Africa Renewal (United Nations)
Efam Dovi
4 November 2008
What if wealthy Africans decided to invest their earnings in Africa instead of overseas?
And if the 80 per cent of Africans now without bank accounts got access to formal financial services? And if African governments put their domestic revenues into productive investments? "Rates of savings [would] go up significantly and Africa could perhaps be in a position to meet more than its resource needs," answers Samuel Gayi, a senior economist on Africa at the Geneva-based United Nations Conference on Trade and Development (UNCTAD).
African countries' ability to finance a greater share of their development needs from domestic sources "would give them much-needed flexibility in the formulation and implementation of policies" to address development challenges, direct resources into high-priority areas and "strengthen state capacity," finds a 2007 UNCTAD report, Economic Development in Africa: Reclaiming Policy Space, Domestic Resource Mobilization.
Africa is estimated to lose hundreds of billions of dollars in domestic revenues annually through capital flight, tax evasion, the repatriation of profits by transnational corporations and high debt repayments. At the same time, the continent's large informal sector holds considerable financial resources that are not deposited in savings accounts or pass through other formal financial channels.
Yet until recently, most international conferences and summit meetings to address the financing of Africa's social and economic development have generally focused on ways to mobilize more foreign resources. That is changing. But flows of official development assistance (ODA) to Africa remain volatile, and as the UNCTAD report notes, "dependence on external resource flows" leaves countries vulnerable to external shocks. Moreover, the region's share of global foreign direct investment (FDI) has stayed low.
Pan-African fund
As a result, African governments are increasingly turning their attention to the need to better mobilize domestic resources. At a summit meeting of the African Union in Ghana in July 2007, the continent's leaders launched an initiative to mobilize local resources to finance Africa's infrastructure development. The Pan-African Infrastructure Development Fund (PAIDF), under the continent's development blueprint, the New Partnership for Africa's Development (NEPAD), is seeking to raise money mainly from public and private pension funds and asset-management firms in Africa.
A credit union in the Gambia: Micro-finance institutions use innovative methods to help rural Africans save and borrow.
The PAIDF will invest directly in large-scale infrastructure projects in Africa, including in energy, roads, information and communications technologies and water, as well as in the stocks of companies that own, control, operate or manage infrastructure and related assets. Firmino Mucavele, then head of the NEPAD Secretariat in Pretoria, South Africa, said the goal is to invest in projects that will have high yields.
A target of raising $1 bn for the fund was set for July 2008. Some $625 mn had already been raised by the time of the launch. The PAIDF's potential shareholders are reputable pension funds in the region, including the Public Investment Corporation of South Africa, which has assets exceeding $90 bn, and similar pension funds in Nigeria, Ghana, Namibia and Botswana. As Mr. Mucavele noted, totalling such figures from just a few countries suggests that hundreds of billions of dollars can potentially be tapped. "We don't want all of it," he told journalists at UN headquarters in New York. "Instead of going for loans, let us take 5 per cent and invest it in something we all agree on."
Until now, managers of Africa's public and private pension funds, in the search for security and high returns, have invested much of their resources in external companies and stocks, contributing to Africa's outflow of resources. By seeking to direct just a small portion of those flows inward, alongside a number of other initiatives, African governments are now trying to strengthen the continent's national savings.
Low savings rates
Sub-Saharan Africa has the lowest savings rate in the developing world. While figures vary from country to country, gross domestic savings in the region averaged about 18 per cent of gross domestic product (GDP) in 2005, compared with 26 per cent in South Asia and nearly 43 per cent in East Asia and Pacific countries, according to World Bank estimates.
In some countries, those rates are even on the decline. South Africa alone accounts for almost 40 per cent of sub-Saharan Africa's total GDP. Yet in 2006 the country's gross domestic savings rate declined to 13 per cent, from 26.7 per cent in the early 1980s. "This downward trend has been persistent for over two decades," Elias Masilela, a board member of the South Africa Savings Institute, commented in June of that year.
In Uganda the savings rate is only 10 per cent of GDP. Japheth Katto, the chief executive officer of the country's Capital Markets Authority, recently said the rate will not improve in the near future "unless concerted efforts [are] made to increase financial-sector outreach."
Although a handful of countries have achieved higher savings rates, the bottom line is that the region's savings rate "is not commensurable with the investment needs of 25 per cent of GDP required to reduce poverty by 2015," argues Jean Thisen, a senior economic affairs officer with the UN Economic Commission for Africa (ECA), headquartered in Addis Ababa, Ethiopia.
Savings barriers
There are many reasons for Africa's low savings rates, including inadequate financial services. Physical distance from banking institutions and high minimum deposit and balance requirements mean that the majority of the population does not get access to banking services. As a result, only 20 per cent of African families have bank accounts.
In East Africa, Ethiopia, Uganda and Tanzania each have less than one bank branch per every 100,000 people. The ratio is better for some Southern African countries. Namibia has more than four, Zimbabwe more than three and Botswana nearly four.
Banks' minimum balance requirements and the cost of maintaining an account are too high for many people. Opening a bank account in Cameroon requires a $700 deposit, according to a 2007 World Bank policy research report. That is more than the annual income of many Cameroonians.
Many banks also insist on considerable documentation to open an account. Banks in Cameroon, Sierra Leone, Uganda, and Zambia require at least four documents, including an identity card or passport, recommendation letter, wage slip and proof of address. In a continent where many people work in the informal sector and more than 60 per cent live in rural areas, gathering such documentation can be a challenge.
Even when people have extra money, there may be little incentive to save. In Ghana the interest paid on savings is insignificant, while annual interest rates on loans range between 23 and 25 per cent.
The low level of formal savings deposits means that many banks have limited funds to lend out and enables them to charge high interest rates. As a result, the World Bank estimates, firms in sub-Saharan Africa fund between one-half and three-quarters of their new investments from internal company savings. While such "self-investment" may be productive, industry experts say that retained earnings are normally not sufficient, and this constrains the operations of many businesses.
Waiting to be tapped
In Africa, many economic activities take place in the informal sector. While many households have notable savings, "The problem is that these are being held in the non-financial form," Mr. Gayi told Africa Renewal. "These are not being significantly channelled into productive investments."
Many Africans still keep most of their savings in livestock, stockpiles of goods for trading, grain, jewellery or construction material. Data are limited, but some experts estimate that about 80 per cent of all household assets in rural Africa are in non-financial forms.
To tap into such assets, it is necessary to "introduce new financial products or instruments that respond to the saving needs of households," says Mr. Gayi of UNCTAD. Savings products that "permit easy accessibility" and allow for "small transactions at frequent intervals" would encourage households to shift to the formal system, thereby making such assets available for productive investments, he says.
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