Africa’s Sustainable Financing Gap Hit $1.6 Trillion

ADDIS ABABA – The African Union urged member states to exploit domestic resource mobilization effectively after its latest report reveals Africa’s rising financial need for sustainable development goals (SDGs).

The 2023 edition of Africa’s Development Dynamics Report, released this week, put Africa’s “huge sustainable financing gap” until 2030 at $1.6 trillion.

The continent also needs additional financing of about $194 billion annually to achieve the SDGs on time, the report estimates. This annual gap is equivalent to 7% of Africa’s gross domestic product (GDP) and 34% of its investments in 2021.

Sticking balance

With the rising gap, countries are now advised to find the right balance between the benefits and costs of their investments to ensure sustainability.

According to the AU report, investments are sustainable if their economic, social and environmental benefits outweigh their total cost.

When mobilizing and allocating investments, African countries need to manage tensions between development goals and resilience to climate change, the report argues.

This includes balancing energy production and carbon mitigation, developing agricultural land use and conserving ecosystems, or creating mass employment while promoting labor standards.

African-Driven solutions

To bridge the financing gap, AU Commissioner for Economic Development and Trade Albert Muchanga has also proposed “actionable African-driven solutions” including effective domestic financial resource mobilization.

Per the AU Report, domestic government revenues amounted to $466 billion in 2021, equivalent to 17% of GDP, and assets held by African institutional investors hit $1.8 trillion in 2020, equivalent to 73% of GDP,

Muchanga says African countries could mobilize taxes as effectively as the country with the highest tax revenues on the continent – Tunisia at 32.5% of GDP – and governments could collect as much as $500 billion more in revenues, boosted by efficiency in curbing illicit financial flows, he argues.

His proposal also entails setting up a group of African billionaires to enhance their local investments, citing their overall underwhelming impact. More than half of the 46 billionaires in Africa do not invest in the continent, per AU.

Muchanga has also proposed for more African countries to establish pension funds after 15 African countries accumulated $380 billion of assets by 2020.

Countering Negative perception

Natural resources remain key assets for African economies. The AU report says natural capital accounts for 19% of Africa’s total wealth compared to 7% for Latin America and the Caribbean and 3% for developing Asia.

“Despite this potential, global crises are affecting investment in Africa more than in other regions,” the report notes. The average inflation rate is projected to reach 15.5% in 2023 – the highest level in 27 years. As of Feb 28, Eight African countries are in debt stress while 13 others are at high risk.

The cost of capital in Africa has also risen above the levels in other world regions, pricing some countries out of bond markets such as Eurobond, the report notes, according to the AU report.

It further states that “while experienced investors attain higher average returns in Africa than in other world regions, the lack of reliable information and data is an important barrier to new investments.”

Kenya’s Prime Cabinet Secretary Musalia Mudavadi agrees and says Africa needs to counter negative risk perceptions by both foreign and African investors with “reliable data”.

“We should encourage and enable risk assessments that are unbiased, thus making available risk mitigation strategies unknown to investors. Dependable risk assessment must be evidence-based and cannot happen without better and reliable data,” Mudavadi said,