Maximising the ‘Beyond Aid’ Approach: Mobilising Domestic Financial Resources for Africa’s Transformation

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    Africa’s growth in the first decade of the new millennium propels the aspiration that the continent could serve as a growth pole for global prosperity and the next investment frontier. Undoubtedly, Africa is rising as a result of the decade old impact of transformative factors including deep-seated policy reforms in political and socio-economic governance. This has, in turn, enabled many African countries to experience higher growth rates, lifting Africa out of an era of Afro-pessimism to a new epoch of Afro-enthusiasm, accompanied by an amazing shift in demographic profiles, rapid urbanisation, a strong voice of the continent’s civil society and consensual policy measures towards sustainable development.  

    However, for the continent to fully realise its growth potentials, it must frontally address the development finance constraint of continued dependence on external aid. Official Development Assistance (ODA) is falling well short of commitments and is largely unfulfilled. Many development partners have cut back on ODA. In 2011, aid flows declined in real terms for the first time in many years. To thrust African economies into the middle-income class, the consolidated flow of a significant amount of domestic financial resources at national, regional and continental levels is required.

    Fifty years plus of political independence and many African countries are still largely dependent on external resources for public finance and domestic investment. A fully sovereign Africa should exude self-reliance and value-driven partnership, not dependence. Africa must now look more purposefully and decisively inwards to raise extra resources for stable growth and effective development. There is a dire need to break with the past.

    Fundamentals and enabling environment in mobilising domestic financial resources in Africa

    The macro-economic fundamentals exist for the continent to raise more financial resources domestically to fund its own development, including:

    a)     Africa generates over US$520 billion annually from domestic taxes. Public pension fund assets are growing impressively while more than US$168 billion annually is earned from minerals and mineral fuels; with an estimated US$400 billion held in international reserves by Central Banks.  

    b)     Diaspora remittances climbed to US$40 billion in 2012 and have the potential to increase through securitisation.

    c)     Stock Market Capitalisation in Africa rose from US$300 billion in 1996 to US$1.2 trillion in 2007. Banking revenues are estimated at about US$60 billion with over 10 African countries today having established Sovereign Wealth and Stabilization Funds and Private Equity Market is worth about US$30 billion.

    d)     Illicit financial flows (IFF) from the continent reached US$854 billion over the period between 1970 and 2008. To stem IFF, policy options include raising awareness among African policy makers and stakeholders; developing national/regional institutional frameworks to improve greater transparency and accountability; and engaging international counterparts to strengthen global regulatory frameworks. If curtailed, more financial resources will be available for the implementation of national and regional development programmes and projects.

    Economic growth is a pre-requisite for wealth creation and Africa is making respectable progress with many countries ranking high among the world’s fastest growing economies. To sustain current growth rate and step up to double-digit annual GDP growth rate for the next two decades, Africa needs to increase investments in socio-economic infrastructure, human resources and harness the emerging demographic dividend.  Overall, Africa has embraced the best means to promote enabling legal, policy and regulatory environment to promote transformation.

    Tax revenue and tax administration: Africa has good potential to raise more domestic resources from efficient tax administration systems, by broadening the tax base rather than increasing taxes and tapping relatively underutilised sources of taxation such as property and environmental taxes. The excessive granting of tax exemptions, particularly for Multinational Corporations (MNCs) engaged in extractive activities, must also be revisited both to increase available tax revenues and improve perceptions of fairness of tax systems. Improved tax collection must be coupled with measures to ensure that new government revenue is used for the benefit of the citizens through social expenditures and development projects. The average tax to GDP ratio in Africa is higher than that in other regions. Over the period 2005-2010, the ratio was 20% compared to 15% in high income countries, 13% in middle income countries and 11% for East Asia and the Pacific. Though many African countries have ratio that are less than 10%.

