Effective financial markets, key to sustainable development in Africa

Addis Ababa, 12 October 2023 (ECA) - Africa needs strong financial markets to unlock much needed capital to drive sustainable development on the continent, the acting Executive Secretary of the Economic Commission for Africa, Antonio Pedro, has urged.

Mr. Pedro, in an address at the launch of the Absa Africa Financial Markets Index 2023, highlighted that effective financial markets are key to Africa’s development prospects. He said Africa risked realizing the Sustainable Development Goals and the African Union Agenda 2063 owing to heightened financial and social challenges triggered by a combination of the COVID19 pandemic, growing inflation and geopolitical turbulence.

“Strengthening financial markets and diversifying the investor base would not only enable governments to mobilize more funding for economic recovery, sustainable development but also enhance financial resilience to future shocks,” said Mr. Pedro, adding that, “To foster the development of their financial markets, countries require a comprehensive approach, encompassing capacity building, robust infrastructure, essential reference tools, benchmarks and opportunities for peer learning.

Big financing gaps to meet the SDGs
Mr. Pedro said Africa had huge investment needs to achieve sustainable development. For instance, Africa alone is estimated to require up to $86 billion annually to implement adequate adaptation measures by 2030 while the cost of transport and service infrastructure required to enable the implementation of the African Continental Free Trade Area Were at about $500 billion.

“To close the financing gap African countries need to make better use of their domestic capital and gain greater access to global capital, for example, African pension funds should be incentivised to invest locally, special purpose vehicles (SPVs) should be created accordingly,” said Mr. Pedro. He noted that SPVs could equally harness Diaspora remittances that could be channeled to more productive investments but these required “ deeper, healthier, more efficient and more inclusive financial markets”.

Financial markets which include bond markets, commodities markets and foreign exchange markets trade in capital and credit which is vital for economic development of countries.

He commended the Absa Africa Financial Markets Index for offering highly valuable insights to countries which aid policy and guides the prioritization of financial market development initiatives. The 2023 edition of the index covers 28 countries, a significant milestone including more than half of the countries on the continent.

The ECA supported the inaugural participation of Cabo Verde and Tunisia in the Index which assesses markets across six pillars. The pillars include market depth, access to foreign exchange, transparency, tax and regulatory environment, capacity of local investors, market economic environment and transparency and legal standards and enforceability.

With the rapid emergence of new opportunities and challenges, the Index has evolved to reflect emerging trends, including financial technology, environmental, social and government policies, said Mr. Pedro, underscoring that the Index was an important tool for informing policy decisions and facilitating peer learning as part of the ECA’s commitment to assisting member states in the development of their capital markets.

In developing the Index, the Official Monetary and Financial Institutions Forum, an independent think tank organization concerned with central banking, economic policy, and public investment conducted extensive quantitative research and data analysis with surveys of over 50 organizations across Africa.

Progress despite global shocks
The Absa Africa Financial Markets Index 2023 reveals that there has been continued progress in developing financial markets across Africa in the past year despite global shocks.

According to the report, scores have risen for the majority of AFMI countries, increasing in 15 countries largely due to an improvement in market transparency, particularly a rise in the number of credit ratings. Most countries also scored higher as macroeconomic conditions have generally stabilized following shocks from the COVID 19 pandemic and the Russia-Ukraine conflict.

The majority of AFMI countries now implement some form of environmental, social and governance initiatives, up from 57% in 2021, the report found, highlighting that this has helped mobilize new investment as sustainability becomes increasingly important to global investors.

However, progress in the index has not been uniform, the report noted, explaining that each country experienced a lower score in at least one of the six pillars that make up the report.

Commenting on the report’s findings, Charles Russon, chief executive officer, Absa Corporate and Investment Bank said global markets have faced challenges in recent years which pushed many countries into ‘crisis mode’, focusing their efforts on dealing with the next problem and putting long-term structural reform on the back burner.

"Progress in ESG investments, boosting market transparency and improving central security depositories are cementing Africa as a destination for capital investment,” said Mr. Russon.