Mobilizing Africa’s resources for development

Borrowing on international capital markets offers little relief. The era of ultra-low global interest rates that once encouraged private borrowing has ended, leaving limited fiscal space and far higher borrowing costs. More than 50% of low-income countries in Africa are either in or at high risk of debt distress.⁵ Annual expenditure on debt service in the region exceeded $101 billion last year,⁶ crowding out spending on health, education, and social protection. Foreign direct investment flows also remain subdued and increasingly volatile, amid heightened investor risk aversion. 

The deterioration in external financing conditions comes precisely at a moment when Africa urgently needs substantial financing to accelerate its development agenda—highlighting the imperative of strengthening domestic resource mobilization.

The imperative of domestic resource mobilization

The challenges facing the continent in financing its development agenda are substantial. Over the next five years, sub-Saharan Africa’s financing gap is projected to average at least $245 billion annually, reflecting the widening gap between investment needs and available resources.

Figure 1 shows that domestic savings rates averaged under 20% of GDP and are expected to remain at around this rate in the coming years.⁷ Accordingly, investment rates have remained subdued at just over 20% of GDP. This rate is significantly below the minimum 30% investment rate generally required over time to finance development.⁸

This sizable financing shortfall cannot be addressed with external financing alone, not only because of its volatility, but also because it would leave African economies vulnerable to economic instability from large current account deficits, high indebtedness, and balance of payment crises.

Policy options to boost domestic revenues

There are a few promising approaches to boost domestic resources. The first is optimizing the collection of tax revenues which currently falls short of the tax capacity. Brookings research shows that sub-Saharan African countries have a relatively low taxation capacity at 20% of GDP, which largely reflects a narrow tax base due to the high share of the informal economy. Even so, tax revenues only average about 15% of GDP. Improving governance in revenue collection, including combatting corruption and strengthening transparency, can raise tax revenues by 3.9 percentage points closer to the 20% capacity.⁹ This would mobilize roughly $94 billion dollars, on average, over the next 5 years.

Recent international efforts to promote fair taxation and curb illicit financial flows also have the potential to boost domestic resources. UN Trade and Development (UNCTAD) estimates that Africa loses about $90 billion annually from illicit financial flows, reflecting the critical importance of addressing tax avoidance by multinational enterprises and creating a more equitable international tax system.¹⁰ Both the OECD Inclusive Framework and the U.N. Framework Convention on International Tax Cooperation are important efforts in this regard. While the ongoing efforts at the local and international levels will go a long way to fill the financing gap, the underleveraging of Africa’s natural resource wealth offers, arguably, the largest untapped potential to unlock domestic resources.

Leveraging natural resource wealth

Sub-Saharan Africa’s natural resource wealth was estimated at over $6 trillion in 2020, with renewable resources valued at over $5.17 trillion and nonrenewable natural resources valued over $840 billion.¹¹ These estimates, however, are likely undervalued as the available data do not account for the numerous resource discoveries in recent years. The continent holds at least 30% of the proven critical mineral reserves and, by some estimates, Africa could boost its GDP by at least $24 billion annually with the right investments¹² (For more on unlocking Africa’s mineral wealth, see Chapter 3.)

While Africa holds vast reserves of critical minerals essential for the energy transition, much of this wealth is exported as raw materials with little value addition. By scaling local processing and moving up the value chain, Africa can capture greater value from its resources, finance its development agenda, and create jobs. The IMF estimates that global revenues from the extraction of copper, nickel, cobalt, and lithium will total $16 trillion (2023 dollars) over the next 25 years, and sub-Saharan Africa is poised to reap over 10% of these revenues, or nearly $2 trillion (2023 dollars).¹³

Africa’s fossil fuel abundance represents another major opportunity for economic growth. The continent holds 7.2% and 7.5% of the world’s proven oil and gas reserves, respectively.¹⁴ The ability to harness this wealth should not be constrained by the global agenda on decarbonization. While limiting carbon emissions is a collective responsibility, Africa’s share of emissions remains relatively low at about 3-4% of global CO2 emissions,¹⁵ despite constituting 20% of the world’s population. Given the region’s relatively low emissions footprint, it should be supported to take advantage of these resources without compromising its decarbonization plans. In fact, it could be a more effective way to transition to net zero. The continent also has tremendous potential in renewable energy sources, with renewables like solar, wind, hydropower and geothermal energy capable of supplying over 80% of new power generation capacity.¹⁶ However, the development of renewables is constrained in large part by a lack of adequate financing. A dual-track strategy that facilitates the development of fossil fuels coupled with a reinvestment of a share of the proceeds in renewable energy could offer the most promising pathway to net zero. (For a more in-depth discussion of Africa’s energy future and its present energy challenges, see Chapter 3.)

Contracts from mineral and fossil fuel extraction should also be negotiated in fair, progressive, and transparent terms that ensure that the region benefits when prices and profits rise. Many countries have historically seen limited returns from their natural resources due to imbalanced agreements and weak oversight. For example, the region loses between $470 to $730 million annually in corporate tax revenues from profit shifting in the mining sector alone.¹⁷

Utilizing sovereign wealth funds

Finally, policymakers should set up sovereign wealth funds (SWFs) to better manage the revenues from natural resources. Currently, sub-Saharan Africa has a few SWFs which hold around $100 billion in assets-under-management.¹⁸ However, most resource-intensive countries do not have SWFs. Among the advantages, SWFs help stabilize the local economy from external shocks, such as swings in commodity prices, and help contain currency appreciation that can adversely impact the competitiveness of the broader export sector. When managed well, SWFs turn nonrenewable revenues into long-term financial assets for the benefit of both current and future generations and serve as a source of funding for the broader development agenda. 

