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Across Africa, millions continue to be affected by COVID-19, which is in its third or fourth waves in some countries (Total cases: 4 159 055; Total deaths: 111 357; Total recoveries: 3 726 707; Total tests: 39 259 460 – April 10, 2021). Despite the start of vaccination programs in several countries, 2021 is likely to be a year of weak economic recovery across the African continent. Average economic activity in Africa is projected to contract by 3.0 percent in 2020 and recover slightly to 3.1 percent for 2021. This represents a drop in real per capita income of 5.3 percent, bringing per capita incomes back to 2013 levels, the worst outcome on record. The downturn is driven by Africa’s two largest economies, Nigeria and South Africa, which are projected to contract by 4.3% and 8.0%, respectively. The fall in oil prices hit sub-Saharan Africa’s oil exporters hard, especially Angola, and Nigeria. Other commodity exporters and economies dependent on tourism are also facing severe contractions. Moreover, with the continent’s largely non-formal economies, relatively shallow financial systems, and thin fiscal buffers, African governments lack many of the tools necessary to counteract the pandemic’s varied socioeconomic impacts.

The pandemic is reversing gains in human development and poverty reduction in Sub-Saharan Africa, with between 26 million and 40 million additional people predicted to be pushed into extreme poverty (World Bank 2020). The long-term effects of COVID-19 on increasing child mortality, indirect mortality, and economic downturns by 2030 and 2050 might well exceed the extent of the initial shock (UNDP 2021).1 Countries with low levels of government capacity and low government investment in the health system prior to COVID-19 will bear the largest burden of the pandemic’s lingering social, economic, and financial impacts.

The COVID-19 pandemic has further highlighted certain development challenges on the continent (weakness of the health system, lack of social protection, vulnerabilities in the informal sectors, etc.), but also revealed the potential to face them with innovations in emerging sectors (digitalization) or new dynamics in other sectors (governance). The need for transformative domestic reforms to promote resilience (including revenue mobilization, digitalization, and fostering better transparency and governance) is more urgent than ever.

The combined effects of global economic slowdown, the sharp decline in commodity prices, disruptions to domestic economic activity, and costs of measures to prevent or contain COVID-19 outbreaks have dealt an extreme shock to all African countries.

Africa’s under-developed financial systems and low levels of financial inclusion lead to a savings- investment gap. The continent’s investment needs are immense; estimates range from $93 billion to $130-170 billion per year. For sub-Saharan Africa (SSA) to achieve all of the infrastructure-related SDGs by 2030, the additional annual spending is estimated at about 9% of regional GDP. For decades, Africa has relied on external financing to accelerate its development. While Africa’s borrowing has supported growth, it has also heightened the continent’s debt vulnerabilities, increased the risks of debt distress, and led to a broader deterioration of public finances. Now, in the face of COVID-19, Africa’s wave of debt seems finally at risk of crashing down.

The crisis is putting significant pressure on African finances, which were already strained in many countries. Governments are facing new and unexpected spending pressures in their effort to respond to COVID-19, including health costs and economic stimulus efforts. Across SSA, government revenues are projected to decline by 10-15% in 2020, with average revenue-to-GDP decreasing by 2.6 percentage points from 2019 levels. Revenue in oil exporters and tourism-dependent countries is expected to be particularly hard hit. The average SSA fiscal deficit is expected to widen to 7.6% of GDP, almost doubling the 2019 average of 4.4%. With the projected GDP growth reversals, the region’s average debt level is projected to reach 64.8% of GDP in 2020 (UNDP 2020).

