An Overview of African Economy: Funding Source and Investment Trend

Africa is the World's second largest and second most-populous continent in the world with a total area of around 11 million square miles that account for 5.7% of the earth’s surface as well as 20% of the total surface of land on our planet. There are 54 countries as well as quite a few disputed territories. The most interesting facts about Africa is that the breadth and length of this continent are about the same.

There is no doubt that, the Economic growth in Sub-Saharan Africa is rebounding in 2017 after registering the worst decline in more than two decades in 2016, according to study of bi-annual analysis of the state of African economies conducted by the World Bank. Estimated to have strengthened from 1.3% in 2016 to 2.4% in 2017, Gross Domestic Product (GDP) growth in the region is mainly led by the continent’s largest economies: Nigeria, South Africa, and Angola.

But we can’t deny this fact that, African countries facing a lot of challenges in these days i.e.:  endless poverty, unemployment, population growth, over dependence on international aid, lack of true leadership, corruption, Insecurity, endless conflict and Violence, Hunger, ignorance of intellectual principals, lack of infrastructure facilities, inadequate and lack of good education, poor understanding of the World, Economic growth rate is far too low and natural & disaster risk.

However, a lot of development agencies are working throughout the African region in order to eliminate these challenges by providing the financial and technical aids in term of Loan, Grants and Technical Assistance. (AfDB, the World Bank, USAID, UNDP, African Aid, Bill & Melinda Gates Foundation, ActionAid, CARE International)

African markets are characterized by economic growth and it is the hope for the future. Now a day’s African countries and their markets are on top of mind in the context of financing for development. The Development Agencies play significance role toward archiving the Sustainable Development Goals.

Within Africa, the number and type of projects vary by country, sector & region. Nigeria and South Africa are good examples of the more mature African countries when it comes to investment in and success of projects and in 2016 the South Africa had the highest number of projects/assignment in the African continent. However, recent years have also seen the emergence of other developing economies in Africa (i.e.: Rwanda) with previously low numbers of projects, which are expected to have much more increased activity and investment in the next five years. Nigeria is one of the most populated country in African continent (estimated population of 120-140 million). In financial Year 2017, Nigeria is one of top borrower and received the funds about 1,601$ Million from the IDA (The International Development Association (IDA), the part of the World Bank). Ethiopia and Kenya is 2^nd and 3^rd top borrower in African Continent. Different regions focus on different sectors, with 33.6% of projects comes in the transport sector, followed by 22.4 % in real estate and 21 % in energy and power in 2016. All of these variations and trends play a part in deciding which sources of funding are the most suitable and where.

Sources of Funding for Infrastructure Financing in Africa

In October 2014, the Africa Development Bank noted that Africa's 'first/primary task' was to find ways to plug the annual infrastructure funding deficit.  It is nearly a decade since they estimated the financing/fund requirement to close the deficit amounts would be US$93 billion annually until 2020.There is a lot of funding options available for African Countries:

•  Sovereign Debt.
•  International Financing Institutions (IFIs) and Development Finance Institutions (DFIs).
•  Commercial Bank Debt (CBD).
•  Debt Capital Markets.
•  Export Credit Agencies.
•  Private Equity/PPP

Funding Source

 Sovereign Debt: Sovereign debt remains a key source of infrastructure financing since a long time. A number of African countries have been seeking to find alternative financing measures/sources and after the global financial crisis in 2008, nearly half of all African countries issued sovereign bonds.

International Financing Institutions (IFIs) and Development Finance Institutions (DFIs): DFIs have played an essential role in financing infrastructure in Africa with a combination of direct lender and soft and hard tools to attract private-sector investment. IFIs and DFIs can lend directly to projects and lend under A/B loan as well, structures whereby they have been able to bring other DFIs and smaller commercial banks into the market, which may not have previously been able to sustain the associated project and jurisdictional risks. The African Development Bank the World Bank, and the European Investment Bank is the Traditional Development Finance Institutions in African Region.

Commercial Bank Debt: Commercial bank lending plays an important role in funding and a good source for infrastructure financing in Africa. It can be in the sense of local and international commercial bank loans. For example:  Standard Bank, based in South Africa, provides financing for energy deals and is currently involved in projects in Ethiopia, Ghana, Nigeria, Namibia, Mozambique, Zambia and Zimbabwe.

Debt Capital Markets: Today, Banks are reducing their lending in order to meet new liquidity standards. The balance sheets of the African Development Bank and the World Bank and do not have enough funding available to bridge Africa's infrastructure gap. Against that backdrop, capital markets are an obvious alternative source. Except the South Africa, though, to date these have generally not been widely used as sources of project finance in Africa i.e.: Nigeria and Kenya have successfully issued infrastructure bonds, (corporate bonds are tax-free in Nigeria, for example).

Export Credit Agencies (ECAs): ECAs can provide direct untied funding/financing or can provide guarantees/insurance policies to commercial banks with respect to political and commercial risks. The main focus of ECAs mostly on extractive/mining industries. Export Credit Agencies always played an important role in Africa, which is characterized by extractive/mining industries.

Private Equity/PPP: Besides the major funding from the governments, private finance has also been used to fund infrastructure projects to a limited extent in both developed and developing countries. Governments provide public finance for development of infrastructure projects with the goal of meeting the social and economic objectives. On the other hand, private sector participates in infrastructure projects and provides private finance with the objective of furthering their business interests. Maximizing the return on their investment into infrastructure projects have been amongst the key business interests of private sector.