In a strongly thwarted global economic context, Africa is resisting. According to the World Bank, the IMF and the OECD, real GDP growth in Africa is expected to reach 3.7% in 2023, a return to pre-COVID-19 levels. Positive economic prospects, but still insufficient to achieve the Sustainable Development Goals (SDGs) set by the UN for the African continent. The recent summit for a “new financial pact”, held in Paris last June, demonstrated the intensity of the debates around the economic and climate challenges that concern the African continent.
In this context, the latest edition of the report of the Organization for Economic Co-operation and Development (OECD), in partnership with the African Union Commission, devoted to the Dynamics of Development in Africa, sheds interesting new light to decipher. Based on a comprehensive assessment of Africa’s sources of financing, the document, rich in seven extremely detailed chapters, offers several avenues for reflection and above all solutions for African governments and their partners to improve investor confidence and accelerate sustainable investments on the continent. Main author of this study, Arthur Minsat, head of the Europe, Middle East and Africa unit at the OECD development center, agreed to answer questions from Point Afrique.
Le Point Afrique: There has been a lot of talk about sustainable financing in recent years. What is it about ? And what are the stakes for Africa?
Arthur Minsat: An investment is said to be “sustainable” when the sum of its expected economic, social and environmental benefits exceeds its overall cost. However, for Africa, there is a financing gap for the Sustainable Development Goals. To give you hard numbers, I would say that Africa needs an additional $1.6 trillion by 2030 – or $194 billion a year – to achieve its SDGs, or around 7% of GDP. Which is, in reality, minimal in comparison to the financial resources available on a continental and global scale. This equates to less than 0.2% of global stock and 10.5% of African stock of assets under management. The gap could therefore be closed if only 2.3% of global financial assets were allocated to Africa by 2030, less than the continent’s share of global GDP.
So money is not the problem. For African countries, the main challenge is to fill this gap by attracting more investment, and of better quality. States can mobilize savings internally, African pension funds, and externally foreign investment flows, development aid, remittances from the diaspora, portfolio investments, etc.
In any case, the growth is in Africa. It is the second fastest growing in the world. We are at 3.7% GDP growth, just behind the Asian countries, before the OECD countries, and before the Latin American countries. But this is not enough to achieve development goals.
The continent can successfully turn the tide, as it has unique human and natural assets to attract investors. Its population is growing rapidly and it is young. Half of Africa’s population is aged 19 or younger. Regarding the natural potential, it offers considerable opportunities for investment in sustainable development, for example, the Congo Basin has become the largest carbon sink in the world ahead of the Amazon forest. The continent has 60% of the world’s solar resources, but they are not exploited enough to respond to basic issues such as access to electricity, yet access to energy is a major constraint for investment.
What are the main constraints that African states face in attracting more sustainable investments?
The question of access to financing is a challenge, as is the poor perception of African risk. It is linked to several factors, and entails a cost of capital which is much higher than in other regions of the world. This is a major obstacle to the imperative to invest in African economies.
Why is the risk perception assigned to the region not changing despite improving macroeconomic fundamentals or global economic conditions?
The current global environment is not conducive as investors try to hedge against risk. And the lack of information and data, in African countries, penalizes them strongly. In a majority of States, statistical systems are failing, the cost of access to information hinders investments and delays decisions.
In our survey, investors mainly point to macroeconomic risks, then political risks, technical and regulatory risks related to changing laws, and finally risks related to currency volatility, an issue that mainly affects large African economies that have their own currency and are facing great volatility, especially since the Covid crisis. Operational risks, legal risks and perception risks are other barriers.
Why, despite Africa having weathered the global headwinds, it seems to have no fiscal breathing space?
Because macro-economic risks persist despite the very significant reforms undertaken by many African countries. International initiatives are not lacking either, such as the G20’s Compact Africa program which provides strong support to a dozen pilot or model African states which are carrying out reforms to improve their investment policy.
However, we find that the global crises have had a more negative impact on investments in Africa than in the rest of the world. Thus, Africa’s share of foreign direct investment fell to 6% in 2020-2021, while that of advanced OECD countries reached 61%. The cost of capital in Africa has also increased more than in other parts of the world, which excludes some African governments from bond markets and prevents investment in up-and-coming sectors like renewable energy. Even though Africa’s population is much larger and growing, it will grow from 1.4 billion today to 2 billion soon.
So we are dealing with real global issues and where the macroeconomic situation is not about to change.
So what are the levers of action that you have identified to improve or change this poor perception of African risk?
We have identified three main levers for action to improve investor confidence and accelerate sustainable investments on the continent. The first is access to better data and information. This is crucial, because the poor perception of risk in African countries persists, in particular because of the lack of data.
If an investor does not have data or the right information, at the right time and at a reasonable cost, he is not going to invest. In many African countries, simple GDP growth projection data is not available or not sufficiently comparable with historical data, particularly population or business censuses, due to the preponderance of the informal sector.
There are also significant gaps at the sectoral level. For example, if an investor wants to invest in the automotive sector in Ghana, they must have access to data on the components needed to participate in the automotive value chain in the country, know what Ghana produces, what components can be produced locally, etc. However, these data are, most of the time, either insufficiently informed or unavailable.
