Chapter 2.3

A new dimension of financing

Click here to download the full draft (as at January 2017, PDF, 1.3 MB).

In 2015, ODA (Official Development Assistance) for Africa amounted to more than 50 billion euros globally. Of course, we need more ODA funds to meet the current challenges. In view of the investment volume of over 600 billion US dollars per year required to implement the UN Sustainable Development Goals (SDGs) in Africa (Economic Development in Africa Report 2016, UNCTAD), relying on ODA funds alone cannot be the solution. It is important, therefore, to take a three-pronged approach to financing:

  • Mobilise own financial resources in African countries and strengthen their capacity to generate own revenues
  • Boost private investment and mobilise private capital using new support instruments and investment products
  • Use ODA funds to leverage private investment

It is hard to explain why the tax ratio in the poorest African countries should still be below 17 per cent when it stands at an average 35 per cent in OECD countries, or why education budgets are chronically underfinanced in many African countries despite them selling their natural resources.

The crucial factor is to mobilise the private sector to a greater extent. If Germany and other donors, and also the multilateral development banks, support suitable funds, it will reduce the risks faced by investors significantly. In this way, public funding can be used to directly boost private investment in Africa. Every euro of tax revenue can leverage many more euros in private capital. And then investing becomes attractive even for large institutional investors such as insurance companies or pension funds.

ODA funds can also be used for guarantee instruments – similar to the covering of exports by Hermes guarantees – to protect private investments (ODA-financed guarantee instrument). The World Bank already has a Multilateral Guarantee Agency, which could expand its activities in Africa if donors made the necessary commitments.

Moreover, we must ensure that investments in Africa are no longer exposed to currency risks. We thus need to ensure a better hedging of local currency risks, for instance through the Currency Exchange Fund. 

Together with the World Bank, the International Monetary Fund and the regional development banks, Germany will launch an initiative during its G20 Presidency to boost private investment in Africa.

In addition, existing instruments need to be coordinated and managed better. This is also something we are already working on with the World Bank. The structures of the EU External Investment Plan can be the basis for a pan-European investment initiative.

Capital stock of development banks
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Capital stock of development banks

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