated special drawing rights (SDRs) by the International Monetary Fund (IMF), and that they assist countries in debt-restructuring.
Development finance institutions have a significant role to play in helping countries channel the SDRs allocated to them to priority policy areas. They can assist them in leveraging the resources to attract additional resources, especially from the private sector. Regional development finance institutions must also play a mediation role between the countries and the SDR allocating institution to ensure proper coverage of target regional member countries. Furthermore, it is critical to maintain the provision of technical support to countries to help them better manage their public debt productively and transparently.
Collective action required
Global action is urgently required to support the African continent in mobilising low-cost and affordable financing for an inclusive development transition. They need support to mitigate the looming risk of debt distress through debt restructuring and cancellation programmes. The Debt Service Suspension Initiative, the G-20 Common Framework beyond the Debt Service Suspension Initiative and the IMF’s issuance of SDRs are helpful in the short term.
However, these instruments do not address the fundamental structural issues in the global development finance architecture that created and sustain Africa’s development finance challenges. What is urgently required are innovative instruments to rapidly scale access to development finance from concessional and non-concessional sources.
Without adequate financing, it will not be possible to achieve all our development targets. The world has the knowledge, the policy tools, and the resources to achieve the SDGs everywhere. This is demonstrated in the scale and pace of the global response to Covid-19, including the unprecedented speed in the development of Covid-19 vaccines and therapeutics. It is also evident from the scale of fiscal stimulus provided to address the pandemic’s impacts on economies. Essentially, the world can get the job done if there is the collective will to do so.