By Continental Pot Afrika

Speakers:

Mr. Paul Corti Lakuma: Senior Research Fellow, EPRC, Makerere University

FA Diana Muriuki: CEO, Institute of Certified Investments and Financial Analysts (ICIFA)

Date:

May 30, 2024

Overview:

This report summarises insights from the Continental Pot Afrika’s Continental Audit Public Dialogue session titled “Financing for Development in Africa and its Strategic Implications,” held on May 30, 2024. The dialogue brought together a diverse audience to explore the evolving financing landscape in Africa, focusing on innovative mechanisms, strategic challenges, and opportunities for sustainable growth. The discussion was led by Mr Paul Corti Lakuma and FA Diana Muriuki, who provided deep analyses of Africa’s financing models and their implications for the continent’s long-term development.

Mapping the Financing Landscape in Africa

Mr. Paul Corti Lakuma provided an overview of the key financing models shaping development across Africa, highlighting the significant role of debt, tax revenue, non-tax revenue, and State-Owned Enterprises (SOEs). Each financing model has implications for national reserves, economic stability, and sectoral investments.

• Debt remains a central financing tool, but it has contributed to debt crises and placed pressure on many countries to seek debt forgiveness.
• Tax revenue collection remains low across Africa, limiting governments’ ability to fund critical sectors like healthcare and education.
• Non-tax revenue sources and the decline of SOEs have created financing gaps, while domestic borrowing continues to increase.
• A major constraint is the mismanagement of infrastructure projects, exacerbating inefficiencies in public finance.

Key Challenges in Development Financing in Africa

• Low Tax Collection: African countries struggle to raise sufficient tax revenue, leading to reliance on external financing.
• Domestic Borrowing: Increased borrowing poses risks to debt sustainability, often crowding out private investment.
• Ineffective Public Infrastructure Management: Poorly executed infrastructure projects result in cost overruns and under-delivered services.

Innovative Financing Mechanisms for Africa

FA Diana Muriuki emphasised the importance of diversifying development financing to address Africa’s unique challenges. Drawing on key statistics from the World Bank, UNCTAD, and the OECD, she outlined current sources of development financing and proposed innovative solutions:

• Domestic Resources: 60% of development financing originates from domestic resources, followed by foreign direct investment (FDI) at 20%, official development assistance (ODA) at 15%, and remittances at 5%.

To optimise these financing sources, Muriuki introduced several innovative mechanisms:

1. Blended Finance: Combines public and private capital to mobilise resources for sustainable development projects.
2. Public-Private Partnerships (PPPs): Leveraging private sector expertise to complement public investments in infrastructure.
3. Impact Investing: Prioritising measurable social and environmental impact alongside financial returns.
4. Sovereign Wealth Funds: Long-term state-owned funds to support infrastructure and social development projects.

Strategic Implications for Financing Development in Africa

Both speakers discussed the broader strategic implications of development financing, stressing the need for integrated approaches that align financial systems with Africa’s long-term development goals.

Key Areas of Focus:

• Financial Technology (FinTech): The adoption of FinTech can enhance the efficiency of financing mechanisms, facilitating digital payments, crowdfunding, and fintech-enabled lending to promote financial inclusion.
• Capacity Building: Investment in the skills of policymakers and stakeholders is essential to improving the design, management, and execution of development projects.
• Transparency and Accountability: Strengthening oversight of public finances can mitigate inefficiencies, reduce corruption, and ensure the effective use of resources for development.

Addressing Corruption and Sustainability

Corruption was a central issue in the discussion. Mr Lakuma argued that while only 5% of development funds are reportedly lost to corruption, broader inefficiencies and misallocation of resources—rather than corruption alone—undermine development efforts. He stressed that addressing these systemic inefficiencies should be prioritised over focusing solely on corruption.

• Corruption impacts both citizens’ trust and international partners’ willingness to invest in African projects. Tackling corruption through better management practices and public engagement can lead to more sustainable financing models.

  “Corruption is a major concern in development financing in Africa as it essentially gives a bad impression to both the citizens and developmental partners and also a symptom of fiscal illegitimacy at the micro level yet only 5% gets stolen. What happens to the other 95%? There are inefficiencies-allocative and technical at the macro level” _

— Paul Corti Lakuma, 2024

FA Muriuki reinforced the need for public participation in development financing, particularly in processes such as budget-making, to improve accountability and transparency.

“While laws can enhance accountability, public participation is essential, especially during budget-making processes.“
— Diana Muriuki, 2024

Bridging Development Financing and Sustainable Growth

Both speakers highlighted the importance of integrating development financing with sustainable development initiatives. Africa’s economic and social progress must be achieved without compromising future generations, particularly in light of climate change and environmental degradation.

• Socioeconomic Development: Prioritising sectors such as education, healthcare, and infrastructure is essential for inclusive economic growth.
• Sustainable Development: Emphasising environmental protection, resource conservation, and climate change mitigation will ensure long-term resilience.
• Integrated Approach: Coordinating these efforts will deliver inclusive, sustainable development across Africa.

Enhancing Intra-African Trade through Regional Integration

Mr. Lakuma pointed to the significance of regional integration, especially in infrastructure development, for promoting intra-African trade. He called for stronger mechanisms to ease cross-border trade, particularly for small-scale traders, many of whom are women. Regional cooperation, he suggested, could follow models seen in the European Union, which drew on integration ideas from the East African Community (EAC).

Geopolitical Engagement and Development Financing in Africa

The session also considered the impact of geopolitical engagements on Africa’s development financing. Reflecting on recent high-level visits, including President Ruto’s trip to the United States, Mr. Lakuma urged caution in assessing their immediate impact. He advocated for a thorough analysis of these engagements’ long-term implications for Africa’s strategic financing priorities.

The Way Forward: Key Takeaways for Development Financing in Africa

The discussion provided a roadmap for the future of development financing in Africa. To achieve sustainable growth, Africa must:

• Mobilise Domestic Resources: Strengthening tax systems and managing non-tax revenue effectively can reduce dependence on external financing.
• Concessional Borrowing: Accessing concessional loans and grants from international institutions is critical for financing social and infrastructure projects.
• Improve Public Finance Management: Better selection and management of public investments will ensure efficient use of resources.
• Diversify Financing Instruments: Exploring innovative financing models like PPPs, green bonds, and impact investing will attract private capital and align with sustainability goals.

By leveraging these strategies, Africa can achieve equitable, inclusive, and sustainable economic development.