Shifting From Aid to Trade is the Key to Africa’s Sustainable Future
Published: July 23, 2024
Jolene Abshire, Sector Head for Development Organisations, Absa Group, discusses the shifting dynamics of donor funding for Africa in recent years, explaining how moving from traditional aid to trade-centric models can help the continent to support its own initiatives, economy, and resources.
Donor funding to Africa is shrinking as budgets dwindle. Global crises, such as the Covid-19 pandemic and the conflicts in Ukraine and Gaza, are adding strain to already squeezed development funds, and leading to the redirection of resources at a moment’s notice. This unpredictable reallocation leaves many African entities, previously dependent on aid, with major funding gaps.
Historically reliant on foreign aid, Africa is now facing serious cutbacks in international financing. Many of the largest European donors have made cuts to their aid budgets worth billions over the last decade, including the UK, France, and Germany. This is partly due to the reclassification of several African nations from ‘developing’ to ‘developed’ status, resulting in reductions to their aid budgets.
As funding can be redirected at any given moment, the continent must seek new fundraising mechanisms to ensure it is not as heavily reliant on international aid. As NGOs seek to bridge the funding gap with alternative solutions, Africa is laying the groundwork to enable long-term trade, thereby supporting its own initiatives, economy, and resources more sustainably. Trade holds significant potential as a powerful engine for economic empowerment and presents a promising pathway to self-reliance for Africa.
Plugging the funding gap
With aid budgets reducing, NGOs are increasingly turning to alternative funding to sustain their operations. These include ramping up fundraising efforts, generating income through building rentals and forming partnerships with similar organisations.
NGOs are also increasingly leveraging social impact bonds (SIBs) as an effective method of alternative funding in developing markets to address various social challenges and action sustainable change. Currently, there are 294 impact bonds worldwide, which have raised $764m in capital and benefited at least 2.5 million people. These bonds represent unique public-private partnerships that fund effective social services through performance-based contracts.
In a typical SIB structure, private funders, such as impact investors and philanthropic organisations, provide the capital necessary to scale up the work of NGOs. This enables NGOs to expand their reach and effectiveness without the immediate financial burden, enabling them to focus on delivering impactful services.
The government or another outcome funder agrees to repay these private funders if and when the project generates public value. This repayment is contingent on the success of the project and by doing so, SIBs transfer the financial risk from the public sector to the private sector, incentivising all parties to work towards meaningful impact.
SIBS and other funding strategies are becoming essential as traditional sources of funding decline and there is growing competition among NGOs for limited available resources.
Driving growth with state and private sector action
As NGOs work to bridge the financial abyss , the opportunities to transition from aid to trade across the African continent are being explored. While this shift will create new opportunities for self-reliance in Africa, the need for international financing cannot be entirely negated. Many African countries still lack the infrastructure required to fully capitalise on trade opportunities – particularly those in the earlier phases of development that have not yet established a securities exchange.
A balanced approach that blends aid and trade is therefore crucial to strengthen financial resilience. The private sector and African governments can work hand in hand to drive this transition. In South Africa, for example, politicians and governmental groups often appeal to the private sector to deepen their pockets and contribute to social causes. Frameworks including the corporate social investment (CSI) scorecard incentivise firms to contribute 1% of their net profit after tax towards NGOs and socio-economic development initiatives, aiming to address historical inequalities and promote financial inclusion.
The political landscape also plays an important role in financing in Kenya, where the government has actively engaged with corporate CEOs to create funds addressing specific crises, such as drought. Rwanda also demonstrates significant private-sector involvement, contributing to job creation, economic growth, and a more self-sustaining economy away from international aid.
African governments must also work towards creating an environment ripe for local and international investment. This means improving market infrastructure, focusing on the development of local capital markets, and creating a robust regulatory environment to boost investor confidence. Laying the foundations now will help African countries to attract more foreign investment and reduce the need for external aid.
The ripple effect of trade
Trade will be a critical element of Africa’s long-term strategy to support its economy, finance its own development initiatives, and reduce dependency on foreign investment. Promoting intra-African investment and tackling trading issues were key motivations behind the establishment of the African Continental Free Trade Area (AfCFTA) agreement: a landmark decision that presents its members with an opportunity to take advantage of expanding trade to lift growth and living standards across the nations that make up the region.
It aims to dismantle barriers to intra-African trade and align disparate regulations across countries. Organisations including the African Union are spearheading efforts to successfully implement the AfCFTA, which is expected to facilitate economic integration and enhance the continent’s bargaining power on the global stage.
Supporting intra-African economic ties also provides crucial backing for the continent’s budding SMEs industry. These enterprises are pivotal to Africa’s economies and trade relations, providing employment opportunities and significantly contributing to GDP growth. By growing trade within the continent, Africa’s SMEs can expand their reach into larger markets and invigorate local economies – creating a positive ripple effect that benefits communities across all levels.
However, accessing finance is a hurdle for many regional SMEs. Supporting grassroots initiatives – such as women in business programmes and small loans for agricultural ventures – can provide much-needed support to bridge the financing gap for SMEs. These initiatives empower Africans to generate their own income, reducing the need for aid. For instance, the Mastercard Foundation has collaborated with Absa Bank Ghana to deliver funding, training, and advice to help scale up and ensure access to finance for SMEs, particularly for women-led concerns. By offering affordable credit, this initiative supports individual livelihoods while also deepening financial inclusion and contributing to the broader economy in the region.
Managing the transition
With traditional sources of aid shrinking and global crises constantly reshaping the allocation of resources, the continent is exploring alternative funding mechanisms to ensure that its growth trajectory remains firmly on track.
The transition must be managed delicately – ensuring aid and trade are blended effectively to address immediate needs, while supporting African nations as they prepare to rely on trade as a long-term strategy. By preparing to focusing on trade by developing market infrastructure, empowering local initiatives, and cementing private sector and governmental collaboration, Africa can pave a path towards greater self-sufficiency and sustainable growth.