Ten years ago delegates from all over the world gathered in Addis Ababa, Ethiopia, to discuss the future of development finance. African countries saw grounds for cautious optimism. Foreign investment flows to the continent had doubled over the preceding decade. New sources of credit – especially dollar-denominated bonds and Chinese loans – created financing options beyond traditional aid. An ambitious list of “Sustainable Development Goals” (SDGs) was being finalised. The World Bank talked of turning “billions to trillions” by courting the pension funds and insurers of rich nations.
But the last decade has not turned out as promised. Growth in Africa has slowed, from an annual average of 5% in the ten years before the third International Conference on Financing for Development in Addis Ababa in July 2015, to 3% since. The next of these United Nations conferences is on 30 June in the Spanish city of Seville.
The UN thinks that another $4 trillion is needed every year to achieve the SDG targets, but money is hard to come by: the US is cantankerous; China preoccupied; investors hesitant; taxpayers indignant; and budgets stretched. Four days of talking in Seville will not change any of that. But the conference, the fourth in a series since 2002, is a forum where countries meet on a slightly more equal footing than usual. For African countries, it might be an opportunity to articulate an alternative vision of how to finance development – if anyone is listening.
A lost decade
In retrospect the Addis Ababa conference of 2015 was a high-water mark, held at the very moment the tide was about to turn. The miracle of Chinese growth and the convulsions of western finance had, for a time, worked in Africa’s favour: low interest rates, quantitative easing and soaring commodity prices all brought capital to the continent.
But however carefully they managed their economies, and however vital their natural resources, African countries were still on the periphery of the world economy, buffeted by forces beyond their control.
The first shock was a slump in commodity markets in 2014. Already China’s economy was slowing, and soon American interest rates began to rise. Then came the Covid-19 pandemic and the war in Ukraine.
“Those big shocks – Covid, climate change, the different wars that are happening globally – have really diverted so much of the resources that were meant for development,” says Claver Gatete, the executive secretary of the United Nations Economic Commission for Africa (UNECA).
Foreign financiers proved to be fair weather friends. Bond yields spiked when the pandemic hit, shutting African governments out of international capital markets for nearly two years. Since 2020 they have been paying back more money to banks and bondholders than they have received in new credit. Lending from China also dried up: its loans to Africa peaked at $29bn in 2016 before falling to $1bn in 2022; they totalled less than $5bn in 2023, according to researchers at Boston University. Aid from traditional donors has fallen too, even before the latest cuts.
As for the vaunted plan to turn “billions to trillions”, even the World Bank’s president Ajay Banga now concedes that it was “unrealistic”. By their own reckoning, multilateral development banks and development finance institutions mobilised about $20bn of private co-financing for their projects in Africa in 2023, with only modest increases over the last decade. Less foreign direct investment is flowing into Africa now than in 2015.
A recent report from an International Commission of Experts on Financing for Development, reflecting on the legacy of the Addis Ababa conference, reaches sobering conclusions. “Ten years on,” it says, “the record of achievement falls far short of what was envisioned… The SDGs, as an international framework for action, have been systematically undermined. The international financial system has proved to be ill-suited to support the investment needed and drive transformative change.”
Léonce Ndikumana, an economist at the University of Massachusetts Amherst who sat on the expert commission, describes a sense of déjà vu. “It’s as if 2015 is today,” he says. “The same issues are being raised, and the same dissatisfaction is still being expressed, and the same gaps are still being observed.”
Taxing times
What is to be done? For all the talk of new financing mechanisms, the most important source of money is still taxation, which raises twice as much revenue as inflows of aid, remittances and foreign investment combined. African states collect about as much tax as might be expected, given their levels of income, but are struggling to get more. In 2015 they raised an average of 14.1% of GDP in taxes, according to the OECD – the Organisation for Economic Co-operation and Development, a club of rich countries. By 2022 the figure had crept up to 14.6%.
Lots of effort has gone into collecting taxes from small informal businesses, without much success. Many of these businesses make miniscule profits anyway. In countries like Uganda and Tanzania, disgruntled traders have shuttered their shops for days in protest. In Kenya, protesters tried to storm parliament last year and forced the president William Ruto to back down on his revenue-raising plans, such as a value-added tax on bread.
A more promising source of revenue, for some countries at least, is natural resources. “African countries are made to believe that they must provide good incentives in the form of tax reductions and waivers for foreign companies to come and invest in extractive industries,” says Ndikumana, “and they end up getting very little from the exploitation of natural resources in terms of tax revenue”.
He argues that governments should play a more direct role in extraction and negotiate for a larger share of the profits in joint ventures, as Botswana has recently done with the mining company De Beers.
“The other problem,” says Ndikumana, “is that multinational corporations are very, very good at evading taxes, by manipulating their profits, by shifting their revenue to low-tax jurisdictions outside the continent, and by gaming the system through things like transfer pricing.”
African countries have been leading the charge for a UN Framework Convention on International Tax Cooperation, hoping that they will have more of a say at the UN than in existing processes led by the OECD. Negotiations on the text began in February, although the US immediately walked out.
Clamping down on tax avoidance is part of a broader effort to stem illicit financial flows. Ndikumana and his colleague James Boyce have scrutinised discrepancies in the capital accounts of 30 African countries and estimate that $97bn has fled the continent unrecorded every year on average since 2010.
That is an estimate of capital flight, not uncollected tax, and the estimates are contested: discrepancies in the data sometimes have innocent explanations. Nonetheless, the problem is probably large, and too often overlooked.
