Dean Adansi, chief executive at Ghana International Bank plc (GHIB), examines the challenges and opportunities for sustainable growth in Sub-Saharan Africa, focusing on financing and policy alternatives.

 

The answer to how to achieve high sustainable growth in Sub-Saharan Africa (SSA) remains largely elusive. What is known is access to private sector capital is limited, and the public sector often crowds out opportunities for emerging businesses. While recent efforts have sought to improve funding channels for the private sector, they remain insufficient and uncoordinated to drive significant growth. Expanding capital availability will require macroeconomic stability and healthy sovereign balance sheets, which is difficult for resource-dependent economies.

In 2023, macroeconomic fundamentals in SSA reflected the challenging conditions in developed markets, with slower growth in China and policy rates elevated in response to higher inflation. According to the IMF, a 1% change in China’s GDP has a 0.25% impact on growth in SSA, and with over US$250bn of annual trade relations (20% of SSA’s exports go to China) it is not surprising that growth slowed in 2023 to 3.3%, down from 4% in 2022.

In 2023, commodity prices failed to provide the needed lift to boost incomes and reduce fiscal imbalances.

Supply chain impediments also contributed to higher consumer prices due in part to the ongoing disruptions caused by the war in Ukraine and structural rigidities in local distribution channels.

Indebtedness (debt/GDP) and fiscal balances did not materially change from 2022 to 2023, as several countries took positive steps to discontinue costly subsidies and create fiscal space for critical spending elsewhere.

According to data from the IMF, eight countries are expected to end 2024 with indebtedness ratios exceeding 80%, which exposes them to potential external shocks with no meaningful buffers (especially with an increased reliance on higher priced commercial debt in recent years).

Access to the Eurobond market has been difficult, with only US$49bn issued across all SSA issuers between 2020 and 2023 – far below the region’s annual financing needs.

Refinancing opportunities (using yields on outstanding Eurobonds as a proxy for funding costs) may also be limited as borrowing costs are significantly higher than the coupon rates available at the time of issuance.

Shoring up access to funding

The global multilateral institutions will need to play a more significant role in supporting the funding needs of many of these countries in the next few years.

Multinational financial institutions in SSA play a crucial role, particularly in supporting local financial institutions with loans, guarantees and other credit enhancement arrangements. However, three of the major pan-African financial institutions in SSA currently have a combined equity base of just US$9bn, which is woefully inadequate compared to the region’s commercial and development needs. To put this into perspective, the Asian Development Bank alone boasts a staggering US$55bn in total equity, and Asia contributes well over half of the global GDP annually. In contrast, the African Development Bank has only about US$10bn in total equity, and Africa’s share of global GDP hovers around 5.2% annually.

Given that Africa’s share of global trade is currently only 3%, the role of these pan-African financial institutions in promoting trade and credit expansion should be a top priority for policymakers and international multilateral institutions. With better capitalisation and access to funding, African financial institutions could potentially drive exponential growth across the continent.

GHIB has continued to play an important role in promoting trade and punch above its weight by supporting financial institutions and public entities with trade finance solutions, and other types of creative structured arrangements.

The main multinational commercial financing institutions in Africa, for example, despite having investment grade or high-quality ratings in most cases, are currently able to borrow at about 7% (for 10 years, according to Bloomberg and JP Morgan), but can only deploy those funds at spreads of 300 basis points to cover their costs and provide a reasonable return to their shareholders.

So, while these institutions provide a much-needed alternative to other lending sources, the cost of this type of funding remains relatively expensive. Funding assistance for these regional and indigenous institutions through term facilities and equity support would be a welcome addition to the arsenal of options to address the woeful lack of funding for trade and the private sector and would provide a meaningful boost to GDP growth in the region.

Given the high financing needs for urgent social and development projects, continued reliance on foreign sources of funding is likely in the medium term.

Support from donors and concessional assistance remains crucial, especially for fragile economies. The IMF has provided over US$55bn since the pandemic’s onset, but more efficient allocation of development funds is needed to achieve the desired social returns on investment.

Reliance on local capital markets can also be problematic, given the high rates investors expect in an environment of fluctuating exchange rates and elevated inflation, as well as the shallowness of many government securities markets in the region.

With an estimated GDP of just over US$2.1tn, SSA’s 4% overall fiscal balance in 2023 (as per the IMF) implies a net new financing need of about US$80bn for the region, by my estimates. Current yields mean borrowing costs in excess of US$8bn just to service that incremental debt.

Growth rates in SSA will also need to meaningfully exceed the average 4% rate delivered in the last decade, to lift millions more out of poverty and create the conditions for a more sustainably high standard of living.

That means there needs to be an area of focus, both intra-market and with the rest of the world.

In fact, it will take a combination of factors in a mutually reinforcing process of:

1) Increased capital flows at below-market yields;

2) Massive funding support for pan-African financial institutions like GHIB;

3) A more progressive and creative approach to managing the region’s critical mineral reserves;

4) Boosting intra-regional and global trade volumes;

5) More effective tax mobilisation;

6) Renewal and expansion of energy and transportation infrastructure;

7) Raising educational standards and expanding access;

8) Significantly improving governance standards in both the private and public sectors;

9) Harnessing digital technologies including artificial intelligence in education, healthcare and the public sector;

10) Development and support for early-stage and/or venture funding opportunities for start-ups and small businesses engaged in trade and other growth-stimulating enterprises.

 

It is a herculean task, but good progress can be made in the medium term with relentless focus and an uncompromising stance from policymakers, development and commercial finance institutions and partners in the private sector.

We at Ghana International Bank will continue to do our part in providing critical trade and funding support to financial institutions and firms in West Africa, and increasingly in East Africa as well.

 

About GHIB

GHIB is a regulated legal entity registered in the United Kingdom. The bank has been present for 65 years in the City of London, one of the world’s leading financial centres, serving financial institutions, sovereign states and parastatals, corporates, SMEs and the diaspora. GHIB’s unique status as a Ghanaian-owned bank authorised by the UK Prudential Regulation Authority (PRA) and regulated by the Financial Conduct Authority and the PRA allows the bank to intermediate between international and African markets by combining knowledge of the African continent with international correspondent banking links, to bring bespoke solutions to its customers and partners.

Trade finance is GHIB’s leading business with correspondent and corporate banking, treasury and transactional banking supporting the trade business.

For more information about GHIB and its products and services, please visit https://www.ghanabank.co.uk