African countries are at a crossroads. The continent’s hard-won economic gains of the past two decades, which are critical to raising living standards, are at risk of being reversed.
For these countries to achieve a robust recovery and avoid economic stagnation, the private sector will need to contribute more to economic development. African heads of state hammered this message home at the “Summit on Financing African Economies” held in Paris in May.
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Infrastructure, both physical (roads and electricity) and social (health and education), is an area where the private sector could become more involved. The need for infrastructure development is immense in Africa: on average 20% of GDP by the end of the decade. How can they be financed? All else being equal, resources would come first and foremost from increased tax revenues, which most countries are already doing. But given the magnitude of the needs, new sources of funding will have to be mobilized from the international community and the private sector.
The African continent is full of opportunities for private investors. It has a young and growing population, abundant natural resources, massive urban growth, and many countries have launched long-term initiatives for industrialization and digital transformation. However, considerable investment and innovation will be required to unlock the region’s full potential. According to recent IMF staff work, by the end of the decade, the private sector could provide additional financing for physical and social infrastructure equivalent to 3 percent of SSA’s GDP each year. This represents about $50 billion per year (based on 2020 GDP) and nearly a quarter of the region’s average private investment rate, which is currently 13 percent of GDP.
What are the current barriers to private financing?
Compared to other regions, the private sector currently has limited involvement in financing and providing infrastructure in Africa. Public entities, such as national governments and state-owned enterprises, execute 95% of infrastructure projects. The volume of infrastructure projects involving the private sector has declined significantly over the past decade, following the collapse of commodity prices. The limited role of private investors in Africa is also evident internationally: the continent attracts only 2 percent of global foreign direct investment flows. Moreover, this scarce investment is concentrated in natural resources and extractive industries, not in health, roads or water.