Are we witnessing a turning point in Africa’s economic and financial history? One thing is certain: in Sharm el-Sheikh, Egypt, at its 2023 Annual Meetings around the theme “Mobilizing Private Sector Finance for Climate and Green Growth in Africa”, the African Development Bank seems set to change tone and better adapt its tools to efficiently combine economic growth and green growth, “resist financial shocks and build economies resilient to climate change”. The leading personalities and experts who intervened stressed the need to be more concrete, more realistic and more methodical. Kevin Chika Urama, Chief Economist and AfDB Vice President for Economic Governance and Knowledge Management, castigated “megawatts of words that don’t turn into megawatts of actions.” Moussa Faki Mahamat, Chairperson of the African Union Commission, pointed to the need to assess the various decisions taken in the endless meetings of all kinds. “Serve us with deeds, keep us from your promises. President Akinwumi Adesina expressed regret that “Africa receives only 3% of global climate finance, of which 14% comes from the private sector, which is the lowest rate in the world”. To which Egyptian President Abdel Fattah Al-Sissi countered that there was a need to find “creative solutions” to the $144 billion a year Africa needs to deal with the repercussions of the coronavirus pandemic. Covid-19, to $108 billion to fund adaptation projects and modernize infrastructure, and finally to $200 billion to achieve the Sustainable Development Goals.
Vice-President in charge of finance of the African Development Bank Group, Hassatou Diop N’Sele has successfully extended the AfDB’s activities on the international capital markets and brought the pan-African institution into those of green but also social bonds. . How does she apprehend the new African, economic, ecological and financial complexity, against a backdrop of geopolitical and geoeconomic tensions. Response items.
Le Point Afrique: In the current context where Africa is working to regain control of its destiny, how does the AfDB support countries that want to increase their tax base?
Hassatou Diop N’Sele: Faced with a context marked by decelerating official development assistance and the multiplicity of challenges facing the continent, it is essential that particular attention be paid to the mobilization of domestic resources by countries Africans. The African Development Bank Group, in its strategy for governance in Africa, gives it a prominent place to ensure the effectiveness of the public sector.
As you know, domestic resource mobilization covers all potential sources of domestic revenue, including taxation, non-tax revenue, deepening the capital market, and providing more inclusive financial services to mobilize savings and stem illicit financial flows. The Bank promotes reform policies aimed at diversifying the economy with a view to broadening the tax base and also works to promote efficient and effective tax policies by supporting the capacity building activities of the administrations responsible for collecting and controlling internal public resources.
Concretely, our activities cover, inter alia, the digitization of tax administration, the optimization of tax incentives and exemptions, the development of policies, regulations and instruments to support increased mobilization of domestic savings and unlock this savings for investment. Our actions also tackle corruption and embezzlement through digitization by reducing direct contact between taxpayer and public fundraiser. In 2022, for example, we approved 16 projects totaling approximately $1 billion. These projects – it is important to point out – included a component on the mobilization of internal resources and the broadening of the tax base.
In Chad, we approved an operation that will build economic resilience through economic diversification and improved transparency in the extractive sector. This will increase the share of non-oil revenue from 7.5% of gross domestic product in 2021 to 9.55% of GDP by 2026. Also in Djibouti, we have funded a project that will increase external audit of public accounts from only 30% currently to 80% at project completion in 2025.
The question of the availability of resources is clearly posed due to the repercussions of the consequences of Covid-19 and the Russian-Ukrainian war. What arguments can still fly with international donors?
It is a fact, the excessive perception of risk associated with Africa makes the mobilization of resources for the continent even more difficult. We have put in place risk mitigation instruments to induce investors to have confidence in the continent. These instruments include guarantees and syndicated A/B loans, an instrument that allows our partners to benefit from the Bank’s preferred creditor status, which is a key factor in mitigating country risk in this period of volatility. We have also seen greater interest in this type of financing since the start of the pandemic.
In addition, our traditional co-financing agreements enable our donors to benefit from our experience and our proven procedures in terms of project evaluation and monitoring. For example, as part of our partnership with Japan, we jointly rolled out the 5th phase of the enhanced private sector assistance program in Africa (Enhanced Private Sector Assistance, Epsa) for a co-financing amount of 4 billion dollars for the period 2023-2025. Five key priority areas have been identified for the implementation of Epsa 5, namely: energy, transport, health, connectivity, agriculture and nutrition.
At the same time, we are also innovating and have been able to attract investors who have never before invested on the continent thanks to a synthetic securitization operation of part of our portfolio of loans to the private sector. This experience allowed them to have a better and more accurate appreciation of African risk, to consider it with new eyes and to potentially free up additional resources to invest on the continent. I still remember this famous study by Moody’s Analytics which showed that the default rate of infrastructure projects was lower in Africa, compared to North or South America, Europe or Asia.
