Donor funding drops as investments rise

Rwanda Trading Company workers at work at Kigali Special Economic Zone

Donor funding to Sub-Saharan Africa is declining as funds flowing to the region for investment purposes, trade and business rise, a new International Monetary Fund (IMF) report has indicated.

The IMF’s latest Regional Economic Outlook for Africa indicated that the aftermath of the global financial crisis has seen official development assistance (international aid) to Africa fall as nonofficial cross-border capital flows continue to rise.

With official development assistance to the region declining, these flows could provide much-needed financing for development initiatives and boost economic growth and welfare, IMF said.

According to the report, nonofficial net capital flows to sub-Saharan Africa, which totalled about US$4 billion during the 1980s and 1990s, increased six-fold to $25 billion in 2007, before doubling to about US$60 billion in 2017.

In terms of GDP, net capital flows to Africa have been at a historically high (3 per cent of GDP) and exceeded those to emerging market economies by about 2 per cent of GDP in 2015-2017.

The regional outlook analysis indicates that the impact of capital flows, however, depends on the type of flow. Debt flows, for instance, are typically considered the riskiest, while foreign direct investment (FDI) is deemed the safest.

“The residency of the investor also matters–non-resident investors tend to be more skittish than domestic investors,” the report says.

It goes further to state that much of the capital flow increase has been due to an increase in liability flows (non-resident acquisition of domestic assets), which have more than tripled since the mid-2000s, while on the asset side, domestic residents have continued to invest abroad on a net basis.

The report is an analysis based on a sample of 45 Sub-Saharan Africa countries from 1980 to 2017.

By Julius Bizimungu