Summary

Even before the COVID-19 pandemic, low commodity prices, high debt levels, low levels of domestic savings, and weak private capital were a drag on GDP growth across several African economies. With both domestic and external financing drying up in the face of the pandemic, and its aftermath, existing unmet financing needs for the SDGs in Africa will be further exacerbated. Given high debt levels and limited fiscal space in several African countries, financing needs must be aligned with available pools of domestic and external capital. Lessons from past crises show that African policymakers can weather the storm and rebuild more resilient economies across the continent. To ensure the current crisis does not erase years of development gains, and that African countries are more resilient to future crises, it is important to rethink and reconfigure current private, public, domestic, and external financing sources under a forward-looking framework.

Domestic Resource Mobilization

Domestic resource mobilization faced unprecedented pressures from lockdowns and other restrictive measures. The dual impact of pandemic-related financing and falling government revenue has led to diminished fiscal spaces in many countries on the continent. In addition to reduced public revenues resulting from various lockdowns and hence lower economic activity, the collapse of the travel and tourism industry – particularly for tourism-dependent economies – resulted in deficits that were financed largely through additional borrowing. Domestic resource mobilization remains a challenge, and the continent continues to rely substantially on external resources (e.g., foreign aid, FDI, export earnings, and diaspora remittances) to finance its development priorities. While many African countries have made a lot of effort to raise more revenue from taxation, several others are finding it challenging to do so. These challenges include a low tax base, structural characteristics or large informal sectors that are difficult to tax and inefficient tax collection systems. Postponed current expenditures in the immediate aftermath of the pandemic will be reactivated eventually, with major implications for the much-needed capital investments for diversification and structural transformation.

External Resource Mobilization

In the external context, resource mobilization for development witnessed a major setback as donor countries pivoted to prioritize domestic needs and focus on ongoing challenges related to the pandemic. Nowhere was this more evident than in the race to secure adequate supplies (or some might say, hoarding) of COVID-19 vaccines. Disruptions in global supply chains and capital flows further worsened things due to deteriorating trade balances that exacerbated shortages of foreign exchange reserves for external financing needs, including international debt servicing obligations.

The AfCFTA

Considering the continent’s vast and highly heterogenous markets, the African Continental Free Trade Area (AfCFTA) provides a unique opportunity to transition Africa from the margins to the mainstream of global commerce. To be sure, the continent’s small global trade footprint is in part the result of the dependence of African countries on the export of primary products and natural resources, compared to the larger share of manufactured goods that is traded around the world. However, trade is important for many African countries when measured as a share of their domestic output. While there is a long history of regional integration in Africa, albeit with varying success, there is a real optimism about the potential of the AfCFTA to be a game changer.

For example, since foreign capital inflows in the digital economy are often sensitive to technological advances and innovation ecosystems, with a market size of $3.3 trillion and a population projected to be over 3 billion by 2050, enhanced access to markets and financing through improved digital infrastructure can help entrepreneurs and small and medium-sized enterprises (SMEs) on the continent to scale up their operations much faster and seamlessly. This has implications for development financing in the context of reducing inefficiencies from limited, fragmented market size and related demand- and supply-side constraints. Increased digitization and economic integration have implications for harnessing increased household consumption and business spending to drive value-adding digital trade to help bolster sustainable and inclusive growth. The trade policy innovation opportunities heralded by the AfCFTA, if properly harnessed, can significantly contribute to Africa’s economic diversification and structural transformation efforts – and by extension, resource mobilization for development financing.

A Call to Action 

Given ongoing divergent economic recovery speeds and possible future threats from new strains of the coronavirus, among other things, it is important to strike a right balance between mitigating further spread of the virus and efforts targeted at rebuilding the economy. Even so, building back better will require carefully navigating risks and making sure lessons from the pandemic inform long-term development financing planning – for industrial diversification, inclusive structural transformation, resilience, and a more equitable economic outcome.

Lessons from past crises show that African policymakers can weather the storm and rebuild more resilient economies across the continent. For instance, due to a wide range of reasons, including the lack of toxic assets in their bank portfolios, African countries – particularly lower-income ones – were less impacted by the Great Recession of 2008. Since global imbalances from structural and cyclical forces lead to the transmission of financial shocks to the real economy, African economies were largely insulated from the resultant shocks. Also, Africa, along with Asia, recorded the highest growth rates in the aftermath of the crisis.

For context, recessions are typically triggered by a demand shock, a supply shock, or a financial shock, causing overheating as the economy reaches the limits of its capacity when demand outstrips supply. While the diverse and heterogenous nature of African countries will make any generalizations difficult on the effectiveness of policy responses in mitigating the impact of the Great Recession, on average, many more countries on the continent now have robust macroeconomic stabilization measures and stronger policy response frameworks in place. Effectively navigating the highly dynamic landscape in the coming years will require a multipronged approach that not only manages policy trade-offs, but also pays attention to other nuances across and within countries, subnational jurisdictions, industries, genders, socioeconomic groups, age groups, occupational groups, and skill levels.

Since it is only a matter of when – and not if – the next crisis will happen, now is the time for African policymakers to build capacity in healthcare, make the required investment in technical and vocational education, strengthen broadband access and digital infrastructure, restore decimated fiscal buffers, and institute more sustainable macroprudential policies. These and other related issues are addressed in the various chapters of this volume. As well, while it is understandable that many countries will return to somewhat aggressive domestic resource mobilization regimes, it is important to ensure the approaches deployed do not hurt economic growth prospects, which will disproportionately impact vulnerable populations in the continent’s largely informal sector. Achieving a win-win outcome will require innovative strategies that balance the “triple constraints” of generating revenue, providing social safety nets, and reducing public debt.

Bottom Line

In many ways, the pandemic presents a unique opportunity to overhaul existing development financing paradigms and policies for innovative and more sustainable and equitable mechanisms and outcomes on the continent. To ensure the current crisis does not erase years of development gains and that African countries are more resilient to future crises, it is important to rethink and reconfigure current private, public, domestic, and external financing sources under a forward-looking framework.

To scale up financing and put Africa back on a sustainable, resilient recovery trajectory, innovative and non-traditional financing tools and mechanisms capable of unlocking market failures that often hamper sustainable development financing must be considered. Among others, these include public-private partnerships, gender lens investing, new growth drivers, and emerging and disruptive technologies. We believe that a comprehensive examination of these various factors is presently lacking in the African context. This book fills this void.

Drawing on a range of original research and insights from practice, this book is a useful guide for international development and African studies researchers, as well as policymakers, investors, finance specialists, global business practitioners, and entrepreneurs.

Outline

The book is divided into four parts. Part I discusses the challenges and opportunities for mobilizing resources and achieving the sustainable development goals in the broadest sense, with emphasis on leveraging the green transition, on sovereign wealth funds (SWFs), on gender-responsive development financing, and on technical and vocational education and training (TVET). Part II unpacks external financing in the post-COVID-19 era, and its implications for migration and remittances, foreign direct investment (FDI), and fiscal space and debt sustainability. The third part puts into perspective nimble trade policy implementation and Africa’s place in global value chains in the context of the deindustrialization debate.  Part IV adopts a sectoral approach and examines the implications of the economic recovery for tourism and its long-term sustainability in the context of climate action, the blue economy and natural assets preservation and climate adaptation efforts, and Africa’s agricultural value chains under an integrated market approach and increased digital adoption and climate smart mechanisms. The concluding chapter synthesises and draws out the lessons learned from the various chapters.