    Development finance in Africa (US$ billions)

    Type of Development Finance




    Domestic revenue




    Private flows












    Source: ECA and OECD 2012

    Domestic financing instruments - impetus for transformation

    Major viable instruments and financial intermediary arrangements are listed below(1):

    1. Establishment of specialised funds for Africa’s infrastructure development, notably the Africa 50 under the auspices of the African Development Bank (AfDB) to promote regional and transformative infrastructure projects. The Africa50 is now matured into a specialized investment vehicle designed to significantly narrow the infrastructure finance gap, with a proposed initial Project Finance Business Line of up to US$500 million and a contribution of up to US$100 million to Africa50’s Project Development Business Line.(2)
    2. Setup of an African Credit Guarantee Facility (ACGF) as a credit enhancement mechanism to support financing of development projects. ACGF could provide guarantees on bonds issued by special purpose vehicles to raise finance projects of transformative nature. ACGF will underwrite Public-Private Partnerships and less than investment grade private companies that would otherwise have difficulty in raising long-term finance from both local and international capital markets. The Facility will bolster the confidence of investors in Diaspora bonds, private equity funds with African origin, investment of pension funds and the use of international reserves of central banks as well as improve credit rating for bond issuers and lower interest payable. ACGF’s bond guarantee operations will enable African companies to access bond markets, expand and diversify their sources of debt capital.
    3. Deepening Africa’s bonds markets - The short-term maturity of loans offered by the banking sector is not suitable for financing long-term investments. Hence, deepening viable and vibrant bond markets is critical. Issuance of Infrastructure Bonds could raise long-term finance for infrastructure development. A growing phenomenon with varying degrees of success recorded already in Ethiopia, Kenya, Nigeria and South Africa. To make Africa’s bonds markets work, attention should be paid to superior returns on bond coupons held by investors; low borrowing cost;  and tax-exempt status for returns from investment on infrastructure bonds.
    4. Likewise, issuance of diaspora bonds as debt instruments by governments to raise development finance from its diaspora communities is a viable alternative to borrowing from the international capital market, multilateral development finance institutions (DFIs) or securing bilateral loans. From the early 1930s, Japan and China, Israel and India have recorded successful diaspora bonds issuance. With the rising importance of Africa’s Diaspora, the AU in 2007 pronounced Africa’s Diaspora as the 6th Region of the continent and the African Diaspora remitted over US$40 billion in 2010. Over US$3 billion annually could be mobilised from such Diaspora funds. Securitisation of remittances from Africa’s Diaspora provides another valuable source of development finance essentially as long-term funding through the sale of assets to a special purpose vehicle (SPV) that then incurs debt secured (remittance-backed bonds) by the assets, which are collateralised by the future income stream. Remittance-backed bonds have been performing very well and global rating agencies note that these bonds outperform their rating class and will continue to perform well even during global credit crises.
    5. With over 10 African countries establishing sovereign wealth or stabilisation funds, the surpluses from natural resources are being harnessed and converted into sovereign wealth for developmental uses or even for future generations. Strategic Development Sovereign Wealth Fund (SDSWF) is utilised to promote national economic or development goals. It is commonly accepted that most sovereign funds have a commercial objective which is to earn a positive risk-adjusted return on their pool of assets. SDSWF is targeted at sole utilisation of promoting national economic or development goals.
    6. Regional stock exchanges offer African countries the appropriate mechanisms to mobilise long-term capital for development. The economic benefits of fully functional regional capital markets will change Africa’s financial landscape and make available additional investment funds from internal sources. Major benefits include low cost of borrowing, liquidity, reduced cost of financial transactions, risk transfer and improved corporate governance. Africa needs to promote more regional stock exchanges such as the BRVM - an electronic stock exchange for eight West African countries headquartered in Abidjan, Côte d’Ivoire, which commenced activities in September 1998. Such initiatives help to address the stock market characteristics of relatively small capitalisation and liquidity. Harnessing capital from national and global investors through fully functional regional exchanges will provide access to cheaper sources of long term finance; opportunity for improved management of financial risks and diversification; improved capital allocation: savings mobilisation; and improved corporate governance.
    7. New financing models for Public-Private Partnerships will add more impetus to bridging the fiscal gap through an infusion of private capital and improve timeliness of delivery of goods and services, and provide better value for money. Key features of the new PPP models include: a) replacing private sector equity, wholly or in part, by some form of concessional equity or subordinated debt, thus allowing for a cheaper cost for the end user; b) creating reliable refinancing process through which key debt providers have the opportunity to reduce or remove their exposure to the project after completion; c) enabling domestic or diaspora investors to invest in long term, low risk and stable domestic infrastructure assets through properly structured project bonds; d) structuring project bonds through “re-financing vehicles” set up for instance by Sovereign Funds supported by DFIs.