Looking outside
Meanwhile, the world’s richest countries have failed to meet their promises to provide 0.7% of their income in aid, while continuing to gobble resources, harbour illicit outflows, and fuel climate change. Most big bilateral donors will spend less on aid this year than last, according to SEEK Development, a consultancy.
Donald Trump’s budget proposals would cut the US foreign aid budget to just 0.03% of its GDP, according to DEVEX. “There has to be an increase in terms of concessional resources,” says Gatete of UNECA. “We are not talking about aid; we are talking about cheap resources for developing countries.”
He argues for a scale-up of financing through the concessional lending arms of the World Bank and the African Development Bank (AfDB), both of which provide long-term loans at interest rates far better than those on offer from private creditors.
An independent expert group on the reform of multilateral development banks, commissioned by the Indian presidency of the G20 group of nations, reckons they could be lending an additional $260bn a year by 2030, including $60bn of extra concessional finance; but that will only happen if rich countries stump up more money.
The World Bank’s concessional lending arm has a record $100bn to play with for the next three years; but that falls short of the $120bn that African countries wanted. And that amount was only raised by recycling payments from past loans and leveraging the Bank’s balance sheet, as pledges from donors have been flat. Meanwhile the AfDB is battling to persuade donors to replenish its own fund.
Another idea is to issue more special drawing rights (SDRs), a type of international reserve asset created by the IMF which can be exchanged for dollars and other major currencies. The last allocation, in 2021, helped African countries to plug fiscal holes after the pandemic.
“A new issue of special drawing rights is the right thing to do,” says Vera Songwe, a non-resident fellow at the Brookings Institution, and founder and chair of the Liquidity and Sustainability Facility. “That is the only source of cheap resources. We should do it before the [next] crisis hits.”
African countries also want a more effective mechanism for restructuring debt when they run into trouble. Chad, Zambia, Ghana and Ethiopia all applied for restructuring under the G20’s Common Framework, but bickering between creditors meant the process dragged on for years. Ethiopia’s application is still unresolved.
Suggestions range from suspending debt payments during negotiations to systematic debt relief and even convening a UN convention on debt, similar to the convention that African countries are already demanding on tax.
“The most important thing coming out of [Seville] is to get a comprehensive intergovernmental binding process on debt restructuring,” argues Jason Braganza of the African Forum and Network on Debt and Development (AFRODAD), a pan-African civil society group with head offices in Zimbabwe.
Private dreams
The other big area for discussion will be the role of private finance, which has not flowed into Africa in the volumes that was hoped. Here, too, macroeconomic turbulence is partly to blame. “People are holding off on making investment decisions because there is uncertainty,” says Songwe. “The advanced countries first of all need to bring some order to their own economies, because the fastest way to growth is that the advanced economies give us some stability.”
Institutional investors in the global north, who hold trillions of dollars of assets, remain hesitant about Africa. In some cases they are bound by regulations, such as the solvency capital requirement for European insurers, which make it more difficult to invest in emerging markets. In others they are held back by the view that African assets are too risky – a perception that many in Africa say is unwarranted.
Data on loans by multilateral and bilateral institutions to private borrowers show that average annual default rates in sub-Saharan Africa are nearly 6%, a couple of percentage points higher than in any other region; but recovery rates are higher too.
Even when private investors do venture into Africa, they struggle to find bankable projects. Organisations like Africa50, established by the AfDB with the support of African governments, are trying to change that by midwifing projects through their early stages. Over the past year Africa50 has partnered in initiatives ranging from an innovation hub in Rwanda to a renewable energy fund in Nigeria.
African investors might be a better bet than foreign ones. A recent report by the Africa Finance Corporation estimates that the continent’s insurers and pension funds manage $777bn of assets. It suggests that there are big pools of savings that can be deployed into infrastructure projects, although a note of realism is needed. Three-quarters of those assets are concentrated in South Africa. In Nigeria pension funds have grown rapidly, but just 1% of their money goes into infrastructure, and their first duty is to protect the savings of their members. Even in the ageing, wealthy economies of the OECD, large pension funds invest less than 4% of their portfolio in unlisted infrastructure – that which is not owned by publicly traded companies.
A deeper concern is that a focus on private finance is undermining the prospects for building developmental states. The political economists Daniela Gabor and Ndongo Samba Sylla describe an emerging “Wall Street consensus” under which de-risking mechanisms such as credit guarantees are used to transfer risk onto states while leaving profits in private hands. “Industrial partnerships based on de-risking ultimately surrender the pace and agency of structural transformation to private and mostly foreign capital,” they write.
The road to Seville
Geopolitics will hang like a cloud over the conference in Seville. The US will not be attending, after walking out of talks to negotiate the declaration that will accompany the meeting (see ” Modest progress after the US quits” below).
The World Bank and IMF are uncomfortable with a UN process trying to tell them what to do. Patient multilateralism is giving way to a world of bilateral deal-making, from the surge of Gulf investment into Africa to US talks with the Democratic Republic of Congo.
“We have talked and talked and talked… but of course if you are the one giving money you know what you want to listen to,” says Gatete, hinting at the frustration that African countries feel about broken commitments from rich countries in the past. Nonetheless, the gathering in Seville might be their best chance to get heard.
As Songwe notes, UN-led conferences “are a little bit more open and more democratic” than processes led by the G20 or the Bretton Woods institutions, where the rich rule.
Braganza, the civil society activist, concurs. “The Financing for Development process is not a pledging conference – it’s about changing normative ways of how we do business,” he says. “It’s about changing the way the global economic system works and democratising it.”