Access to financing amid the downturn will be a significant challenge for most African countries. Tightening global financing conditions between February and May 2020 resulted in capital outflows of nearly $5 billion from African countries. Remittance inflows are likewise expected to decline by as much as 20 percent. African central banks have responded by easing monetary policy, in many cases significantly; the South African Reserve Bank reduced benchmark interest rates by 275 bps, the Central Bank of Nigeria injected liquidity equivalent to 2.4% of GDP into the banking system, and the Bank of Ghana agreed to finance the central government’s budget deficit. Exchange rates have depreciated or been adjusted downwards in most countries, which among other impacts will increase the cost of servicing any external debts denominated in foreign currencies (UNDP 2020).2

This situation shows the need for African countries to rethink the model of financing their development. Indeed, the entire financing ecosystem of African economies must be rethought. The corruption of the judicial system which discourages the financing of the private sector by the banking sector, the lack of guarantees for rural entrepreneurs and MSMEs, the weakness of property rights, especially land rights, the unstructured management capacities of entrepreneurs in the informal sector, are all challenges of financing Africa’s development which invite to rethink the financing model that we want to apply in Africa. Is it not time to develop financing and investment models that are articulated to the continent’s socio-economic realities considering the level of financial literacy, the high level of informality and endogenous mechanisms for collecting savings in Africa?

The resources are there. Their mobilization requires tackling the deficiencies of the banking and state systems seriously. According to the UNCTAD’s Economic Development in Africa Report 2020 an estimated $88.6 billion, equivalent to 3.7% of Africa’s GDP, leaves the continent as illicit capital flight every year. It shows that these outflows are nearly as much as the combined total annual inflows of official development assistance, valued at $48 billion, and yearly foreign direct investment, pegged at $54 billion, received by African countries. These outflows include illicit capital flight, tax, and commercial practices like mis-invoicing of trade shipments and criminal activities such as illegal markets, corruption, or theft.

On the government side, despite significant tax reforms, the tax revenue mobilization is limited by structural factors such as low per capita income, large informal sector, large peasant agriculture and very small manufacturing and modern services implying very low effective tax bases despite the growth profiles. The average revenue to GDP ratio in Africa has been about 23 percent, between 2008 and 2016 compared with 40 percent in the European Union in 2016. A narrow tax base focused mainly on trade taxes3 characterizes the taxation system in many African countries. The heavy reliance on trade taxation indicates relatively weak fiscal capacity which is also possibly a reluctance to invest on revenue collection capacity by the political elite in connection with the economic power.

Domestic revenue losses are significant drain on domestic resource mobilization for many countries in Africa due to the lack of coordination between investment promotion objectives and resource mobilization needs, excessive tax incentives and large drains through illicit financial flows (ECA, 2016).

The role of central banks in unlocking idle resources and channeling them into productive investments remains critical. Currently, over US$1 trillion of excess reserves have not been effectively put to work to finance Africa’s development. African stock markets could also be developed to attract further investment opportunities. The development of sovereign wealth fund in African countries (15 already created) and the mobilization of African pension funds4 could open opportunities to a growing domestic source of capital for private equity and investment in local businesses, infrastructure projects and services that are desperately needed for Africa’s continued transformation and growth. The insurance sector also has similar potential in the financing of Africa’s development. Further opportunities arise through the better management and use of extractive industries. Proven stocks of extractable energy resources in Africa (oil, natural gas, coal, and uranium) worth between US$13-14.5 trillion and identified US$1.7 trillion of potential wealth and additional production potential in six key sectors -agriculture, water, fisheries, forestry, tourism and human capital (Africa investor 2010).

1- Unraveling the immediate and long-term effects of the COVID-19 pandemic on socio economic development in sub-Saharan Africa, UNDP 2021

2- COVID-19 and External Debt in Africa, UNDP, RBA, 2020.

3- On average, trade taxation accounted for 44 percent of total tax revenues (excluding grants) in Africa, between 2008 and 2016; while direct and indirect taxation accounted for 28.3 and 22.9 percent, respectively, over the same period (Mobilizing Domestic Resource in Africa for Inclusive Growth, AfDB, 2020)

4- Estimated at over US$29 billion by Ashiagbor et al., 2014