Innovative financing for development in sub-Saharan Africa a must

Official aid (development assistance) alone will not be adequate for funding efforts to accelerate economic growth, poverty alleviation and other Millennium Development Goals (MDGs) in Africa.

Global, regional and national growth all require a blend of many contributing factors, such as a robust private sector, the political will to create an environment conducive to business’s and institutional structures and mechanisms to cater for these markets as well as the social conditions of education, health, water and sanitation, etc. True growth and development encompasses all these in a complex nexus of facilitation and delivery.

Pro-poor growth in sub-Saharan Africa

Critically important in sub-Saharan Africa is ‘pro-poor growth’. This is about achieving three things. Firstly, it is about the pace of economic growth and about its pattern: how the poor participate in growth as agents and beneficiaries. Secondly, pro-poor policies must tackle the cross-cutting dimensions of poverty and the environment. These issues are mutually reinforcing but should go hand in hand. Thirdly, empowering the poor is essential in improving their voice, income and role in an economy. It’s about inclusion.

Ultimately, the private sector will need to be the engine of growth and employment generation, and official aid efforts must be the catalyst for innovative financing solutions for the private sector. It is important to stress that financing the MDGs would require increasing the investment rate above the domestic saving rate, and bridging the financing gap with additional financing from abroad.

Private sector growth requires markets to function, governments and institutions to provide the framework for this to happen, and ultimately political will to ensure a level of comfort that consistency and longevity will prevail. How markets operate matters greatly to the poor and to those involved in poverty alleviation.

Official aid flows to sub-Saharan Africa rose, from US$12.2 billion in 2000 to over US$40 billion (or approximately 38% of Official Development Assistance to developing countries) in 2010. Private resource flows to sub-Saharan Africa (other than Foreign Direct Investment), however, have risen at a slower pace compared to other developing regions, and the region’s share of private capital flows to developing regions has continued to remain small and undiversified.

In short, the development community has little choice but to continue to explore new sources of financing, innovative private-to-private sector solutions, and Public-Private Partnerships to mobilise additional international financing.

Assessing creditworthiness

An analysis of country creditworthiness suggests that many countries in the region may be more creditworthy than previously believed. Establishing sovereign rating benchmarks and credit enhancement through guarantee instruments provided by multilateral aid agencies would facilitate market access and market functioning. Creative financial structuring such as the International Financing Facility for Immunization (IFFIm) can help front-load aid commitments, although these may not result in additional financing in the long run.

Preliminary estimates suggest that sub-Saharan African countries can potentially raise US$1 billion to US$3 billion by reducing the cost of international migrant remittances, US$5 billion to US$10 billion by issuing diaspora bonds, and US$17 billion by securitising future remittances and other future receivables.

These types of financial innovations and mechanisms, coupled with technological innovation (for example, mobile payments and transfer platforms) can greatly impact in the region in a positive way. If people from all walks of life can participate fully in markets, everyone wins.

David Okwara

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