Speech by Dr. Akinwumi A. Adesina — President, African Development Bank Group at the Launch of the African Economic Outlook 2023 during the 2023 Annual Meetings of the African Development Bank Group at Sharm El Sheikh, Egypt on 24 May 2023
Speech by Dr. Akinwumi A. Adesina — President, African Development Bank Group at the Launch of the African Economic Outlook 2023 during the 2023 Annual Meetings of the African Development Bank Group at Sharm El Sheikh, Egypt on 24 May 2023.
I would like to welcome you to this launch of our flagship report on the African Economic Outlook for 2023.
The African Development Bank puts great priority on the development of knowledge products to inform policy-makers on the performance of the continent, current and emerging global economic, financial, and geopolitical challenges, and risks, and how to tackle important issues such as debt and public financial management for sustainable development.
As we gather today, the world is facing multiple challenges, including climate change, inflation driven by higher prices of energy, commodities, and disruption of supply chains due to the ongoing Russia-Ukraine war. And the tightening of monetary policies in the US and Europe has led to rising interest rates that are compounding debt service payments for African countries.
The report shows that in the face of these challenges, African economies have demonstrated remarkable resilience. The continent achieved an average growth rate of 3.8% in 2022, with projected average growth of 4.1% for 2023–2024. This surpasses the global average of 3.4% in 2022.
African countries that are exporting oil have experienced a boost in growth as global oil prices have remained high. However, resource-intensive countries experienced a deceleration of growth because of their lack of diversification and the lower prices of commodities, especially minerals due to weak global growth. Non-resource-intensive countries with more diversification experienced higher growth.
African economies are moving in the right direction. Five of the six pre-pandemic top-performing economies are set to be back in the league of the world’s 10 fastest-growing economies in 2023–2024.
External financial inflows to Africa — including foreign direct and portfolio investment, official development assistance, and remittances — have rebounded by approximately 20%, reaching USD 216.5 billion (or 7.5% of GDP) in 2021. This is up from USD 179.9 billion (or 7.4% of GDP) in 2020 during the peak of the Covid-19 pandemic.
However, all countries face challenges from high inflation globally, while the contractionary monetary policies in the developed countries, especially the US and the EU have led to rising interest rates that are causing rapid increases in debt service costs, with stronger dollar leading to devaluation of currencies, driving up imported inflation and capital flight by portfolio investors.
The report shows that 25 African countries that are either in high risk or in debt distress saw highest increases in debt service payments. The longer the global monetary policy of raising interest rates, the higher debt vulnerabilities countries will face. This is especially critical as the debt service payments due in 2023–2025 will rise from USD 22.2 billion to USD 26.7 billion, which could lead to more debt distress.
Also challenging is the high level of domestic debt that needs to be restructured. Short tenor of these debts, as well as the high coupon rates they incur, further complicates debt vulnerabilities for many countries. It is clear from the report that domestic debt restructuring will be equally important in the future.
As African central banks also raise interest rates, the weakened demand for financial services could increase the risks to financial stability, unless banks are supported with capital and liquidity buffers.
The rising global interest rates have had negative effects on portfolio investments in Africa, with the outflow of portfolio investments increasing from USD 8.1 billion in 2020 to USD 27.5 billion in 2021.
The report shows that 25 African countries that are either in high risk or in debt distress saw highest increases in debt service payments
However, remittances continue to help boost recovery, as this increased across several countries due to better than expected economic recovery in migrant destination countries. Remittances increased from USD 84 billion in 2020 to USD 95.6 billion in 2021.
This is especially instructive, as the war in Ukraine has led to a shrinking of net official development assistance to Africa. Net ODA to Africa declined by 7.4% in real terms from USD 36.6 billion in 2021 to USD 34 billion, which is the lowest level in the past 12 years. This calls for greater efforts in Africa to mobilize more domestic resources.
Also, it is critical to ensure a coordinated debt treatment between official and private creditors and ensure that the G20 Common Framework works for African countries. Other policy recommendations include industrial policies to accelerate diversification of economies, and expansion of regional trade to lower exposure to global volatilities.
Africa is being short-changed by climate finance. The continent will need between USD 235–250 billion annually through 2030 to meet investments under its Nationally Determined Contributions. Yet, Africa received just about $30 billion in climate finance.
Of particular concern: Public climate finance is six times that of private finance. Private flows of climate finance in Africa are the lowest in the world. Africa’s private financing gap is estimated to reach USD 213 billion annually through 2030. This implies that private sector climate financing will need to increase by 36% annually.
This explains why the theme of our Annual Meetings is focussed on this issue.
The report recommends several ways to attract private climate financing, including green bonds, debt-for-nature swaps, green banks, blended finance, and carbon markets.
Africa needs to do a lot more to attract a significantly higher share of global green bonds as the continent accounts for just 0.2% of the USD 2.2 trillion of cumulative global green bonds issued up to 2022.
The report shows clearly that Africa can accelerate its development by optimizing its natural capital, estimated at USD 6.2 trillion in 2018. However, the continent is not getting the best out of its natural resources, because of poor valuation, degradation, illicit capital flows and losses from royalties and taxes.
Expanding private sector participation in green growth will require several policy interventions, including strengthening capacities to develop long-term strategies on green growth, development of appropriate regulations and incentives, support for project preparation and project development, and the development of stronger capital markets that can support exits from investments.
It will require eliminating fossil fuel subsidies, greater use of blended finance, deployment of de-risking facilities at scale, and development of platforms that can allow the private sector to invest in a portfolio of green projects, as opposed to individual projects, to diversify and manage risks.
There are just so many insights and policy recommendations in this report.
I am sure that you will find this report both insightful, action-oriented, and very useful as we look for ways to substantially raise private sector financing for climate and green growth in Africa.
I wish to thank Vice President and Chief Economist, Professor Kevin Urama, and his team, and all the collaborating team members across the Bank and external partners, for their excellent work on this report. Great job! Congratulations! It is now my great pleasure to call on Professor Urama to deliver a presentation on the report.
Thank you very much.