While African SWFs are primarily invested overseas, evidence suggests investing these resources domestically could help overcome financing constraints, provided these funds are governed transparently and managed professionally.¹⁹ Investments should focus on assets with the highest social and financial returns and should be subject to independent oversight and transparency. Investments should also be undertaken in partnership with arm’s-length institutional investors, such as the private sector, pension funds, and development banks.

Conclusion

The deterioration of the global aid framework undoubtedly poses challenges as Africa seeks to sustain progress on its development agenda. It is a reminder that mobilization of domestic resources is now imperative. Yet it also presents an opportunity to look inward and leverage the continent’s inherent comparative advantage. Opportunities to enhance domestic resource mobilization abound, including strengthening tax revenue collection systems, curbing multinational enterprise tax avoidance, and harnessing the potential of SWFs, local pension funds, and national development banks. By seizing these opportunities, African economies can secure a more stable and reliable source of funding for their development agendas.

To craft effective policies for the emerging crisis, countries should first pinpoint weaknesses in their current health financing systems. Health financing systems in many African countries struggle to mobilize sufficient resources, limiting both effective service purchasing and pooling (i.e. the accumulation and management of prepaid funds to enable redistribution and spreading of financial risk²⁸) (Table 1). Government health spending also faces constraints from low revenue and competing fiscal priorities with more urgent issues such as food insecurity, epidemics, and debt distress.²⁹ Given these recurring systemic shortages, African nations should address the impending crisis by optimizing all existing health financing mechanisms— without neglecting any of them (see Table 1).

Strategies to optimize existing health financing mechanisms

First, African governments need to spend better and more on health. In line with the launch of the recent Accra initiative reset for global health governance, the recent decline in donor aid should trigger a sense of self-reliance among African governments. The rest of Africa can learn from the experience of Burkina Faso, which introduced free primary healthcare in 2016, funded by increases to government spending rather than donor reliance.³⁰ Also, this year, Nigeria’s lawmakers proposed a 25% increase in the federal government’s health budget in response to DAH cuts.³¹ Health administrations in countries should succeed in positioning health spending as a domestic investment that delivers economic growth by building human capital and job creation.³²

Advocacy should also aim to direct additional resources toward equitable service of a high priority package that provides the highest value for money and is affordable. There is evidence that low-income countries and many lower middle-income countries can raise their tax-to-GDP by 9 percentage points simply by broadening the tax base and strengthening their tax administration capacity.³³

The health sector can also contribute to the tax base through excise taxes on tobacco, alcohol, and sugary drinks, which aim to discourage consumption and thereby reduce the negative health impacts of these products. Estimates indicate that these “health” taxes could boost government health spending by up to 40%, if the funds are allocated to healthcare.³⁴ In addition, health budget execution can be improved by coordinating health and finance administrations to address bottlenecks, which could avoid losses in public health spending.

Second, there is an urgent need to define “new compacts” for the remaining DAH in African countries. As an example, Ethiopia has initiated compacts for reproductive, maternal, neonatal, and child health services’ commodities and non-communicable diseases where donor and private sector resources complement domestic financing.³⁵ These new compacts should include health aid for urgent or humanitarian needs.

The new compacts should also foster greater coordination between donor support and national priorities. Donors’ self-alignment to local priorities has not always worked well in the past. Such alignment succeeded only with firm support from local authorities. Foreign in-budget financing is appropriate when well-functioning public finance systems exist and policy options are clearly defined, actionable, and endorsed.

Foreign off-budget support should ideally be utilized only to pilot or reinforce initiatives with strong evidence of cost-effectiveness, market viability, or fiscal and institutional absorbability. The outlook for pharmaceutical manufacturing in specific African countries or regions is a notable example of such an initiative, given its potential market viability in the private sector, an opportunity that is further strengthened by the continued progress of the African Continental Free Trade Area.

Third, compulsory national health insurance should be implemented after an enforceable plan for integrating the informal sector is in place. A study of six African economies shows that about 37% of informal sector households can save for the long-term and contribute to social protection, while 18% remain vulnerable but are able to make precautionary savings.³⁶ The former category are labeled non-poor informal. Strategies based on innovation and technology are required to expand this group’s engagement with formal prepaid health financing schemes. Also, to expand coverage, compulsory national health insurance and voluntary national health insurance need reliable, long-term subsidies for the poorest.³⁷

Fourth, micro health insurance and self-insurance groups exhibit considerable potential in various contexts and present opportunities for further development. Contributions to micro health insurance or self-insurance groups provide a pool of funds mobilized beyond the amounts that would otherwise be available for health care. The main strengths of micro health insurance and self-insurance groups are the degree of outreach penetration achieved through community participation. They have emerged against the backdrop of severe economic constraints, political instability, and lack of good governance. The full potential of these strategies may therefore be realized if certain design limitations are resolved. Key actions include: (i) gaining a deeper actuarial understanding of these small-scale schemes—especially the self-insurance groups—to inform effective risk transfer or reinsurance strategies, (ii) integrating them with formal financing mechanisms and health service provider networks, and (iii) addressing financial challenges—such as liquidity constraints in rotating savings and credit associations—to incentivize higher participation in health-related risk.

Fifth, the north star for effective public health expenditure should be continuous assessment and enhancement of health service quality across both public and private providers. Quality of health care is essential to a health system’s technical efficiency and crucial for increasing participation in protective health financing schemes. Many countries use performance-based financing to strategically purchase health services, encouraging public spending on defined benefit packages adjusted with a quality index.³⁸

In total, this unforeseen sharp decline in DAH may present an opportunity for Africa to implement critical reforms and foster innovation in protective health financing. Let us not let this “good crisis go to waste.”