Developing countries in general, and African countries in particular, face a huge funding challenge to achieve the United Nations Sustainable Development Goals. This funding gap featured prominently at the 2021 United Nations Climate Change Conference (COP26) and has been intensified by the impacts of the COVID-19 pandemic.
Even before COVID-19, prospects for mobilizing the US $ 2.5 trillion needed to meet the Sustainable Development Goals by 2030 were move back quickly despite global savings and an overabundance of liquidity.
Most of the funding is needed to close the gaps in electricity, transport and water Infrastructure. This must be done in a way that puts the continent on a decisive path towards net zero emissions. At the same time, substantial funding is needed to agricultural modernization and greener industrialization.
The moral arguments for providing large-scale international concessional finance to Africa are overwhelming. The countries of the continent are expected to feel the impacts of climate change the most. This despite the fact that they represent a tiny part cumulative global emissions of carbon dioxide.
Climate finance from multilateral development banks has increased. But it is far from reaching Africa’s estimated annual funding gap of $ 200 billion to achieve development goals. Figures for the whole continent are not readily available. But the $ 7.4 billion in commitments from multilateral development banks countries in sub-Saharan Africa in 2019 reflects the size of the gap.
Ambitious recommendations have little success. This concerns in particular the proposal of the United Nations Financing for Development Working Group for the development of long-term financing instruments. These include, for example, 40-50 year bonds, necessary to finance a global market New Green Deal.
Emphasis is also placed on the role of “Mixed finance” close the financing gap by mobilizing scarce and low-cost financing through multilateral development banks and foreign development assistance. In the World Bank’s conceptualization, billions of dollars of such concessional finance can be used to attract trillions of private investment by reducing the risk of projects aligned with the Sustainable Development Goals to make them attractive to private investors. .
But blended finance projects have failed to take off At scale. They have only reached about $ 20 billion per year for all developing countries.
In my opinion, much more effort is needed to increase the capacity of African national and regional development banks to mobilize public and private investments for structural transformation.
This has been done successfully elsewhere in the world. Examples include the European Investment Bank, KfW in Germany, BNDES in Brazil, and strategic banks in China.
Development banks have played a pivotal role by mobilizing long-term financing for industrialization, the development of new industries and the reduction of project risks by developing capacities to undertake the development, implementation and monitoring of projects.
Effective development banks play an important role in shaping an economic policy conducive to productive investment. They directly attract private finance and unlock private investment upstream and downstream of catalytic projects.
Africa has indeed a many development banks. They number 95, representing 21% of national and regional banks in the world. But one handle dominates assets and financing. These are the African Regional Development Bank and the African Export and Import Bank (Afreximbank) and national banks in Morocco, South Africa and Egypt.
The rest are mostly small and under-capitalized. Thus, African development banks collectively represent only 1% of development bank assets around the world.
African countries cannot afford to stand still while the global system of multilateral and private financing becomes more equitable or responsive, even if they must fight for it in the medium and long term. Rather, they should rapidly increase the capitalization of their development banks to allow for higher lending levels.
How to get there when public debt in sub-Saharan Africa is at its highest level in twenty years and considered unsustainable by rating agencies and multilateral financial institutions?
What needs to be done
First, there is a strong case for consolidating fragmented and under-capitalized national banks into larger sub-regional development banks.
Second, the shareholding of other Southern development banks with proven scope and expertise should be encouraged. A striking example is the new development bank. Founded by Brazil, Russia, India, China and South Africa in 2014, it quickly larger scale loans to member countries.
Third, proceeds from periodic commodity booms must be directed to development banks. And we must crack down on illicit financial flows.
Fourth, governments can reduce the cost of borrowing by guaranteeing the repayment of bonds issued by their development banks.
Fifth, fiscal transfers at appropriate times in the sovereign debt cycle should not be ruled out.
Finally, if central banks are serious about ensuring long-term financial stability, they must support financing instruments that address long-term social and climate risks. For example, they can reduce the cost of climate finance by purchasing green bonds.
The intensification and consolidation of African development banks would also improve governance and development capacity. Wider range of shareholders would make it harder for crude political appointments at managerial level which are closely associated with poor performance. Other development banks in the South provide essential technical expertise to build the capacities needed to reduce project risks, including project development, monitoring and implementation.
In addition, the rise of African development banks may well prompt multilateral development banks to increase their own financing efforts in Africa.
Rather than crowding out private finance, scaling up African development banks offers the most promising avenue for attracting long-term private finance to achieve the goals of sustainable development and structural transformation.
A version of this article was first published by LSE activity review under the title, African development banks: the urgent need for scale.