Africa must add to the challenges of development those of the fight against climate change. What does the Bank’s terms of reference look like in the projects and plans it supports?
Africa is the continent most vulnerable to the adverse effects of climate change and receives the lowest share of climate finance globally. According to the report published by the African Development Bank on the economic prospects in Africa in 2022, Africa received between 2016 and 2019 only $18 billion on average per year in the form of climate finance (about 3% of the financing global climate). In the 2023 edition of the same report, it is noted that “only around a third of private finance mobilized by Multilateral Development Banks (MDBs) and Development Finance Institutions (DFIs) targeted climate action on the continent on the period 2018-2020”. Furthermore, the continent is also grappling with high needs, low access to finance for infrastructure while nearly 600 million people remain without access to electricity. Of note, nearly $600 billion will be needed through 2030 to close the climate adaptation financing gap as the costs of climate change continue to rise.
In the Bank Group’s new strategic framework on climate change and green growth adopted in 2021, the institution has set itself the objective, inter alia, of helping Africa increase its climate finance by 3% to 10% by 2030. We will also continue to mobilize more finance through the private sector for adaptation and mitigation projects. We also ensure that projects are aligned with the Paris agreements – meaning low-carbon and climate-resilient projects.
We have also committed to allocate 40% of our annual investments to climate finance and to ensure parity between adaptation and mitigation. Since 2018, the Bank Group has committed more funds to adaptation than to mitigation, becoming the first multilateral development bank to reach and exceed parity. This effort has been sustained and reinforced with 67% of the Bank Group’s climate financing allocated to adaptation in 2021. The Desert to Power initiative is thus led by the Bank Group with the aim of harnessing the solar potential Sahelian countries thanks to the development of 10 GW of solar production capacity. The goal is to provide electricity to nearly 250 million people in 11 Sahelian countries through grid and off-grid solutions.
Through the Africa Adaptation Acceleration Program, a Bank Group partnership with the Global Center on Adaptation, we have strengthened adaptation and resilience to climate change in the design of new worth over $1.6 billion. The Bank’s $6.5 billion support for the Great Green Wall initiative will accelerate the implementation of the program across the continent. It is arguably the largest sustainable development initiative in Africa. This aims to reforest the Sahel, which is already affected by multiple challenges of climate vulnerability, desertification, loss of biodiversity and food insecurity.
For Africa, it is time to implement policies allowing the creation of local value chains likely to create the jobs that young Africans increasingly need. How can AfDB financing help nurture virtuous ecosystems?
From design and production, through marketing, distribution and support services, to the consumer at the end of the chain – and beyond the circular economy – we believe that the development approach of the value chain offers more and better job creation opportunities at all levels of business activity. The African Development Bank Group, through its Jobs for Youth in Africa strategy, supports African countries to invest in value chain development as a way to maximize the impact of our operations and our special employment initiatives.
Our Enable Youth program, for example, is designed to empower young people at every stage of the agribusiness value chain as ‘agripreneurs’. By providing new skills, technologies and financing approaches to young people, the program enables them to create viable and profitable agribusinesses. A total of 14 countries are involved for an investment of $467 million. According to our estimates, these projects have reached 25,000 young people and should create around 80,000 direct jobs.
In addition to traditional value chains, such as agriculture, we are also investing in youth-friendly value chains to maximize job creation for youth. One example is our $170 million investment that helped the Nigerian government mobilize $618 million to create decent jobs in Nigeria’s digital economy and creative sector value chains.
We also have flagship programs that specifically target young people in specific value chains. For example, the Bank Group’s Youth Adapt program in green economy value chains. With a donation of US$100,000 from the Youth Adapt Challenge Fund, Kenyan Carolyne Mukuhi Mwangi, 31, was able to adapt her plant seedlings and start-up nursery and attract new customers who have taken up gardening for food during confinement during the Covid-19 pandemic.
What contribution can be expected from the African Development Fund in scaling up the continent’s energy sources while respecting the constraints of the transition imposed by climate change?
The potential for renewable energy development on the continent is immense. As such, we will continue to support Africa’s access to affordable, efficient, resilient and sustainable energy. With its 16th replenishment successfully concluded at the end of last year, the African Development Fund will intervene in upstream technical assistance, large-scale renewable energy projects and battery storage, in on- and off-grid energy access projects and in critical investments in transmission and regional interconnections.
What to expect from trust funds in this context?
Despite the current economic and financial context, donors have maintained their support for the countries of the continent. The record replenishment of ADF 16th cycle resources, held on December 6, is the clearest illustration of this. To this replenishment should be added the contributions of $316 million made in 2021 by these donors to other African Development Bank Group fiduciary vehicles, including through innovative instruments. This is proof that trust funds are and will remain an important instrument for supporting beneficiary countries. These funds come directly in addition to the group’s resources to support beneficiary countries on current crucial issues, such as resilience to climate change or food security.