Many people think that Africa is poor because it lacks money. They believe that if only more aid, loans, or investments flowed into the continent, its problems would be solved. But this is a misconception. Liquidity, or the availability of cash, was never the problem in Africa. The real problem is how that cash is used, distributed, and accounted for.
I will explain why liquidity is not a constraint for Africa’s development, and what are the actual challenges that need to be addressed. I will also suggest some ways that African governments, businesses, and civil society can work together to improve the management and allocation of financial resources in the continent.
Why liquidity is not a problem?
First of all, let’s look at some facts. According to the World Bank, Africa received $48 billion in official development assistance (ODA) in 2019, which is equivalent to 3.6% of its gross domestic product (GDP). This is more than any other region in the world. In addition, Africa received $54 billion in remittances from its diaspora, $45 billion in foreign direct investment (FDI), and $34 billion in portfolio investment. These are all sources of external liquidity that can be used to finance development projects and activities.
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Moreover, Africa has its own sources of internal liquidity. According to the African Development Bank, Africa’s domestic savings amounted to $500 billion in 2019, which is equivalent to 18.5% of its GDP. This means that Africans are saving a significant portion of their income, which could be mobilized for productive investments.
Furthermore, Africa has a large informal sector that accounts for up to 40% of its GDP and employs up to 80% of its workforce. This sector generates a lot of cash transactions that are not captured by official statistics, but that could be leveraged for development purposes.
Therefore, it is clear that Africa has access to enough liquidity, both from external and internal sources, to fund its development needs. The question is: why is this liquidity not translating into more growth, poverty reduction, and human development?
What are the real problems?
The answer lies in the structural and institutional factors that affect how liquidity is used, distributed, and accounted for in Africa. These factors include:
Mass Corruption: Corruption is a major obstacle to development in Africa. It undermines the rule of law, erodes public trust, distorts markets, and wastes resources. According to Transparency International, Africa is the most corrupt region in the world, with an average score of 32 out of 100 on the Corruption Perceptions Index (CPI) in 2020. Corruption reduces the effectiveness and efficiency of public spending, diverts funds from priority sectors such as health and education, and discourages private investment and innovation.
Bureaucracy and Mismanagement: Mismanagement is another challenge that hampers development in Africa. It refers to the lack of capacity, accountability, and transparency in the administration and implementation of policies and programs. Mismanagement leads to poor planning, budgeting, execution, monitoring, and evaluation of development interventions.
It also results in wasteful spending, duplication of efforts, delays, and errors. Mismanagement reduces the quality and impact of public services and goods, lowers the return on investment, and creates opportunities for corruption.
Inequality: Inequality is a third problem that affects development in Africa.
It refers to the uneven distribution of income, wealth, opportunities, and power among different groups and individuals. Inequality creates social and economic disparities that hamper growth, stability, and cohesion.
According to the World Bank, Africa is the second most unequal region in the world after Latin America, with a Gini coefficient of 0.44 in 2018. Inequality limits the access and participation of marginalized groups such as women, youth, rural dwellers.
The report identifies several factors that constrain the development and deepening of Africa’s financial markets, such as weak institutions, inadequate infrastructure, low financial literacy, high transaction costs, and regulatory barriers. It also highlights the opportunities and challenges posed by the rapid expansion of digital finance, which has increased access and inclusion for millions of Africans, but also raised issues of consumer protection, cybersecurity, and data privacy.
The report proposes a comprehensive agenda for reforming and transforming Africa’s financial sector, based on four pillars: enhancing financial inclusion, strengthening market infrastructure, fostering regional integration, and promoting innovation and technology. It also provides country-specific recommendations and best practices from successful experiences in other regions.
The report concludes that unlocking Africa’s financial potential is not only a matter of increasing the quantity of capital, but also improving its quality and allocation. By doing so, Africa can unleash its economic potential and achieve its development goals.
“Africa is the second most unequal region in the world… Gini coefficient of 0.44 in 2018”
Sorry – inequality always worsens & it never improves back to previous level – inequality metrics are statistical cons to hide the fact.
They cannot legitimately be used to compare to other countries or even previous years of a country.
Gini coefficient merely compares poorest 20% to average income (not to rich) then calc continues underestimate rest of population.
UK Gini coefficient was 32.3% in 1986 & 2012 yet rich annually increased by larger percentage than poor & workers – compound massive disparity.