Role of attracting private finance for Africa’s economic growth



Africa abounds in natural resources and offers enormous opportunities for investors to realize their full potential.

According to the International Monitoring Fund (IMF), in Africa, the strong economic gains that have been crucial to raising living standards over the past two decades may be reversed by the consequences of the disease.

Opportunities for growth through large public investment projects are limited by unclear international aid prospects and high levels of government debt. The IMF stresses in its statement that the African private sector should be more active in economic growth if the nations of the region are to enjoy robust regeneration and avoid stagnation.

According to the IMF, both social and physical infrastructure (roads and energy) should integrate the private sector.

“At the end of this decade, on average, infrastructure development needs for Africa amount to 20% of GDP. How do you finance this? Similarly, higher tax revenues, which most countries are aiming for, would be the main source of funding. However, given the magnitude of the demands, the international community and the business sector will need to mobilize new sources of funding. IMF rated.

By 2020, an additional 3% of Sub-Saharan Africa’s GDP could be spent on physical and social infrastructure by the private sector. In 2020, GDP stands at around $50 billion per year, almost a quarter of the region’s average private investment rate, which already stands at 13% of GDP.

What are the obstacles for Africa to attract private financing?

In Africa, national governments and public companies are involved in 95% of infrastructure projects, while the private sector is little involved. The number of infrastructure projects implemented by the private sector has declined significantly after falling commodity prices over the past decade.

“A global comparison also shows the limited participation of private investors: Africa attracts only 2% of global inflows and outflows of foreign direct investment. And investing in Africa is primarily for natural and extractive resources, not health, roads or water. IMF rated. According to experts, to remedy this situation, it is necessary for financial companies to become more active. One of the most demanded financial companies across the continent is Forex Brokers in Africa, which analysts say has the potential to generate more foreign direct investment. Through this, developing countries have the opportunity to attract more foreign investors and help their economy and interest rates to grow as well. The IMF has observed that before the investment decision, three major risks occupy the minds of international buyers: project risk, currency risk and exit risk.

  • Project risk: Despite the continent with its many business prospects, the pipeline of “investment ready” projects remains small.
  • Currency risk: Currency is the biggest problem for investors because if a project produces an annual return of 10% at the same time the currency drops by 5%, then half of the investor’s profit will be lost.
  • Exit risk: if an investor is not sure that he can leave a project and recover his profits by selling his participation in a project, he cannot invest in a country.

The IMF also pointed out that developing sectors have specific characteristics, especially in the more favorable climate, which makes the involvement of the private sector more complex. He said infrastructure projects in most cases involve large upfront expenditures, but revenues accrue over long periods of time, which can be difficult for investors to assess.

He suggested that the efficiency and effectiveness of public incentives in Africa can be maximized while avoiding hazards. Governments may also consider offering additional incentives to attract private investment in infrastructure projects. These incentives containing various types of guarantees, subsidies and tax risks can be costly, but without them many industry initiatives will not materialize. The IMF pointed out.

“African nations and development partners could consider reallocating some resources from public investment to fund public incentives for private initiatives given the limited availability of public finance. This redistribution could improve the quantity, variety and quality of services for Africans if it is gradual and supported by good institutions, transparency and governance. More inventive thinking can contribute to the continent’s transformative potential. – according to the IMF.

Role of private financing

The international development community remains hard at work to achieve its full implementation by the 2030 goal, with less than 10 years to achieve the Sustainable Development Goals (SDGs). Without progress on the SDGs, nations would become more vulnerable to financial crises while diminishing their ability to manage or adapt to the impacts and risks of climate change, extreme poverty and growing inequality. The COVID-19 outbreak has highlighted the vulnerability of unpredictable shocks to the economy and communities.

While establishing the full economic effect of the COVID-19 outbreak is necessary for the forecast, it is evident that the pandemic could adversely affect progress towards the SDGs. With its less diversified economy, it will be much more difficult to mobilize limited domestic resources towards the SDGs in many developing markets and especially low-income countries (LICs).

Against a backdrop of massive job losses and weak business incomes, deteriorating family and business budgets could jeopardize the pace and robustness of the recovery while limiting external financing opportunities for many countries. This increase in the sector’s debt could lead companies and individuals, whose maturities are recovering, to deleverage, that is to say to sell debt reduction assets. This could put growth significantly below its potential, limiting future progress towards the SDGs.

Many LICs are still distant targets, particularly in sub-Saharan Africa and Oceania. This unpleasant fact mainly reflects the difficulties in providing infrastructure for sustainable industrialization to develop resilient infrastructure. The success of the SDG funding gap of $5-7 trillion per year will be resolved over the next decade and LICs will be worth over $2.5 trillion per year. In the areas of energy infrastructure ($790 billion), climate change mitigation ($700 billion) and transport infrastructure ($650 billion), SDG investments in MEs and LICs are particularly important.

The IMF predicts that emerging markets will need additional annual spending of 4% of GDP to achieve the SDGs by 2030. The problem facing LICs is much worse with an average increase in spending of more than 15% of GDP per year. Difficulty in meeting the high demands for SDG funding would add to concern about rising public debt, which remains the main source of funding for social and economic infrastructure in LICs. Over the past decade, public debt has increased rapidly, from around 30% of GDP in 2011 to around 47% in 2019, given the chronic budget deficits of many LICs.

COVID-19 will continue to increase LIC’s public debt, which will increase this year by more than 7% to reach more than 55% of GDP. Many of these fragile nations are grappling with rising borrowing costs and debt sustainability. Eight LICs already had debt problems in June 2020 according to the IMF – in other words, they were struggling to repay their debts. There is a good chance that 27 other nations will go into debt as the external debt burden increases.

In addition to a wide range of debt instruments, this environment offers significant potential for the private sector across the full spectrum of investment vehicles – including FDI, listed, unlisted and private equity. Given the huge rise in emerging market debt over the past two decades, this could be a more sustainable way to narrow the SDG financing gap towards more non-debt financing.

Part of the problem lies in the inefficiencies of public investment: more than 40% of public investment in LICs would not become real “public social capital”. In addition, LICs are now much more dependent than emerging market members on debt-creating capital flows (FDI debt (portfolio liabilities, bank loans and trade credit). One possible solution is to improve domestic tax regimes and encourage alternative financing and partnerships to stimulate non-debt capital flows such as equity financing.As a result, this would alleviate fiscal pressures.However, it is crucial for significant fiscal risks and private sector financing that an effective structure be created to monitor public/private partnerships and related contingent liabilities.

Another challenge for many LICs is the lack of transparency about their financial obligations in all their magnitude and character – in some cases related to “protected debt” or unclear contingent liabilities, as well as inadequate governance. . As a result, the risk of financial distress may increase, access to markets may be reduced, or borrowing rates may increase.

This would also help diversify the foreign creditor base. Currently, the main source of external financing for most LICs, which account for 80 percent of public external debt, is official bilateral and multilateral creditors. Working to mobilize private creditors can help by establishing LIC debt and SDG-aligned bonds partially guaranteed by multilateral development banks. In addition, the growth of local bond markets could help channel domestic financing towards the SDGs and contribute to the welcome diversification of the inventor base.

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