Financing Development in Africa: Review of Progress and Challenges

OUTLINE

• Background

• Monterrey Consensus and Financing Development

• Achievements: From Commitments to Action

• Key Policy Challenges

• How ECA is Organized to Deal with these Challenges

• Conclusion

1. Background

• The achievement of sustained economic growth and poverty reduction remains the key development challenge facing Africa

• Access to finance has a key role to play in addressing this challenge

• But Africa has, and continues to face, a huge financing gap

2. The Monterrey Consensus and Financing Development in Africa

2.1: The Monterrey Consensus (2002)

The Monterrey Consensus is a major development and represents the first global attempt to comprehensively address financing development issues and challenges facing poor countries

2.2: Other Multilateral Initiatives

The Paris Declaration on Aid Effectiveness

Covers five areas: Ownership; Harmonization, Alignment; Managing for Results, Mutual Accountability

The Heavily Indebted Poor Countries Initiative (HIPC) and the Multilateral Debt Relief Initiative (MDRI)

3. Achievements: from Commitments to Action

• Five years into the adoption of the Monterrey Consensus, the key question is “To what extent have African Countries achieved its objectives.”

• Progress have been made in the following areas:

• Growth performance has improved in the region

• Savings and investment ratios have gone up

• There have also been significant increases in FDI and ODA relative to pre-Monterrey period

• External debt to GDP ratio has declined

• In summary, there have been positive developments since 2002 but there are still challenges that have to be addressed

Selected Economic Indicators

Variable 1998-2002 2003-2006 Real Growth rate 3.30 5.23 Savings-GDP ratio 18.86 22.83 Investment-GDP ratio 20.14 21.45 Inward FDI (Billion $) 12.7 26.2 Export share 2.2 2.6 ODA (Billion $) 17.4 30.5 External Debt-GDP ratio 61.56 39.88

4. Key Policy Challenges There are six broad areas in the Monterrey Consensus. A

mid term review of the Consensus will take place in the first quarter of 2008. Some of the challenges associated with these areas are as follows:

4.1: How to improve domestic resource mobilization

African countries have low savings ratios relative to other developing countries. They also have low ratios relative to investment requirements

4.2: How to mobilize international financial resources for development

FDI inflows continue to be concentrated in a few countries

They are also in extractive or capital intensive industries and so have very limited employment impact

4.3: How to increase international financial and technical cooperation

There has also been an effort to increase the quantity as well as effectiveness of aid through reductions in tied aid as well as an increase in the share of grants in total ODA

Despite these gains, donors need to increase the predictability of aid, improve aid allocation (more to poorer countries), as well as align and harmonize aid flows.

4.4: How to use international trade as an engine for development

Africa’s share of world trade is very low

Need for assistance in diversifying into production of dynamic products to improve the region’s share of benefits from trade

There is also the need to take Development Issues more seriously in the Doha Round trade talks

4.5: Finding an Effective Solution to the External Debt Crises Facing African Countries

The HIPC and MDRI initiatives have reduced the debt service burden facing some countries

However, there are concerns that these initiatives have not led to debt sustainability in several post-completion point HIPC Countries

4.6: Addressing Systemic Issues

There is the need to increase for reform of international monetary, financial and trading systems to give more voice to African countries in decisions affecting them.

5. How is ECA Organized to Respond to these Challenges

In an effort to confront these challenges, ECA embarked on the following initiatives

A capital market development program was launched to help countries boost domestic savings and investment

A new section on Financing Development was created at ECA to focus attention on these financing development issues

The African Trade Policy Centre was established in 2003 and has been providing valuable technical assistance to African countries on Trade Policy and Multilateral Negotiations

We are also providing valuable technical assistance to African countries through the following activities and interventions:

Facilitating African consensus on financing development issues

Abuja and Ghana Ministers of Finance Conferences Ministers of Trade Conferences

Making results of our Research Studies available to Member States as an aid to policy formulation

Advocacy work aimed at providing an African perspective on Financing Development Issues

ECA is conducting a survey to get the views of African countries on the implementation of the Monterrey Consensus so far

6. Conclusion

Limited progress has been made in terms of fulfilling the commitments in the Monterrey Consensus

Therefore, more needs to be done by both African countries and their development partners to accelerate progress

At the national level, there is the need to intensify efforts to mobilize domestic savings, boost remittances, reduce capital flight and create a domestic environment conducive to investment and sustained growth

At the international level, there is the need for our development partners to translate their pledges to Africa into action

The challenges are enormous but with the political will of African leaders and their development partners, Africa will hopefully be able to deal with these challenges