Financing needs and debt sustainability in Africa

28 February 2017

Written by Claudia Roethlisberger and Junior Davis based on UNCTAD's Economic Development in Africa Report 2016: Debt Dynamics and Development Finance in Africa.

The financing needs of Africa related to the SDGs are enormous, amounting to at least US$600 billion a year. As both external and domestic debts are growing, how can Africa finance its development aspirations and maintain debt sustainability?

The international community adopted an ambitious global development agenda in 2015 aimed at eradicating poverty, protecting the planet's environment, and ensuring prosperity for all.

This vision is encapsulated in the Sustainable Development Goals (SDGs). Along with implementing Agenda 2063, Africa's own continental development vision, achieving the SDGs is one of the major development aspirations of the continent.

This piece is based on UNCTAD's Economic Development in Africa Report 2016: Debt Dynamics and Development Finance in Africa.

The financing needs related to the implementation of the SDGs and Agenda 2063 are immense. Schmidt-Traub estimates that the incremental costs of financing the SDGs in Africa amount to more than US$600 billion per year. This amount equates to almost one third of Africa's aggregate gross national income. But this may be a conservative number, as estimates differ depending on the method used.

Chinzana et al. estimate the required GDP growth rate to achieve SDG 1 (ending poverty) and the corresponding investment-GDP ratio and financing gap-GDP ratio, assuming that savings, official development assistance (ODA), and foreign direct investment remain at current levels. According to this method, an annual GDP growth rate of 16.6 percent per year will be required, along with additional investment of US$1.2 trillion per year, to meet SDG 1 only

The level of growth and financial resources required for realising the SDGs will be challenging to achieve. After more than a decade of unprecedented growth in Africa, the economic conditions have been rapidly changing and look less favourable. The steep decline in commodity prices, the slowdown of Chinese demand, and unstable international financial markets are likely to negatively impact Africa's growth prospects.

Moreover, the global development finance landscape has evolved, as reflected in the outcome document of the Third International Conference on Financing for Development, the Addis Ababa Action Agenda. There is a shift from a model centred on ODA and the coverage of remaining financing needs through external debt, to a framework with greater emphasis on the mobilisation of domestic resources.

At a time when debt levels are rising and donor funds have become scarcer, these changing economic and financing conditions raise concerns on how Africa can finance its development aspirations and maintain debt sustainability.

Africa's financing needs are enormous and require African governments to carefully evaluate their financing options and how they impact on debt sustainability.