Declining investment growth
Investment growth in sub-Saharan Africa has been going downhill. In its ‘Africa’s Pulse’ report for April 2017, the World Bank noted that investment growth in the region nosedived from an 8% pace in 2014 to just 0.6% in 2015. While the long-term average investment growth has been 6%, it had peaked at 11.6% during 2003-08. This slowdown is visible in both public and private investment.
Generally, high public investment growth fuels private investment growth. But given the fiscal state of most of the countries in the region, represented by the high debt-to-GDP (gross domestic product) ratios, higher public investment looks difficult.
So how do these countries encourage investment?
The World Bank has identified four key areas to address investment needs and ensure sustainable financing:
- Sustaining public investments
- Encouraging greater private sector participation in infrastructure
- Strengthening public investment management systems
- Promoting regional integration of infrastructure
Given the acute need of building and maintaining infrastructure in sub-Saharan Africa, all four areas above relate to it. But with our focus on investments, let’s look closer at the first key area.
Sustaining public investments
Even though they are constrained, domestic resources could potentially be the dominant source of infrastructure financing for sub-Saharan Africa.
Though some countries have been successful in tapping international bond markets since 2016, pressure on government finances is likely to make external financing in the medium-term expensive. Thus, the countries from the region need to look at increasing resources at home.
The World Bank holds that, “Increasing domestic revenue may provide the most sustainable way to finance infrastructure investment.” Increasing domestic borrowing and improving tax collections are vital to increasing resources at home.
Improving tax collections would require structural changes and may not provide an immediate solution. Hence, increasing domestic borrowing looks like the speediest answer to the region’s investment problems.
Some countries have been finding novel ways to increase borrowing. Countries like Nigeria and Kenya have been issuing retail bonds to raise money. Nigeria has found its scheme to be successful, while Kenya has taken the innovative approach of selling bonds to retail investors via mobile phones to cater to a large segment of the population who do not have bank accounts.
These methods can be examples for other nations from the region. Though the amount of public debt needs to be checked, given the fact that at least for now, international investors can’t have enough of emerging and frontier market bonds, the financing needs of sub-Saharan Africa will likely be fulfilled if countries continue improving domestic systems and to keep indicators reassuringly positive.