Unlocking African infrastructure finance for sustainable growth

Africa’s sustainable development and growth will require substantial investment in key sectors such as power, renewable energy, water, healthcare and roads.

The African Union projects that by 2030, Africa’s population will reach 1.7-billion, which will further increase the demand for energy and infrastructure investment. Currently, over 600 million people on the continent still lack access to electricity, making power infrastructure an urgent priority.

Financial institutions must collaborate closely with export credit agencies to provide long-term funding for infrastructure projects and address concerns regarding the perceived risks of lending to sovereigns.

To provide context, Africa’s infrastructure funding requirements are immense, with estimates suggesting that needs will grow to as much as $170bn per year by 2025, leaving a funding gap that could reach $108bn. Bridging this gap is essential not only for meeting basic needs but also for potentially increasing Africa’s GDP growth by 2% to 3% annually over the next decade.

Additionally, the demand for trade finance is expected to remain high, with the trade finance gap projected to surpass $90bn by 2024, driven by increased demand for both imports and exports as Africa’s economies expand. 

There is growing demand and appetite for infrastructure and project funding, driven by economic and structural reforms across many African countries aimed at attracting both foreign and domestic investment.

Promoting export trade is also crucial, especially in light of the African Continental Free Trade Area (AfCFTA), which is projected to increase intra-African trade by 52% by 2030.

However, the credit risk profile of many countries outside SA makes it difficult to access long-term, reasonably priced finance for infrastructure and trade. This challenge presents opportunities for development finance institutions and commercial lenders to step in, using risk-mitigation tools and providing the required funding within an acceptable risk appetite.

Against this backdrop, the role of export credit and insurance players becomes even more important. They provide insurance solutions and guarantees, which are critical for reducing risks for lenders who are providing funding for infrastructure projects or facilitating the export of goods.

Political and commercial risk insurance offers essential safeguards against nonpayment, giving funders the confidence they need to commit to large-scale funding for Africa’s infrastructure and trade investments.

Export credit agencies, multilateral development agencies and pure insurance providers, especially in Africa, are essential for managing the evolving risk profiles in export credit and project finance. While each segment has its own challenges, they share a common goal: offering risk mitigation that helps catalyse development by enabling investment or lending where risks are managed.

There remains a disconnect between the perceived benefits and the cost of risk mitigation. Insurance premiums often need to be factored into project costs, and these premiums should translate into returns for banks and investors. Regulators need to create a more conducive environment to support export finance and insurance, ensuring that lenders can play a leading role in infrastructure funding without bearing excessive risks.

Local currency financing should also be encouraged to mitigate currency risks associated with infrastructure funding. By 2025, over 60% of African infrastructure projects are expected to rely on local currency financing, driven by efforts to reduce the risks of hard currency. Using local currencies is often more cost-effective than borrowing in hard currency. The International Monetary Fund has highlighted that local currency borrowing will be key in ensuring sustainable financing and reducing the risks associated with currency fluctuations.

This shift places pressure on governments to implement monetary policies that combat inflation and protect local currencies. Borrowing in local currency reduces the need for political risk cover, making funding more competitive.

Export finance and insurance can also support social development projects with far-reaching impacts across Africa. For example, a strategic partnership between Nedbank Corporate and Investment Banking (CIB), the UK Export Credit Agency and NMS Infrastructure Ltd led to the construction of over 100 mini-hospitals [in Zambia], transforming healthcare for underserved communities.

This project provides essential healthcare services to rural populations who previously had limited access to clinics. Africa’s healthcare infrastructure is expected to have grown by 15% by 2025, driven by increased funding and investments.

Nedbank CIB is committed to playing a role in Africa’s infrastructure development. It has established an Africa-focused infrastructure finance team to sharpen its capabilities on the continent. Additionally, it has developed a sovereign lending strategy, recognising that the private sector alone cannot meet Africa’s trade and infrastructure funding needs.

Sovereign lending will play a vital role in bridging this gap. In fact, sovereign lending is projected to grow by 20% annually through 2025, as governments take on more infrastructure projects to meet rising demand.

Nedbank’s deep experience in Africa positions it well to work with export credit agencies and contribute to closing the infrastructure funding gap, ensuring the continent’s sustainable growth.

This article was sponsored by Nedbank CIB.