24th November 2022
Own Correspondent
The role of Development Financial Institutions(DFI), in overcoming the burden posed by COVID-19, in supporting governments through countercyclical measures, including funding of COVID-19 related development projects, has become more important than ever before in Africa.
However, with the increasingly limited resources from governments, DFIs are now 4 expected to mobilise resources to meet the fiscal gaps and continue to meet their developmental mandates across the various affected sectors of their economies.
“It will therefore be imperative that DFIs, which are already threatened by shifts in demographics, societal needs, economic and market conditions as well as political, legal and regulatory regimes, reposition themselves to raise the necessary resources to assist governments,” said Karabo Gare, Minister of Enterprises.
He said, “The theme therefore, challenges DFIs to tackle “the how” by redefining their objectives, building better linkages, optimizing systems, improving efficiency in operations and accelerating progress and more importantly aligning and accelerating their goals toward meeting SGD Goals.”
It further emphasises the role of DFI’s as a vehicle in driving global economic development.
“As you all know, one of the fundamental principles in setting up DFIs was to address prevailing market failures and reach underserved segments,” said Gare.
He said, “The main reason being that private entities maximise profit and have low or no interest in offering services to low-income individuals in remote communities or more generally in financing high risk projects with positive social externalities.”
Due to the associated burden of assisting SMMEs which include: lack of collateral, the cost of administering and monitoring 5 loans and substantial default rates; DFIs have been instituted to close the gap and finance this important sector of the economy.
There is evidence that DFI’s have an important role to play in the development of our economies.
DFI’s are now generally expected to address broader developmental policy objectives, including employment creation, income distribution, import substitution and developing new industrial sectors or boosting weak ones.
According to officials DFI’s generally achieve modest but steady profits that allow them to grow year-after-year, while raising additional funding for their investments in the markets. On top of their own investments, DFIs also already play a crucial role by mobilising private investors.
They typically do this by providing risk capital to enterprises, that can then in turn raise additional funding from commercial financiers. It is through these arrangements that countries like Botswana, strive toward their goal of nurturing Private Public Partnerships.
The right mix of finance, therefore, includes risk capital backed by manpower, experience and a long-term perspective.
“The DFI model aims to contribute to these outcomes by investing in projects with good commercial sustainability that also live up to high standards for environmental and social responsibility,” said Gare.
The challenge for DFIs today say public officials is to go further than private investors in two respects: by investing in enterprises that involve too high commercial risk to be funded solely by the private, while mobilising more private co-financing.
The real challenge is to get the right mix of financing that supports the first hard steps taken by entrepreneurs as well as the last dollar needed to reach financial close.
Governments around African continent are looking upon the leadership of DFI’s in Africa to mobilise resources to enable African countries to meet their SDG goals. However, it is not enough to mobilise resources but equally important is development impact of these resources.
The COVID pandemic and the ongoing Russian-Ukraine conflict has set the clock back in these efforts to achieve the SDG’s. Achieving some of the key components of the 2030 Agenda, focusing on green and quality infrastructure, health and social protection, climate adaptation and resilience, and human rights and inequalities, is challenging in Africa.
“Health care in Sub-Saharan Africa remains the worst in the world, with few countries able to spend the $34 to $40 per person per year that the World Health Organization considers the minimum for basic health care. And despite widespread poverty, an astonishing 50 per cent of the region’s health expenditure is financed by out-of-pocket payments from individuals,” said Thabo Thamane, Chief Executive Officer for Citizen Entrepreneurial Development Agency(CEDA) and Chairman of the Association of African Development Finance Institutions(AADFI).
He said, “The International Finance Corporation (IFC) estimated that over the next decade, $25-30 billion in new investment will be needed to meet Africa’s healthcare demand.” “Achieving improved health is a costly endeavor, and many African countries have limited fiscal space. African countries spend $8 to $129 per capita on health, whereas highincome countries spend more than $4,000 per capita.” In terms of Green and Quality Infrastructure, “inadequate infrastructure remains a major impediment to Africa’s full economic growth potential.”
It is estimated that about US$93 billion will be needed annually over 6 the next decade to overhaul sub-Saharan African infrastructure.
About two-thirds of that, or $60 billion, is needed for entirely new infrastructure and $30 billion for the maintenance of existing infrastructure. So whilst trade agreements such as the AfCFTA create immense opportunities towards achievement of the 2030 Agenda, there is a need to develop infrastructure to ease trade within and between African countries.
