Africa struggles with finance model for Agenda 2063
The continent's finance experts are still trying to find the right formula to fund the ambitious Agenda 2063. PHOTO | TEA GRAPHIC |
What you need to know:
At the just concluded UNECA - Africa Union Commission conference in Addis Ababa on Agenda 2063, no consensus on the model of financing was reached.
The most contentious issue is on the use of the central bank reserves to finance the transformation agenda.
African governments are facing a daunting challenge of raising finance for implementing their transformation development agenda for the next 50 years.
Although the 54 African countries are in agreement that Agenda 2063 should be funded by Africans themselves and that the public and private domestic resource mobilisation is critical to financing the region's structural transformation, the formula for how and when this will be done is yet to be found.
Suggestions on the table to mobilise funds from within Africa include the use of the central banks' reserves by channelling them into investments, remittances to the continent from abroad, public pension funds, private equities, expanding of the tax base and improving tax collection.
At the just concluded United Nations Economic Commission for Africa (UNECA) - Africa Union Commission (AUC) conference in Addis Ababa on Agenda 2063, no consensus on the model of financing was reached. It was agreed that more consultations by and among the governments will be required before a concrete resolution is adopted.
Agenda 2063 was adopted by the Assembly of the African Union in January this year as the continent's new long-term vision for the next 50 years.
The most contentious issue however is on the use of the central bank reserves to finance the transformation agenda.
According to the Economic Commission for Africa executive secretary, Carlos Lopes, African governments collectively hold about $500 billion as reserve in their central banks. The money is mostly invested by governments in the US Treasury bill, Eurobonds and triple aid financial vehicles instead of it being invested in Africa.
"This means it's our money being used for other people's development and not for Africa," said Dr Lopes, adding that the main reason has been the lack of a political attention to where the money is being invested. According to the rules applied by most central banks in Africa, the savings ought to be put in a safe type of investment.
"But now the leaders are getting involved and we think that's the way to go if we want a better Africa."
However the African central bank governors are not in agreement saying that African countries do not have equal amounts in their reserves to adopt this suggestion.
Wealth fund
"Many countries are still struggling especially in terms of their import cover and not all countries have enough reserves in their central banks," said Benjamin Maturu, Kenya's assistant director for Central Bank. He added that the mechanism at the moment could only apply to Botswana which runs a stabilisation fund to finance fiscal deficits and a savings fund to help achieve intergenerational equity.
Botswana set up the Pula Fund as far back as 1994. Taking its income mainly from diamond exports, the Pula Fund is managed by the central bank, and had about $5.4 billion as at August 2014. The fund invests only in foreign currency–denominated assets of developed countries.
"The success in raising such an amount of funds is attributed to the government's establishment and adherence to a sustainable fiscal policy," said Dr Maturu.
In the past two years, Angola, Ghana and Nigeria have also established that type of fund while Kenya, Liberia, Mauritius, Mozambique, Senegal, Zambia and Zimbabwe are in the process of establishing theirs.
Some experts, however, felt that remittances were the way to go. According to Jacob Oduor, a Principle research economist at the African Development Bank (ADB), remittances are the easiest and most stable source of funds for Africa.
He however cautioned that the external financing must be leveraged.
"A first step would be to lower the cost of sending money to Africa, then develop financial instruments to channel them towards developmental programmes like creating an infrastructure fund," said Dr Oduor.
He said that although remittances are expected to remain the dominant sources of private capital inflows, they are outweighed by huge illicit financial outflows.
The African Economic Report 2015 indicates that African remittances nudged up from 4.4 per cent of GDP in 2013 to 4.5 per cent of GDP in 2014. They are expected to further rise to 4.6 per cent of GDP in 2015 as more African expatriates seek to invest in their home countries.
Pension funds
Dr Oduor noted that in addition to remittances, governments also should make better use of pension funds which could become a viable source of capital for private equity through investment in profitable assets, hence raising enough finances to tackle Africa's finance gap.
The collective value of Africa's pension funds is currently estimated at $1 billion.
"Private equity is one opportunity because countries that recorded more progress in terms of economic growth over the past decades are the ones that also attracted a greater share of private equity capital," he said.
"This source of funding is particularly promising for small and medium enterprises and it could enhance domestic financing, given the high bank interest rates and weaknesses in financial intermediation in most of Africa."
Africa offers opportunities for private equity with its growth spurt, abundant natural resources, few private equity players and a growing market.
Recent studies indicate that private equity investment has risen sharply in Africa over the past decade albeit from a very low base with an average annual growth of 26 per cent, reflecting an improved business environment.
