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The state of development finance in Africa

development finance in Africa
  • July  11 2019
9 minutes to read

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Two years before the Monterrey Conference on Financing for Development, which was held in Mexico in 2002, Africa was labelled “the hopeless continent” by The Economist magazine. Two years before the 2015 conference in Addis Ababa, the same magazine called Africa “the hopeful continent”. Stories of optimism and praise for African economic progress are now commonplace in the world’s media.

Africa’s share of global financial direct investment is rising, with the continent frequently described as the investment destination offering the highest returns in the world. (Development Financing in Africa)

While there is little doubt about the potential growth of Africa, the unfortunate reality is that this growth is affected by numerous obstacles, many of which impact development finance across the continent. In this blog post, we will identify and unpack these challenges.

Africa is not a countryBefore we delve into this discussion, it is important to recognise that one cannot capture a full understanding of development finance in Africa in a single discussion. The region is made up of 54 independent countries, all with different cultures, languages, beliefs and problems. But one can explore the commonalities that exist across the continent.

The common challenges affecting development finance in Africa

First off, what is development finance?Development finance is about the design and financing of interventions aimed at growth initiatives – from roads and railway lines to energy plants, houses, hospitals and telecommunication infrastructure.

Government regulationsThe greatest difficulty affecting Development Finance Institutions (DFIs) is the different government regulations, policies and laws in each country. Each country has its own nuances that affect how DFIs approach financing. This means there is little standardisation.

For example, Tanzania recently introduced its micro-financing bill, which will affect DFIs that work with smaller investment amounts. Under this new law, they will be required to register to continue operating, or face fines, jail time or a combination of both. Ethiopia is another country that despite its challenges, is taking steps to become increasingly investment friendly.

On the other hand, it can be challenging to operate in countries like Nigeria. Nigeria requires a money-lending license, which can be difficult to acquire.

Currency fluctuationsDevelopment Finance Institutions source most of their investments from international investors or organisations. This funding is provided to the DFI in the form of dollars or euros. For it to be used in the relevant region, it needs to be converted to the local currency. If this conversion takes place and the currency loses value, this impacts the value of the original investment, which in turn impacts investors, who may be hesitant to provide additional funding.

Political stabilityIf a region is politically unstable, DFIs will struggle to get investors to commit, as development projects can be, and are, hugely impacted by political turmoil.

InfrastructureBefore a DFI can convince an investor to supply funding for a development programme, it needs to confirm that the country has basic infrastructure in place to complete the project. A country may aspire to build a great mobile telecommunications network, but how will it transport materials and construction equipment without any roads?

ElectricityAs highlighted by this report from Brookings, the availability of electricity in Africa is problematic: “Countries where access to electricity is 80 percent or higher are either high- or upper-middle income countries; nearly all countries with access ratios below 80 percent are low-income economies.”

They also highlight that although sub-Saharan Africa is energy rich, “it is starved of electricity”. Even countries like South Africa suffer from intermittent electricity outages, which have been caused by ageing infrastructure, corruption and resistance to the reformation in the energy sector.

Skills scarcityCountries with struggling economies, such as Botswana and South Africa, are experiencing a brain drain that is not only impacting their economies, but also their ability to implement and sustain development finance projects. DFIs will struggle to convince investors to commit to a project if the region lacks the right people on the ground with the relevant skills. Much like a lack of roads, a lack of skills will hinder the launch and successful completion of development finance projects.

Obtain the right education to handle these challengesAs we have already highlighted, investment in Africa continues to grow despite these challenges. This means that there are and will continue to be many opportunities in this field, if you have the right skills to take advantage of them.

The University of Stellenbosch Business School has a dedicated portfolio of Development Finance programmes for those wishing to advance and broaden their knowledge of development finance. This programme is divided into three paths: a Postgraduate Diploma, MPhil and PhD. If you have specific questions around this programme, contact us today for more information.

Learn about interventions aimed at developing South Africa and other African countries.

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