Our world continues to be shaken by multiple crises and faces triple challenges related to financing, climate, food and energy, which are exacerbated by the lingering effects of the COVID-19 pandemic. I’m doing it.
But after World War II, a difficult period in human history that ultimately led to the creation of the United Nations, we must, as one former politician reportedly said, “never let a good crisis go to waste.” It’s not okay.
This parallel is fitting as we respond to the call of the current Secretary-General of the United Nations, António Guterres, to come together to meet the challenges of our time. Secretary-General Guterres said: “We cannot build a future for our grandchildren with a system designed for grandparents.” ”
Today’s crisis and turmoil provide an opportunity to rethink the global financial architecture that affects Africa’s development finance.
As we gather at the United Nations Headquarters in New York to forge a Pact for the Future, we will use this opportunity to highlight the absurdity of Africa’s continued status as a net creditor nation, even as it suffers from a major financial shortfall. We must question this logic. Every year, large amounts of money leave the continent in the form of illegal financial flows (IFFs), or foreign exchange reserves held in sovereign wealth funds, pension funds and foreign banks outside the continent.
Development financing challenges in Africa
Based on the United Nations Office of the Special Adviser on Africa (OSAA)’s 2023 flagship report, ‘Resolving the African Development Paradox: Financing, Energy and Food Systems’, Africa loses an estimated $88.6 billion annually in IFF; is equivalent to 3.7% of gross domestic product. Product (GDP).
Pension funds outside Africa can be used to de-risk long-term investments towards infrastructure development and the Sustainable Development Goals (SDGs).
The OSAA report estimates that if African countries were able to invest 2.8% of their pension fund assets, an additional $20.9 billion would be generated annually for infrastructure development, reducing the infrastructure funding gap by 30%.
Another major cause of leakages is the poor quality of public spending in Africa, which diverts much-needed resources from budgets.
Public spending inefficiencies amount to approximately $12 billion on education, $30 billion on infrastructure, and $28 billion on health, totaling an annual loss of 2.87% of Africa’s GDP.
There is a need to reconsider the logic of the huge tax incentives extended by African countries ostensibly to attract foreign direct investment (FDI).
OSAA’s Paradox Report shows that most of these tax expenditures are redundant and costly, depriving the government of vital resources. For example, sub-Saharan African countries lost approximately $46 billion in revenue in 2019, or 2.5% of GDP.
Contrary to popular belief, Africa does not have a liquidity problem. Africa is rich in resources, which, if used effectively, can meet a significant portion of the continent’s development financing needs.
Based on this argument, Africa’s development is already financed by leveraging Africa’s own resources through taxes and domestic savings, which are 20 times more expensive than FDI or almost 17 times more than Official Development Assistance (ODA). corresponds to
The real challenge is to mobilize these resources and direct them to financing Africa’s development priorities.
The financial paradox as a game changer
OSAA’s 2022 flagship report, Financing for Development in the Age of COVID-19: The Advantage of Domestic Resource Mobilization, examines the current global economic It reveals some oddities and contradictions in the system.
Various models and development frameworks implemented over the years have yielded little results, and Africa’s development remains elusive. This path is unsustainable and risks achieving the SDGs on the continent and realizing the aspirations of the African Union’s Agenda 2063.
Traditional business approaches need to change. The failure to address these abnormalities is at the heart of Africa’s liquidity problems and the resulting debt stress across the continent. The OSAA report argues that funding Africa’s momentum requires taking a different approach and addressing contradictions.
Africa needs to understand that blaming and begging is a waste of time. The continent must come together to break the triple chain of paradoxes: the financial paradox that causes the energy paradox that leads to the food system paradox.
The first paradox is that Africa, despite being rich in resources, is mired in a debt crisis, debt forgiveness and debt suspension.
Second, although Africa is rich in energy sources, it remains a “continent of darkness”, with 600 million people without reliable access to electricity and many entering the labor market each year despite recession. There is a significant lack of industrialization to absorb 18 million young people. The emergence of that middle class.
And the third and final paradox is that, despite having vast agricultural resources, Africa faces frequent food insecurity.
The key to breaking this chain of paradoxes is to shift the paradigm of financing for African development and address the financial paradox as a game changer.