    Furthermore, promotion of African-owned private equity funds (PEFs) will help in mobilising own financial resources including pension funds. However, with PEF being a new form of investment on the continent, it requires new forms of regulation, and the enabling environment needs to be developed.

    The evolving role of NEPAD

    NEPAD, as an African Union (AU) strategic initiative, is championing the policy adoption of the effective mobilisation and utilisation of Africa’s financial resources for its development. NEPAD is changing steadily after long concentration on traditional external public investment schemes for its programmes and projects, a trend which is creating dependency on partner funding. Today, the NEPAD Agency has adopted the Domestic Resource Innovation Mechanism (DRIM) as a strategy to mobilise and use AU Member States funding for programme development and implementation. This is in the spirit of Africa regaining full ownership and leadership to impact on the realisation of the continent’s development agenda. Equally, the Agency has embraced major initiatives, namely: the National Agricultural and Food Security Investment Plans (NAFSIPs) under Comprehensive Africa Agriculture Development Programme (CAADP); the African Fisheries Impact Investment Fund and the Dakar Agenda for Action (DAA) on Africa’s Infrastructure Financing through the Programme for Infrastructure Development in Africa (PIDA). These initiatives form part of the implementation model to accelerate the NEPAD transformation agenda.

    Overall, the African Union is exerting concerted efforts to reduce aid dependency by promoting the Alternative Sources of Financing the Union which seeks to address the challenge of inadequate funding of AU development programmes and projects, whereby about 90% of funds for continental projects come from external development partners. Equally, another policy initiative in the beyond aid approach is the Illicit Financial Flows being promoted through the African Ministers of Finance, Economic and Planning.

    Breaking with the past

    To maximise the beyond aid approach, African governments and institutions should build sustained progress in regional integration, policy coherence, good governance and institutional reforms with underlined emphasis in Capacity Development to leverage DRM. This will help bolster the renewed drive for industrialisation in Africa.

    ODA has helped, but will not deliver sustainable growth and development in Africa. It is acknowledged that aid continues to play a role in development financing in the short to medium term. However, African governments and regional institutions are intensifying efforts to enhance domestic resource mobilisation and reduce the reliance on aid in the long run.(3) ODA, in the short term, can serve as a catalyst to develop DRM mechanisms in Africa. The continent has the resource base to support the development and implementation of these domestic finance instruments. Africa’s emerging status has today become increasingly attractive to new key partners in the global economy, especially Southern emerging economies. At the global level, NEPAD plays a significant role in pushing the African agenda within the auspices of the Global Partnership (GP) for Effective Development Cooperation, whereby the inter-connections between financing for development, South-South Cooperation and Capacity Development are promoted.

    Africa can finance its development from its own domestic financial resources, if innovative instruments are deployed and supported by appropriate means of implementation. In fact, a number of African countries have taken this route of intensifying policy reforms in raising additional domestic financial resources for development projects.

    With strong and sustained commitment to good governance, effective institutions and a responsive policy framework, enhanced awareness and involvement of the continent’s stakeholders, especially the private sector, and heightened consciousness of the need among Africans for Africa to own its development, the continent can define a new robust threshold for domestic resources that will enable the implementation of at least 70-80% of its development programmes and projects.

    Africa is taking the advantage of its development opportunities by looking within. The continent must now break with the past. The AU Agenda 2063 and Post 2015 Development Agenda must take into full consideration the passion and political determination and the potential capacity to make aid history!

    This article draws largely from the NEPAD-UNECA study report on ‘Mobilizing domestic financial resources for implementing NEPAD national and regional programmes and projects – Africa looks within’ (2014). The study was undertaken in collaboration with UNDP, African Development Bank and UNCTAD under the guidance of the NEPAD Heads of State and Government Orientation Committee (HSGOC).


    Bankole Adeoye is Director Corporate Services at the NEPAD Agency. 


    [1] NEPAD-ECA study report, 2014.

    [2] Dakar Agenda for Action on Africa’s Infrastructure Financing, June 2014.

    [3] African Consensus and Position on Development Effectiveness (2011) issued under the Africa Platform for Development Effectiveness (APDev) which is coordinated jointly by AUC and NEPAD Agency.


    This article was published in GREAT insights Volume 3, Issue 8 (September 2014).

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