Improving funding in Africa

Adding equity and quasi-equity financing mechanisms can advance BRI's objectives in the large, populous but poorest continent and, possibly, other continents too

Extreme poverty is afflicting hundreds of millions all over the African continent. The enormous economic potential of the continent needs to be developed not only for the benefit of its peoples but also for the benefit of the entire world.

Africa's land mass is 30 million square kilometers or 20 percent of the Earth's surface, which makes it the second-largest continent after Asia. It is, however, fragmented into 54 countries. By some estimates, Africa has 1.1 billion hectares of agricultural land, 600 million of which is uncultivated, by far the highest in the world, which is indicative of its enormous agricultural potential. It also has vast quantities of mineral resources such as oil, gas, gold, diamonds, uranium, nickel, phosphates, iron ore, copper and many others.

Currently, Africa's population accounts for 17 percent of the world's total, and is growing at a fast pace; it is projected to reach 2.5 billion by 2050.

The GDP of the continent adds up to $2.7 trillion, which is a paltry 2.8 percent of global economic output. Meanwhile, about 500 million people are living in extreme poverty, on less than $2 a day.

On the bright side, Africa's GDP is growing at an average of 3 to 4 percent a year. The African market is therefore expanding at a fairly respectable pace and should expand even faster in the future with the commencement of the African Continental Free Trade Agreement, which makes the continent the world's largest free trade area.

It is also worth noting that Africa is rapidly urbanizing. Some 44 percent of the population lives in urban areas and this proportion is projected to rise to 56 percent by 2050. Although this rapid urbanization comes with its own problems, it does make the provision of infrastructure and other public goods easier and less costly, a feature relevant to the Belt and Road Initiative.

Africa has the youngest population profile in the world which can be turned into a formidable workforce with the right level and quality of investments in education and health infrastructure.

Given this reality of a large, populous but poorest continent, there is a compelling and urgent need for the continent to pull itself up and realize its enormous potential. There is the strong need for it to rapidly develop its resources, both human and material. A key factor inhibiting economic development on the continent is its massive infrastructure gap: grossly inadequate roads, railways, ports, navigable waterways, airports, communication and power infrastructure. This deficit, by some estimates, adds an average of 30 to 40 percent to the cost of goods traded among African countries.

China's BRI directly addresses the yawning physical infrastructural gap in Africa and is already making a big impact on the continent. With this initiative, China is now Africa's largest trading partner, with bilateral trade value reaching $282 billion in 2022.

Africa's borrowings from all other sources are nowhere near what is required to meet the infrastructure gap. The African Development Bank estimates that the continent's infrastructure financing needs will be as much as $170 billion a year by 2025, with an estimated gap of around $100 billion a year. This amount does not include what is needed for climate adaptation and mitigation.

At least half of the amount needed should come from domestic revenue mobilization within Africa but, nevertheless, a big gap remains which can come from external sources. There is a clear need to do more but the headroom for more lending seems low in view of difficulties and challenges that have become evident. A major challenge for Africa seems to be the worsening debt profile of several African countries, with many facing debt distress. According to the World Bank, 22 countries in sub-Saharan Africa are now at high risk of external debt distress or already in debt distress.

The COVID-19 pandemic has been a major factor, although even before its onset, several African countries were already facing fiscal and debt servicing challenges. The pandemic exacerbated the crisis as governments were forced to increase health spending, make payments to vulnerable segments of the population amid severe contractions in GDP and fiscal revenue. As a result, government borrowings ballooned and average debt to GDP ratio on the continent almost doubled within a decade to 57 percent by 2022. As much of the debt is denominated in US dollars, the post-COVID-19 increase in rates by the US Federal Reserve and other central banks to contain inflation and increases in energy and food prices following the Ukraine crisis have exacerbated debt vulnerabilities.

It is time to consider adding equity and quasi-equity financing mechanisms to advance the objectives of the BRI in Africa and possibly other continents as well. Debt is still needed, in even bigger quantities, but it needs to be complemented by equity and quasi-equity financing instruments. The equity can be sourced from either the public or private sector, and can involve both investor and investee countries. This approach, if appropriately structured, can permit the crowding-in of private sector funding into Belt and Road projects. The private sector can, in this arrangement, bring to the table both debt and equity (or quasi-equity) funding as well as technical expertise, innovation and commercial management. The public sector can provide first-loss capital and other forms of support to de-risk projects.

The equity option is much more complex, and more risk factors need to be taken into account. Not all projects will be suitable, but experience in many countries has shown that the private sector can, if well-structured, participate positively and profitably in the provision of infrastructural facilities. It is also acknowledged that many countries in Africa need to adopt more investment-friendly policies including more effective regulation and transparent legal frameworks for this approach to succeed. The negative impact of all these risk factors can, however, be reduced through government-to-government collaboration and bilateral or multilateral agreements.

This year marks the 10th anniversary of the BRI. It has made a positive impact on the development of badly needed infrastructure in Africa. A lot more, however, needs to be done if the objectives of the initiative are to be fully realized.

It is time to consider additional financing mechanisms in the form of equity and quasi-equity and bring in the private sector. These adjustments will improve the development impact of the BRI by addressing two serious limitations of funding and the project absorption capacity of African countries, which urgently needs upscaling.

The author is former permanent secretary of the Federal Ministry of Finance of Nigeria. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.