How to finance Africa’s economic transformation?

Sebastian Große-Puppendahl, Policy Officer, ECDPM

Post-2015 Charter Event in the Hague, 20 April 2015

Innovative Financing

• A broad field!! with various forms and sources depending on definitions etc.(e.g. impact investments, remittances/diaspora bonds, IFF, private equity, SWFs and bonds)

• 9th African Development Forum’s theme: ‘Innovative Financing for Africa’s Transformation’- Marrakesh consensus (Oct. 2014):Africa’s financial systems are still largely underdeveloped in a majority of countries and unresponsive to the needs of individuals, households, and small and medium sized enterprises, constraining the domestic savings rate and the availability and access to credit for productive investments

• CAP on FFD AUC-ECA consultation (Mar 2015)- Infrastructure gap: $100 billion a year- CAP and Agenda 2063: DRM and trade as main

source of financing for SD in Africa

Background

Page 2ECDPM

• Curtailment of illicit financial flows as unexplored source for mobilising domestic resources (HLP, 2015)- Annual illicit flows from Africa during the past decade up

to $50 billion > ODA (2x)- Undermining Africa’s fiscal policy space, government

programmes and investment resources available- Commercial activities, organised crime, public sector

• Strong linkages between Africa’s transformative agenda and climate change- Climate finance & development finance inseparable- Adaption costs to CC for East, West, Central and

Southern Africa: $14-15 billion/year ($70 billion until 2045, if no additional mitigation action is taken

- Innovative domestic financing mechanisms needed- Climate for Development in Africa Programme (ClimDev

by AUC, UNECA & AfDB) building climate-resilient economies on the continent (AfDB ClimDev special Fund)

IFF & climate finance

ECDPM Page 3

• Not a driver of economic growth but a catalyst• Private equity as a potential source of investment

today approximately $29 billion in pension fund assets that could be invested in private equity in Africa, which remains untapped (UNECA, 2014)

• $1.14 billion (2012) raised from institutional investors for Africa-focused private equity funds (African Private Equity and Venture Capital Association)- another 50 funds currently in the market that are

targeting a similar aggregate amount- Ethos Private Equity alone (a South African fund

manager) is reported to have raised some $900 million

• Challenge: investor perceptions (cost of doing business in the continent)- continent’s sheer physical size, geopolitical

fragmentation and weak infrastructure continue to make it an expensive location for doing business

- restrictions on capital flows between African countries and the rest of the world trade openness

Private equity in Africa

ECDPM Page 4

• Relatively inexpensive sources of external finance for economic growth

• sovereign bond inflows $5 billion (2013) – =20% of aid to SSA & 12% of FDI inflows

• BUT risks involved: currency risks, roll-over risks and greater macroeconomic volatility

• Reducing risks requires to (te Velde, 2014)- use revenues of sovereign bonds to address

economic and social infrastructure gaps - manage macroeconomic conditions to reduce

currency risks

• Role of int. community: reducing quantitative easing, enhancing liquidity in the bond market reducing roll-over risks

Sovereign bonds in Africa

ECDPM Page 5

• Africa’s transformation needs African-grown and financed solutions to be sustainable

• Centrality of DRM in the creation of inclusive & sustainable economic growth for Africa’s transformation (e.g. ClimDev)

• Role of financial markets & market regulation key diversification! of financial products

• Need to further strengthen role & capacity of DFIs, IFIs & Development Banks (incl. mechanisms to address risks)

• Promotion of private equity as an important potential source of investment for growth and development

• High Level Panel on Illicit Financial Flows from Africa• New innovative forms of partnerships (UNECA, 2015)

- boosting intra-African trade & Africa’s transformation- South-South cooperation and the scope for industrialization- regional and South-South initiatives to enhance resource

mobilization: stymying illicit financial flows, cutting remittance costs and harnessing official flows

- South-South coalitions to reform the multilateral trade and financial system

Conclusion

ECDPM Page 6

• El Fassi, S. 2015. Financing for Development: The state of the debate in Africa. ECDPM Talking Points Blog. April 2015. http://ecdpm.org/talking-points/financing-development-state-debate-africa/

• HLP. 2015.Track it! Stop it! Get it!. Illicit Financial Flows from Africa. Report of the High Level Panel on Illicit Financial Flows from Africa. February 2015. http://www.uneca.org/sites/default/files/publications/iff_main_report_english.pdf

• Marrakech Consensus, ADF-IX Consensus Statement Marrakech, October 2014 http://www.uneca.org/sites/default/files/uploaded-documents/ADF/ADFIX/adf_ix_consensus_statement-eng.pdf

• te Velde, D.W. 2014. Sovereign bonds in sub-Saharan Africa Good for growth or ahead of time? ODI Briefing 87. April 2014

• UNECA. 2015. Innovative Financing for the Economic Transformation of Africa. Edited by Abdalla Hamdok. March 2015. http://www.uneca.org/sites/default/files/publications/innovative-financing-economic-transformation-africa2015-adf_en.pdf

• UNECA, 2014. Private Equity in Africa. Issues Paper 9th ADF. http://www.uneca.org/sites/default/files/uploaded-documents/ADF/ADFIX/adf_ix-issues_paper_3-private_equity.pdf

References

ECDPM Page 7

Thank youwww.ecdpm.org

www.slideshare.net/ecdpm

Page 8