Heavy reliance on external financing such as ODA, FDI and debt has proven insufficient. These external sources continue to decline. These are volatile and unpredictable sources of funding.
With low revenue bases and relatively underdeveloped bond markets, African countries have had to borrow money to meet large funding gaps.
This has led to an increase in external debt, which now accounts for an average of 60% of Africa’s public debt and 15.5% of Africa’s exports in 2020, with debt servicing absorbing on average more than 20% of government revenues. and are reducing fiscal spending. policy space.
Leverage domestic resource mobilization
Compounding the situation is the prevailing view that Africa’s debt crisis is due to excessive borrowing and fiscal mismanagement. Such an interpretation overlooks the continent’s complex economic realities, which are fundamentally linked to structural challenges that go far beyond the simple measure of high debt levels.
OSAA’s forthcoming paper, Challenging Africa’s Debt Story, argues that the fundamental problems are illicit financial flows, profit shifting by multinational corporations, unfavorable trade agreements, dependence on primary products, underutilized A lack of control over economic and financial flows in Africa, including a lack of carbon markets, has been identified. , we are repeating the challenges mentioned above regarding unutilized pension funds.
This forthcoming paper argues that “tackling these challenges requires a comprehensive, cross-cutting approach that focuses on strengthening domestic systems, reforming international economic structures, and empowering African countries through systemic change.” “A new approach is needed.”
Achieving Africa’s pursuit of structural transformation and sustainable development requires gaining and sustaining policy space, which can only be achieved through DRM. Prioritizing DRM is the only viable way to resolve the paradox of financing for African development.
The continent must break with its past, take ownership of its future, and look within for its financial development resources.
All these resources flowing out of Africa, if properly mobilized and integrated into the continent’s development priorities such as education, health and infrastructure, could make a big difference and significantly reduce Africa’s vulnerability to external shocks. There is a gender.
This means African countries need to mobilize domestic resources while promoting cross-border investment.
Strong domestic, regional and global partnerships are essential for Africa to advance its domestic resource mobilization (DRM) efforts. These partnerships should address global challenges such as inequitable international tax systems and flawed financial structures, in line with Africa’s development goals.
Improving natural resource management, strengthening fiscal capacity and better allocating financial resources are important steps. We need to increase transparency in resource management and resolve key issues such as mispricing, rent demands, and invalid mineral ownership.
The continent also needs to strengthen its capacity to manage marine resources, combat illegal fishing and optimize the blue economy.
Tackling tax avoidance, tax evasion and illicit financial flows is essential to building a responsible fiscal culture.
Ultimately, Africa must use financial resources effectively, curb leakages, and prioritize development-led investments.
Strategic policy planning for strong national systems
Mobilizing investment resources, strengthening financial intermediation and building effective financial systems can unlock Africa’s development potential. This system is critical to fostering a strong indigenous private sector, which is a key driver of growth for both large and small resource-rich countries.
Over the next decade, African governments will face the grave challenge of developing a genuine capitalist class. Without it, industrialization and job creation will remain difficult. Africa’s agricultural potential offers great opportunities.
The private sector needs to step up to serve Africa’s $30 billion food market and play a role in global value chains. Africa, which accounts for 50% of the world’s uncultivated land, is well positioned to meet the projected 70% increase in global food demand by 2050, if policymakers put in place the necessary infrastructure and institutions. .
We must champion Africa-centric policy-making that prioritizes institution-building and governance, and strengthens productive capacity to fully integrate into global value chains and drive industrialization.
Our focus should be on wealth creation and management by Africans, for Africa and within Africa. To our development partners: Real progress depends on win-win collaboration around a transformative agenda.
Development cannot advance if partners simultaneously enable illicit financial flows or use aid to pressure African countries into unfavorable deals.
Together with our international partners, we must embrace a new paradigm that moves from simply managing poverty to promoting structural change.
As we aim for accelerated development in Africa, let us be guided by Chinua Achebe’s words: “As we do good deeds, let us remember that the real solution lies in a world where charity is no longer necessary.”
The Africa we want. What the world needs is Africa.
Cristina Duarte is United Nations Under-Secretary-General and Special Adviser to the United Nations Secretary-General for Africa.
