In many African economies, including South Africa, infrastructure remains a major challenge as the needs are high. The president of the African Development Bank spoke to Steve Mbogo on what the bank is doing to make more funding for infrastructure development available.

READ: From aid to roads: Rebirth of AfDB

--------------------------------------

Raising money to develop infrastructure is one of the key challenges facing Africa’s expanding economies. What does the bank plan to do make this easier?

The bank plans to launch a Pan-African infrastructure bond to raise about $22 billion that will be used solely to finance Africa’s infrastructure development. It’s time for Africa to mobilise our domestic resources to meet this financing challenge.

The plan involves African countries investing part of their foreign exchange reserves in a new bond that will be administered by the Africa Development Bank. Collectively, Africa’s foreign exchange reserves in 2012 totalled $450 billion.

ALSO READ: AfDB to issue bond on USE later this year

Those reserves are mostly invested abroad, presumably for good security and return. In reality, the security is relative as we saw in 2008, and at this moment, the return is meagre.

We are giving other countries money to develop their economies, and paying them for doing that. Yet the African Development Bank as an AAA rated institution, is able to better manage such a resource.

How will the infrastructure bond be implemented, and how will it be financed?

My proposal is that we begin with only 5 per cent of each country’s reserves; that would be at least $22 billion. We could bring on the non-bank financial institutions, pension funds, insurance and other providers of long-term capital.

At the annual meeting of the IMF/World Bank in Tokyo in October, we will explore these proposals further with the African finance ministers and central bank governors.

The African Development Bank commits 60 per cent of all its resources to infrastructure; that is about $5 billion per year. But that is a drop in the ocean for a gap identified as $94 billion per year, and unlikely to be closed by traditional funding.

What are the key project financing proposals has the bank has received from East Africa?

The bulk of the proposals are in infrastructure, energy, maritime and rail, but already most of those proposals are being implemented or are near implementation. For instance, there is a proposal for us to participate in the financing of Lamu port and related infrastructure.

We are also participating in the financing of Rift Valley Railways and the establishment of the Dar es Salaam-Kigali railway line.

READ: $251m loan for Tanzania, Sierra Leone roads

Kenya’s financial institutions have a big appetite for regional expansion. What lessons can be learnt from the industry in line with plans for financial sector integration?

The Kenyan financial sector has proven that innovation in financial inclusion, through banking the unbanked, can bring lasting benefits to the economy in ways previously unimagined.

With total assets of the banking sector now at $25 billion, it is Africa’s fifth largest market. Banking penetration in Kenya has also increased from 25 per cent of the population in 2006 to over 40 per cent, twice the African average.

In Africa today, two out of three people are unbanked, and therefore as a continent we must let innovation drive the growth and continue to make progress on banking the unbanked.

Financial inclusion is not only good socially, but sound economics. It essentially unlocks resources tied up in non-financial assets for intermediation by the banking sector, thus driving the wider economy faster. Banking the unbanked has the potential to bring into the banking sector three to five times what is currently available.

How can Africa prevent coups and rising secessionist movements from eroding its economic gains?

This is a major concern to us, especially with the instability that has been happening in the Sahel region. With the Ivory Coast, Guinea Bissau and now Mali, the Sahel region especially cannot afford another conflict.

When Mali exploded, investors were ready to commit $1 billion to a sugar processing project. But they have all withdrawn, and even if the country returns to normal that investment may never come back. We are not in the conflict resolution business, but we would want to see these conflicts resolved.

What is your outlook on Africa economic growth this year?

I am still optimistic despite the drop in commodity prices whose super cycle of 2002-2012, seems to have levelled off. But there is still a lot of interest in Africa that is helping to maintain capital flows, including from private equity. What we have said is that Africa must do everything to minimise or avoid the negative impact of the prolonged global recession.  

The cushions that relatively minimised the impact in 2008 are weaker, deficits are higher, debt levels creeping up, the level of reserves lower and fiscal space smaller.

This means, among other things, that there is a strong need for closer co-operation and co-ordination between fiscal and monetary authorities among African states. The recent bouts of inflation in this region, which had crept back to double digits, is an example.