African countries face numerous challenges in achieving sustainable development goals, such as the contraction of the global economy, declining economic growth rates, and climate change, in addition to the rising cost of capital and governmental constraints. In this context, the G20, in its report issued in June 2023, highlights the role of international cooperation and partnerships in enhancing development impact and sustainable self-reliance policies in Africa. The report, authored by Bakary Traoré, Rita Da Costa, and Daphna Mazouzi, outlines the rapid increase in Africa’s debt burden, its exposure to higher borrowing costs amid a slowdown in global economic growth, and the challenges of addressing climate change.
The report also sheds light on the ongoing international disparities in providing financial support to Africa for its development policies and the recent calls by African leaders to improve global governance frameworks, which could enhance Africa’s ability to benefit from current financial tools. Additionally, the report discusses the G20’s role in fostering international cooperation and partnerships, reducing the perception of excessive risk, and the role of credit rating agencies in shaping a better future for Africa’s sustainable development.
Sustainable Development Financing
The report examines the changes in the global development and finance agenda since the Monterrey Consensus of 2002, noting that 2015 was a pivotal year for the evolution of the global framework for financing sustainable development. This was marked by the signing of the Addis Ababa Action Agenda, the strategy for sustainable development, the Sustainable Development Goals (SDGs), and the Paris Climate Agreement. It emphasized that during this period, traditional international cooperation mechanisms merged with new ones, aiming to adapt financial support to new global challenges, especially with the rise of additional actors during the COVID-19 pandemic.
Globally, the report confirmed that the financing gap for the SDGs has widened from at least $2.5 trillion to $3.9 trillion annually since the pandemic, with an additional $400 billion expected between 2020 and 2025 for Africa alone. It noted that the average annual financing gap for the SDGs reached $192.4 billion between 2020 and 2021, compared to $200 billion in 2015. The report highlighted the difficulty in securing these massive amounts from official development assistance (ODA) or domestic public financing.
Despite the adoption of the Addis Ababa Action Agenda, which introduced various innovative financing tools—such as Integrated National Financing Frameworks (INFFs), the G20 Principles for Scaling Up Blended Finance, and the Addis Tax Initiative (ATI), aimed at supporting domestic resource mobilization (DRM) agendas in developing countries—ensuring sufficient financing for sustainable development in the poorest and most vulnerable countries remains out of reach and difficult to achieve.
The mechanisms and channels for accessing financial support are neither fair nor balanced, as they largely depend on the preferences of the funders rather than the needs of the borrowers to achieve development. Options for improving risk assessment and perception are insufficient, and there is a significant gap due to the lack of approaches to address the increasing number of middle-income developing countries.
Key Challenges:
A G20 report highlighted three main challenges that place a significant burden on most African countries:
Limited Financial Availability: The report addressed the debt pressures African nations face, which remain high and raise significant concerns. It noted that the average debt-to-GDP ratio in African countries reached about 72% in 2020, but it was much higher in some middle-income countries, such as Zambia (140%), Cape Verde (158%), and Angola (136%). The report also mentioned that, as of April 2023, the IMF identified eight African countries facing a debt crisis, out of a total of nine globally, and 13 other African countries at risk of debt distress, out of 27 globally. The report cited experts regarding Africa’s ongoing debt crisis, which stems from a lack of financial liquidity. Experts attribute this to external shocks faced by these countries, ranging from the COVID-19 pandemic to rising food prices and interest rates. The report emphasized that Africa needs between $130 and $170 billion annually to bridge the infrastructure financing gap. Despite some notable efforts to support African nations, the report stated that current international initiatives have proven insufficient to meet Africa’s immediate liquidity needs. For example, the G20’s Debt Service Suspension Initiative (DSSI) and the Paris Club temporarily suspended around $12.9 billion in debt service payments for 48 participating countries from 2019 to 2020, but this amount remained modest compared to the financial needs of the countries.
Unequal Cost of Capital: The report highlighted that loan costs in international markets are overly dependent on negative preconceptions issued by international credit rating agencies. For example, capital costs for clean energy projects were five to ten times higher in South Africa and Nigeria than in the United States. It also cited estimates by the UNDP, showing that the exaggerated cost stemming from negative credit ratings (the so-called “African risk premium”) amounts to about $74.5 billion for local and foreign currency bonds issued by 16 African economies between 2007 and 2020.
Lack of Fair African Representation in International Financial Institutions: The report criticized the insufficient representation of developing countries, particularly medium and small-sized nations, in key financial and monetary committees like the IMF and World Bank. This lack of representation reduces their voting power and influence. It also criticized the stringent conditions imposed by lenders, which often do not align with the needs of developing nations. For example, in 2020, some African countries opted not to apply for the DSSI due to fears of negative assessments that could harm their future access to international markets. The report concluded that this issue has become a barrier to development, as global economic shocks—such as shifts in economic activity, financial flows, commodity prices, or currency stability—disproportionately affect these countries, leading to crises and unequal outcomes compared to the rest of the world.
Recommendations for the G20:
The report made several recommendations for the G20 to help mobilize financial resources to achieve targeted development, including:
Making direct contributions or using a small portion of the G20’s Special Drawing Rights (SDRs) to guarantee and mobilize resources for large continental projects. These contributions could take the form of a “Feasibility Study Fund” or a “G20 Project Preparation Facility” to support the most feasible development projects in Africa. This support could be channeled through the AU Development Agency (AUDA-NEPAD) and the “5% Agenda” campaign to mobilize 5% of Africa’s private financial assets.
Redistributing development aid through more channels, and as advocated by African Union Chairperson Macky Sall in 2022, the African Union should have a permanent seat in the G20 to compensate for Africa’s absence in global decision-making institutions.
Under Indian leadership in the near future, the G20 should push for better representation of developing countries in the governance structure of international financial institutions, enhancing their role in regional financial decisions.
Using risk mitigation strategies to lower the high cost of capital by providing guarantees. This is especially relevant, as loans backed by guarantees can facilitate official development assistance and stimulate private investment in key sectors like infrastructure.
Addressing the disparities in the current international financial structure and improving access to capital for developing countries, ensuring a fairer distribution of resources through multilateral development banks. The report noted that thanks to G20 efforts since 2017, 2023 could be a landmark year in providing the financial support needed to achieve the Sustainable Development Agenda.
In 2022, the G20 commissioned an independent expert panel to review and propose a plan for reforming the capital provision frameworks in multilateral development banks. If implemented, this plan could collectively free up between $500 billion and $1 trillion in capital.
Replacing the per capita income criterion used in financing developing countries with a more comprehensive measure of development, such as transparency or quality of life indicators, to better address financing needs.
Providing consistent and detailed information to the public to inform investors about available investment opportunities, their expected social and economic returns, and financial outcomes.
The G20 could also mandate an international organization to evaluate positive investment practices and design a G20 annex to accelerate the mobilization of institutional investors to finance the SDGs in Africa.
Finally, the report stressed the importance of continuing the flow of low-interest financial resources to help countries face multiple crises in the coming years, noting that the world is still far from meeting its commitments to sustainable development, essential goods support, combating climate change, and preparing for future pandemics.
Source: Bakary Traoré, Rita Da Costa, Daphine Muzawazi, Rethinking International Cooperation and Partnerships for Improved Development Impact and Self- Sustainability in Africa, Observer Research Foundation, July 2023.
