African Diaspora as a catalyst for infrastructure development in Africa

A report from the Africa Europe Foundation titled “The Missing Connection: Unlocking Sustainable Infrastructure Financing in Africa”, describes the current infrastructure gaps in Africa and the opportunities offered by the Africa-Europe partnership to develop new forms of financing for their development. Launched in South Africa at the 5th Finance in Common Summit (26-28 February), in association with South Africa’s Presidency of the G20, the report concludes that the financial resources that African governments commit every year for the development of infrastructure on the continent are barely sufficient to cover half of the Africa's total infrastructure needs, estimated between 130 and 170 billion dollars per year. In addition, about 35% of these resources comes from both multilateral and bilateral donors, with the World Bank Group and China at the top, which raises doubts about their sustainability in the long period.

In 2020 the World Bank and China injected respectively $7.1 billion and $6.4 billion in the Africa’s infrastructure development (which include transport, energy and digital connections), accounting for almost half of the total donor expenditure. They were followed by Afreximbank ($2.0 billion), the European Investment Bank ($1.6 billion), the African Finance Corporation ($1.4 billion), India ($1.3 billion), the African Development Bank ($1.2 billion), South Africa ($1.1 billion) and the BRICS’ New Development Bank ($1.0 billion). This clearly shows that Africa has not yet achieved self-sufficiency in infrastructure development. Despite increasing efforts from African governments and initiatives like the Programme for Infrastructure Development in Africa (PIDA), external funding and partnerships remain crucial.

These conclusions are not surprising. The Africa Economic Outlook 2018 of the African Development Bank provided exactly the same estimates in terms of infrastructure gap. The Bank also underlined on many occasions the need to involve private investors in the development of the continent's infrastructure, by sharing with this sector responsibilities and risks especially in the execution of those projects that present greater complexity. In this regard, long-term contractual arrangements such as public-private partnerships (PPPs) were indicated as particularly important.

The Africa Europe Foundation report notes that the infrastructure gap is costing Africa a 2% annual reduction in its GDP growth and is holding back the continent’s growth. In particular, it underscores the need to improve road, rail and energy connectivity as a condition not only for stimulating the industrialization of Africa, but also for improvement of productivity, which remains one of the lowest on the planet, as indicated by a recent study by McKinsey. Indeed, productivity of labor in Africa cannot increase without putting in place an adequate infrastructure network that increases the availability of inputs and allows for the efficient transportation of excess production to destination markets. This is particularly important for agriculture development, which according to some analyses, is the sector where Africa has the highest potential for growth, due to its vast amount of arable land, diverse climate, and relatively untapped potential for increased production compared to its current output. But not only. The manufacturing sector also requires robust logistics and available energy to bring input to the factory efficiently, power production and to distribute finished products.

The Africa Europe Foundation argues that in addition to leveraging PPPs to finance infrastructure projects, African governments should explore innovative financing solutions that primarily leverage domestic resource mobilization (including increasing domestic revenues and combating illicit financial flows). This source of financing is indicated as the most stable and sustainable source of financing to bridge the gap in Africa's infrastructure needs. However, in a period of sharp increases in the cost of living and increased tax pressure in many African States, this solution must be carefully evaluated, otherwise it risks fueling unrest and increase political instability.

Instead, more interesting is the proposal to attract resources from the diaspora communities living abroad to fill (at least in part) the Africa's infrastructure gap. In this regard, a recent trend in many States in the continent is the issuance of diaspora bonds. These financial tools are used to bridge financing gaps in infrastructure development projects. Among them there are Ethiopia, Egypt, Kenya and Nigeria. These countries have managed to tap into the wealth of their diasporas to finance large projects, leveraging the desire of these communities to improve living conditions in their home countries. Diaspora bonds allow governments to diversify their funding sources by borrowing at below-market rates and with longer repayment terms, as these bonds are offered at a “patriotic discount” or during periods of particularly acute fiscal crisis. On 27 January 2023, the role of diaspora bonds - and more generally, of the African diaspora as a catalyst in driving economic growth and development in Africa - was also discussed during the Africa Prosperity Dialogues in Ghana. One of the main findings of this event was the need for African States to develop diaspora engagement policies to craft strategies on how to harness resources of citizens living abroad for promoting economic development in their territories. Among the countries that have adopted such strategies there are Ghana and Ethiopia, which have communities of over 3 million of people living abroad. But more African States need to adopt them.

The World Bank estimates that the total flow of remittances from Africa in 2023 amounted to $72.5 billion, of which $54 billion went to sub-Saharan Africa alone. This represents a significant source of investment for the continent. The International Organization for Migration (IOM) highlights that diaspora remittances can stimulate aggregate demand, increase consumption and accelerate economic growth. However, it also warns that they are not a sustainable substitute for economic development. They must therefore be necessarily accompanied by: a) the creation of an enabling environment that promotes economic diversification, b) the attraction of investment, and c) the generation of adequate domestic revenue, in which it is critical that the tax burden is shared equitably among all categories of taxpayers.

These three areas represent the trilemma that African States will face in the coming years. Developing effective solutions in each of them will be key for solving the Africa's growth problems. And not only in the infrastructure sector.