Economic Impacts of a New Global Financing Aid on Sub-Saharan African Countries

By Bin Joachem Meh (Download PDF)

Economic Impacts of a New Global Financing Aid on Sub-Saharan African Countries

Introduction

The world is challenged with multiple shocks, and Sub-Saharan Africa (SSA) is highly affected by these challenges. Due to these challenges, the chances of diverging from set development agendas to achieving sustainable development goals are high. In the presence of the shocks, economic growth in SSA is anticipated to deteriorate from 3.9% in 2022 to 3.6% in 2023 (1). External debts and inflation are on the rise in SSA, attributed to the war in Ukraine, climate change and the ripple effects of Covid-19 on households, businesses and other economic sectors in the region. The purchasing power, household consumption, investments, government revenue and expenditures of SSA countries are falling, thus exposing the SSA economies’ vulnerabilities.
In the context of combating the adverse effects of the shocks the world and SSA are experiencing, there is a need to introduce new global financial aid to enable these countries to catch up with their development goals. Financial aid can be given as technical or monetary assistance by one country or institution to another or in the form of grants, loans, technical advice, subsidies, training or commodities to respond to a disaster (2). The SSA region in 2015 received an annual official assistance of about US$36 billion as foreign aid (3). Despite this amount received by SSA countries as financial aid, some of the funds are used by those in the political class to enrich themselves, thus making the region remain the poorest region in the world(4).
In this light, the objective of this article is to inform financial actors like development banks, financial institutions, philanthropic foundations, sovereign wealth funds, investment funds, corporations, international communities, and governments on the economic implications of a new global financing aid for SSA economies. The rest of the article will present the situational analysis of SSA (2), the economic effects of a new financing aid for SSA economies (3), and finally, the conclusion and policy statements(4).
Situational Analysis of Financing Aid in Sub-Saharan African
SSA is a region characterized by longstanding challenges such as high public debt, environmental disasters, poverty, climate change, weak institutions, poor governance and democratic practices, autocratic regimes, corruption, weak political systems, poor infrastructural development, and high inflation undermine the qualities of life and standard of living in a handful of countries within this region (5). Bringing the region back to life requires financial resources, and according to the World Bank (2021) statistics (6), SSA received about US$62.29 billion in 2021 as financial aid and the International Monetary Fund (IMF) has provided the region with about US$50 billion dollar in financing since the beginning of the Covid-19 pandemic (1).
Despite the funds received from donors, recipient countries within the economies of the SSA region are still tasty for development funds. In addition, the war in Ukraine has led to an increase in the cost of living with high inflation, an increase in the cost of capital and dwindling access to cheaper funds.
SSA has the least greenhouse gas emissions contribution compared to the rest of the world. However, this did nothing to reduce the vulnerability of the region against unpredictable weather events, which negatively impact sustainability in the local region. Mitigating the effects of climate change will require significant fiscal space or financial resources; moreover, most SSA countries would need to rely on the international community’s assistance (IMF, 2023).

In this regard, enhancing global financing should be a priority for further assistance that speeds up green growth and strengthens resilience and the recovery of these SSA countries against various shocks. Poor creditworthiness limited their ability to obtain much-needed loans from the open market geared toward growth and development programs. This is the reason why SSA countries need international aid (George, 2021).

Economic Implications of a New Global Financing Aid on SSA Countries

A new global financial aid will have strong implications for educational and technical support for SSA countries. The sub-region is predicted to have slower economic growth at just 3.6% (2) because of the devastating effects of climate change, the war in Ukraine that has increased inflation, bad governance practices, and weak technological and innovation acquisition. A new global financial aid directed for educational purposes will be a measure to enhance the skills, invention, creativity, and innovation that prepare the population for decent work and future economic growth. Likewise, the technical support focused on empowering institutions with good governance practices by strengthening the existence of strong legislative, executive, and judicial systems of the states will make state management and resource allocation optimal. Therefore, an effective and efficient introduction of a new global financial aid model will be a catalyzing factor for the economies of SSA.
In addition, the SSA region faces major difficulties that hinder economic growth and increase extreme poverty (7). To bring back growth, the introduction of new financial aid will increase the chances of SSA countries to integrate into the global world economy.
Nonetheless, the need for a sustainable and resilient increase in real per capita income accompanied by a fall in extreme poverty and hunger are the expected implications of a new global financial aid. This aid will strengthen the financial sector by bringing in different financial actors like international and national financial institutions, sovereign wealth funds, continental or regional development banks, international non-governmental organizations, philanthropic foundations, corporations, and pension and investment funds that have different objectives, interests, and techniques. Pulling these actors together can bring new results and make a difference (8).
Finally, a new global fund will be a tool to enhance investment capacities within the sub-region. National and international investors will have the possibility to build partnerships with investors from other regions, governments and continents that have the capacity to finance growth-oriented projects.

Conclusion and Policy Statements

The SSA sub-region is a region that is affected by the devastating effects of climate change, poverty, hunger, food insecurity and inflation. The absence of aid from donors is a call for concern and needs to be urgently addressed. To address this situation, the introduction of new global financial aid will have implications for green growth, reduce climate change effects, improve the educational sector, and increase the rule of law and governance practices within the region. For these new global funds to be effectively and efficiently implemented, the following policy advice is recommended: (1) defining steps in addressing administrative bottlenecks in the use of financial aid in recipient countries so as to avoid the misallocations of funds destined for aid, (2) the new global financial aid should target key sectors that are in need and (3) a need assessment strategy and a committee in charge should be put in place by SSA countries.