The same observation at the operational level, when investors must carry out due diligence operations to ensure that, for example, the environmental, social and good governance criteria for investors of the OECD are well applied, we have found that access to this information is more difficult, takes more time and is more expensive, which automatically leads to an increase in the cost of capital in Africa.
What things stood out to you about investor profiles? Do they all have the same expectations?
During the Covid crisis, we compared foreign direct investment from African companies to other African countries, with foreign direct investment from non-African companies that were not located in Africa and it was found that during the Covid crisis, where there was a huge withdrawal of investments around the world, African investors were more confident and stable, since the withdrawal of investments was three times less important by African investors than by non-African investors.
Because they know the realities on the ground better, they will be able to cross-check more easily the information they have through their experience in other countries or through networks of African investors.
This difference in attitude is also explained by the nature of the projects, insofar as large non-African investors will tend to invest in capital-intensive projects upstream, such as infrastructure and the extraction of natural resources.
States and their partners can act at multiple levels. Governments must establish national statistical institutions. They can also rely on the sector with public-private partnerships. They must also think about their reforms bearing in mind the criteria of the credit agencies, because the absence of information has an impact on the credit rating of a State and therefore also on the ability of African countries to mobilize debt.
At what level can the international community participate in removing obstacles?
The international community should devote more resources to increasing the capitalization of the 102 African development finance institutions that exist on the continent, in order to strengthen their role as intermediaries between international funders and local projects, in particular for adaptation to climate change.
These African financial institutions know the continent better than non-African investors. They will be able to better target their endowments in the pool of African economies, especially those of African investors, through pension funds which have significant assets, which still too often land outside African economies, because they too want to protect themselves against risk.
To give you a concrete example, Egypt and Morocco have issued green treasury bonds which, between 2016 and 2021, were able to mobilize $1.1 billion for these two countries alone. It is very good. On the other hand, when compared with the rest of the continent, these two countries capture 25% of the green voucher emissions of the entire continent. That is why there is a need to strengthen those financing mechanisms that exist. There is very important work to be done by governments from a regulatory point of view, from a technical point of view, and also from a communication point of view.
Another lever for action that we identify is the acceleration of the implementation of initiatives around the African Continental Free Trade Area.
To what extent can Zlecaf be an advantage for financing sustainable development? Isn’t that his primary goal?
A Zlecaf investment protocol was decided at the African Union summit last February, which sets an interesting framework for sustainable financing. Discussions have made good progress on the aspect of the African digital market, which is growing. There have also been advances on development corridors to improve access to energy. East Africa and West Africa are advanced on these corridors. In East Africa, the goal is to connect Eastern and Southern Africa, which could increase energy supply by 2.5 times. This is a really very important project, both for poor and rich countries like South Africa, where there are urgent problems of access to electricity. In any case, it is estimated that this corridor can meet about half of the electricity needs in these two regions by 2030. And since this energy is green, it would allow the two regions to continue on a development path with low carbon emissions.
Since the start of the war in Ukraine, European countries have shown a renewed interest in the issue of energy security, resulting in a change of footing in the use of fossil fuels. What does the OECD recommend to African States?
The problems and the answers are at different levels. First of all, we must recall the context in which these debates emerged. It all started when, under the fire of criticism, the major global financing institutions, in particular the World Bank, decided to no longer finance or grant loans and guarantees on loans for the extraction, in particular of hydrocarbons. Unfortunately, with the war in Ukraine, Western countries have themselves restarted their carbon extractions or production, which was rightly decried as an injustice by African actors, in particular by the President of Senegal, Macky Sall, when he held the presidency of the African Union.
There was also the whole debate about special drawing rights and Africa’s share. Global governance was also questioned, since African countries are insufficiently represented in global governance institutions, and the African Union has asked for its seat in the G20, these are really global issues that go a little beyond the question, but which are very important because they frame the response.
Concretely, we do not use enough existing resources, especially those that are clean. When comparing the cost of capital in energy projects, especially clean and solar, the cost of capital in Africa is seven times higher than in Europe or North America, while the African continent has 60% of the world’s solar resources.
This high cost has a strong impact on the development trajectories of countries. If nothing is done, they will continue to favor polluting solutions, while clean solutions are available in abundance on the continent. So there are also very concrete issues on the investment framework that are not at all related to global governance. We can really make a difference by working on these financial themes, but also at the project level. I emphasize that some pharaonic, very important projects, for example Noor in Morocco, which have been great successes, show that it can really work, if we provide operational responses.
I do not deny that there is a problem at the level of governance, which is political and which is obviously the subject of a debate that cannot be brushed aside. But at the same time, operational solutions exist, they can be immediate, make a difference on the ground, on the well-being of populations. Because the situation in Africa is paradoxical, since we have increasing air pollution linked to the fact that clean energy is not available. This is a concrete issue for women in particular, who will have to cut wood to be able to cook, heat, etc.
We often speak of a low-carbon transition, but this expression obscures the fact that Africa is already on a low-carbon development trajectory. Since, in relation to the population, they emit only 4% of the CO? emissions in the world and half of which is produced by South Africa. So the low-carbon development trajectory already exists. Now, it is a question of finding solutions so that the current modes of development do not reproduce the mistakes of the past.
By laying blame on each other, we risk forgetting real issues which are very important and which have a direct impact on the African population today.
