African countries must embark on innovative investment strategies to achieve inclusive growth and sustainable development: AU STC Finance.

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July 17, 2023

Ministers in charge of Finance, Monetary Affairs, Economic Planning and Integration are convening in Nairobi, Kenya to explore innovative ways for countries to embark on sustainable economic recovery through balanced short-term crises responses actions and long-term strategies to reinvigorate growth and accelerate development. The ministers will be meeting under the African Union Specialized Technical Committee (STC) on Finance, Monetary Affairs, Economic Planning and Integration, a conference for African ministers responsible for finance, economy, planning, economic development and integration , and central bank governors, to discuss matters about the development of Africa. The ministers will consider and adopt a report on key issues that experts from their ministries have discussed in a preceding three-day meeting that concluded on the 19^th July 2023.

The experts discussed, among other issues, a report by the STC’s Sub-Committee on Tax and Illicit Financial Flows that underscores tax as an enabler for sustainable development; the progress on the implementation of African Union Financial Institutions; the revised Statute of the African Monetary Institute; the African Exchanges Linkage Project; treatment of African Multilateral Financial Institutions in African Sovereign Debt Resolution; report on the Status of Implementation of the Treaty Establishing the African Economic Community; update on the study of the establishment of an African Financial Stability Mechanism; update on the establishment of the African Investment Observatory (Digital Platform); update on the study on the establishment of an African Credit Rating Agency, among others.

Africa’s growth in real gross domestic product (GDP) was estimated at 3.8 percent in 2022, down from 4.8 percent in 2021 but above the global average of 3.4 percent. Growth is projected to rebound to 4 percent in 2023 and consolidate at 4.3 percent in 2024, underpinning Africa’s continued resilience to shocks.

While the deceleration was broad-based, with 31 of the 55 Member States posting weaker growth rates in 2022 relative to 2021, the continent performed better than most world regions in 2022, with the continent’s resilience projected to put five of the six pre-pandemic top performing economies—Benin, Côte d’Ivoire, Ethiopia, Rwanda, and Tanzania—back in the league of the world’s 10 fastest-growing economies in 2023–24.

Despite this positive trend, growth remains below the pre-pandemic average of 5 percent and far below the needed 7 to 10 percent level expected in the long-run to achieve the vision and Aspirations of Agenda 2063 for a united, peaceful and prosperous continent.

To accelerate growth and cope with an unfavorable environment, most governments have increased their fiscal spending in the context of declining revenues. Deteriorating financial conditions, reduced fiscal space and lower external demand have led to increased and unsustainable debt levels. Africa's average debt-to-GDP ratio is expected to remain high at 66 percent in 2023 and stabilize at 65 percent due to growing financing needs associated with rising food and energy import bills, high debt service costs due to interest rate hikes, exchange rate depreciations, and rollover risks.

Many countries continue to face difficulties in accessing international capital markets, combined with limited resource mobilization leading to local currency debt, which has increased substantially from 35 percent of GDP on average in 2019 to 42 percent in 2021.

Amb. Albert Muchanga, African Union Commissioner for Economic Development, Trade, Tourism, Industry, and Minerals noted that ddomestic debt restructuring should be part of the negotiations for the resolution of public debt crises in countries facing heightened risks. In a statement at the opening of the experts meeting, he observed that evidence-based analysis suggest that African countries must increase investment from the current level of 20 percent to 40 percent of GDP to achieve inclusive growth and sustainable development supported by innovative investment strategies.

“Realizing the Vision and Aspirations of Agenda 2063 requires 75% of resources to be mobilised domestically. This can be made possible if the continent takes advantage of the $220 billion loss annually due to tax incentives. Additionally, effectively fighting against illicit financial flows (IFFs) will allow us to secure USD 89 billion yearly, which represents approximately 3.7% of Africa's Gross Domestic Product (GDP). To improve their investment capacities, African governments must improve tax revenues by adapting to the digital transformation. The example of Kenya as well as other countries is well-known.”

African countries need massive investments to cope with challenges and shape a sustainable development pathway. Structural transformation has therefore gained unprecedented momentum in African policy making. Prof. Njuguna Ndung'u Cabinet Secretary, National Treasury & Economic Planning of the Republic Kenya in a statement read on his behalf by Mr. Joseph Kiprono, observed that from no country has achieved rapid and sustained economic growth without structural transformation, generally characterized by the movement of production from low to high productivity activities and sectors.

“A prosperous and expanding industrial sector including more manufacturing and resource processing is crucial for structural transformation to occur. Structural reforms are also needed to invest in people. This is easy to say, hard to do at a time of fiscal challenges. But actions such as reskilling workers and quality education are necessary to expand the workforce and ease labor shortages that are necessary to strengthen growth across the continent.”

The financial resources available per capita for development in Africa have dropped since the outbreak of the COVID-19 pandemic. The amount of financing per capita has since decreased for both domestic revenues and external financial flows. Enoch Obeng Darko, Ministry of Finance, Ghana and Outgoing Chairperson of the Specialized Technical Committee on Finance, Monetary Affairs, Economic Planning, and Integration observed that this has resulted to fewer sources of financing, which are also volatile due to over-dependence on global commodity markets and external financial inflows.

“Before 2020, Africa was attracting increasing amounts of foreign direct investment (FDI), although overall FDI inflows remained much lower than in other world regions. To respond to this challenging context, African governments have increased their debt level to the highest since 2002. In 2008, Africa’s sovereign debt, public debt and debt publicly guaranteed by national governments was low and estimated at 28% of GDP. By 2019, the sovereign debt had doubled to 56% of GDP, following a period in which total general government debt nearly tripled. Public debt is projected to remain high beyond 60 % of GDP, with lingering vulnerabilities.”

To ensure robust development, tapping into innovative financing sources will be critical. Dr. Hanan Morsy, Deputy Executive Secretary and Chief Economist United Nations Economic Commission for Africa (UNECA) noted that countries should develop long-term policy options to establish markets for innovative financing mechanisms, including sustainable bonds, carbon bonds, resource-backed loans, Certified Adaptation Benefits, debt-for-nature swaps, and natural capital funds, among others.

“Blended financing approaches that de-risk and leverage private financing coupled with the deepening of secondary markets for African sovereign bonds will be critical in compressing Eurobond yields and mitigating debt vulnerabilities. It will be critical to strengthen governance and accountability systems to ensure that the proceeds from private finance generate the expected and maximum impact for sustainable development.”

The Experts also elected a new Bureau of the STC. Northern Africa will chair the STC. Consultations are ongoing within the region to nominate the country to chair from amongst them. Eswatini will serve as the first vice chair, Ethiopia will serve as the second vice chair, Domestic Republic of Congo will chair as the third vice chair, while Ghana will serve as the rapporteur.

Learn more about the 6^th STC here.

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