Although economies in Africa faced uncertainty in 2022 as economic and global shocks weighed on the post-Covid-19 pandemic recovery, intraregional trade and climate finance initiatives are helping chart a course towards more sustainable development. Growth is projected to remain moderate at 3.8% in 2023 and increase to 4.1% in 2024, according to the IMF’s regional economic outlook for sub-Saharan Africa.
Regional Cooperation
The African Continental Free Trade Area (AfCFTA) seeks to revive intra-continental trade, with Rwandan coffee beans, and tea leaves and vehicle batteries from Kenya making their way to Ghana in early December 2022 as part of the Guided Trade Initiative pilot programme. As of early 2023, 44 of 54 signatories ratified the agreement, which, when fully implemented, is expected to create the largest free trade area in the world in terms of the number of participating countries. As of late 2022 intraregional trade accounted for 15% of the continent’s total, below rates in Europe (67%) and Asia (60%). Indeed, the AfCFTA could boost total African exports by 29%, or around $560bn, and lift more than 30m people out of extreme poverty by 2035.
Moreover, cross-border energy agreements supported by expanded hydropower infrastructure could help promote additional intra-African cooperation. One example is the Lesotho Highlands Project, an initiative to provide water to South Africa and generate power for Lesotho that received a $86.7m loan from the African Development Bank in 2021. In 2022 the World Bank committed funding to Tanzania’s Rural Electrification Expansion Programme and Uganda’s Grid Expansion and Reinforcement Project – the latter of which supports hydropower generation – to finance grid expansion and connectivity, and achieve more reliable power supply in rural areas.
Financing Growth
Increased digital reach and new financing options are poised to expand coverage to unbanked populations and boost access to funds for small and medium-sized enterprises (SMEs), which employ an estimated 80% of the continent’s workforce. A rise in digital transactions is spurring countries to implement an e-money tax to expand their fiscal reach. While critics argue that these policies may stymie e-commerce growth, countries such as Ghana and Zimbabwe have succeeded in broadening their tax revenue by targeting mobile money transfers.
Global remittances increased during the beginning of the pandemic and continue to represent a significant and relatively stable source of foreign income for emerging markets. Financial technology (fintech) has been integral to maintaining this flow of funds. In February 2022 the Nigerian Postal Service finalised arrangements for a microfinance bank that could allow 52m unbanked citizens to conduct financial transactions. Meanwhile, at the end of 2022 Western Union expanded coverage of its mobile banking apps to include customers of KCB Bank Kenya, Diamond Trust Bank and the Kenya Post Office Savings Bank.
Other fintech solutions, such as “buy now, pay later” microcredit models and cryptocurrencies, have been seeing robust uptake on the continent and could help improve financing access for individuals and SMEs.
Cultivating Added Value
In an effort to support sustainable growth and reduce the burden of high commodity prices on consumers, many African countries have directed investment to manufacturing and agro-processing to further the industrialisation of their economies. As a top exporter of commodities such as cacao and cashews, Côte d’Ivoire has placed agriculture at the centre of its post-pandemic investment strategy. A 2022 report by Lloyds Bank named the country the strongest economy in the Economic Community of West African States, thanks in part to foreign investment inflows and increased value-added agricultural processing capacity. Such initiatives and progress is likely to set the stage for future economic growth.
In its efforts to capitalise on the benefits associated with the AfCFTA and facilitate value added, Ghana has focused on manufacturing and the establishment of special economic zones (SEZs). Botswana is similarly expanding its SEZs in a bid to attract investment.
Meanwhile, with agriculture accounting for 25% of GDP, Nigeria is looking to incentivise agro-processing to maximise added value. An estimated 80% of the sector’s profit comes from the processing and retailing of raw goods. As part of its Green Deal initiative, in July 2022 the EU and its development finance institutions announced funding of €1.3bn through to 2027 to help Nigeria diversify its economy away from oil.
In addition to projects focused on reforestation and renewable energy, the EU funding is set to help improve farmers’ access to markets. Moreover, with support from the African Development Bank, in October 2022 Nigeria launched its Special Agro-industrial Processing Zone programme to create opportunities for rural areas where agricultural and food companies can do business, decrease food supply loss and increase agro-processing activity.
Zero Emissions
Other African countries have sought to capitalise on the fast-growing electric vehicle (EV) segment to meet economic and emissions goals. South Africa, the continent’s biggest greenhouse gas emitter, is also sub-Saharan Africa’s largest EV market. When it launched its Low Emission Development Strategy 2050 in 2020 with the goal of becoming a net-zero economy within 30 years, EVs were identified as central to limiting tailpipe emissions. Following plans set forth in its Green Transport Strategy 2018-50, South Africa seeks to mobilise $513bn in investment in the segment by 2050.
Egypt is another major African economy targeting EV manufacturing and development to lower emissions. In March 2022 El Nasr Automotive Manufacturing Company (NASCO) signed a shareholders’ agreement with the National Automotive Company to establish the country’s first EV distributor, as well as a memorandum of understanding with Valeo Egypt, a subsidiary of the eponymous French automotive supplier, to design, develop and produce EV components. The country’s first NASCO-manufactured EVs are expected to hit the market in 2023.
Djibouti, which sourced 60% to 80% of its electricity from neighbouring Ethiopia through a transmission line as of late 2022, aims to generate 100% of its power from renewable sources by 2035 as part of the country’s long-term economic vision. One method for meeting this target is geothermal energy, which has the potential to generate 1000 MW, along with solar, wind, biomass and green hydrogen. The country is also working to limit the impact of climate change: in October 2022 Djibouti, with the support of the International Atomic Energy Agency, opened the Regional Research Observatory on the Environment and Climate, a research observatory focused on understanding the effects of climate change on the country. The observatory is expected to help Djibouti better manage its water and food resources by developing climate models and collecting data.
Funding Sustainability
Perhaps the biggest takeaway from the COP27 UN Conference on Climate Change held in Sharm El Sheikh, Egypt in November 2022 was an agreement on a loss and damage fund for the countries that are most vulnerable to climate change, many of which are in Africa. While the fund’s details are forthcoming, the continent has long been a test bed for creative climate financing. The 51 African countries that submitted nationally determined contributions during the COP21 UN Conference on Climate Change in Paris in 2015 will require $28bn in funding by 2030 to meet those goals, according to a June 2022 report by the Climate Policy Initiative.
Southern and Eastern African countries are seeking to use climate-for-debt swaps known as blue bonds to build the so-called Great Blue Wall, an initiative that aims to protect marine and coastal resources in the Indian Ocean, from Somalia to South Africa. The participating countries hope to sequester 100m tonnes of CO₂ and create 1m blue jobs by 2030.
Green bonds protecting rainforests have also emerged as a useful climate finance tool. At COP27, in a nod to the Organisation of the Petroleum Exporting Countries (OPEC) the Democratic Republic of the Congo joined Brazil and Indonesia in talks to form a strategic conservation alliance nicknamed “the OPEC for rainforests”. An agreement could protect the 52% of global rainforest cover that lies within their borders.
In October 2022 Gabon, a proponent of debt-fornature swaps, announced plans to sell sub-Saharan Africa’s largest green bond – valued between $100m and $200m – to fund the construction of hydropower plants. It has also discussed using green bonds to help conserve its rainforests, supporting goals for diversification and job creation. These initiatives, in combination with efforts to provide funding to cross-border energy projects and increase value-added exports, are expected to set the stage for future economic growth.
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