# 6   Conclusions and policy recommendations

With the obvious exception of South Africa, local financial markets in the African focus countries remain underdeveloped, shallow, and small in scale. Locally sourced financing with maturity terms commensurate with the longer-term horizons of infrastructure projects is particularly scarce. Official development assistance thus remains an important source of (external) financing in Africa, particularly for those focus countries with very low levels of financial intermediation.<sup>66</sup> Private participation in infrastructure (PPI) can also serve as a significant external financing source for infrastructure projects in certain niche sectors and has undergone a resurgence in recent years.<sup>67</sup> There is growing awareness, however, of the need to explore the potential for accessing local and regional sources of private financing, particularly as national financial market reforms, in many cases taking a regional approach, gather increasing momentum across the countries.

## Macroeconomic stability, financial depth, and infrastructure financing

Sound macroeconomic policies provide the foundations for developing a national financial system that makes available sustainable and affordable medium- to long-term finance, which can be accessed for infrastructure development. In the absence of macroeconomic stability, sources of medium- to long-term finance at predictable (preferably fixed) interest rates required by infrastructure projects are scarce if not nonexistent. The overall trend in the focus countries has been one of improvement in macroeconomic policies and performance in recent years, as reflected in the macroeconomic stability indicators discussed in chapter 1. But in several countries one or more key indicators of macroeconomic stability—volume of savings, savings rates, and ratios of domestic and external debt to GDP—fall far short of the foundations needed for well-functioning local financial markets capable of financing infrastructure. It is important for the focus countries, including those that have made good progress in recent years, to build on the regional momentum to further macroeconomic and structural reforms to accelerate sustainable economic growth, reduce poverty, raise living standards, increase their ability to weather external shocks, and provide an enabling environment for private sector activity and financing.

A minimum degree of financial intermediation is needed to establish a market for term finance that could potentially serve as a source of finance for local infrastructure. Chapter 2 looked at the levels of financial depth and intermediation in the focus countries based on selected indicators. The level of financial depth (as indicated by the ratio of total financial intermediaries’ assets to GDP) of the majority of the focus countries is very low, with 15 of 24 countries having ratios below 25 percent. Three countries have ratios of financial intermediaries’ assets to GDP exceeding 100 percent (Cape Verde and Namibia, as well as South Africa), but the next highest ratio is only 52 percent (Kenya). Ratios of private credit by banks to GDP also point to a low level of financial intermediation in a large majority of the focus

> 66 ODA commitments for Sub-Saharan Africa amounted to $5.1 billion for 2006, with low-income countries receiving the vast majority (80 percent), primarily for transport but also for improving water supply, according to data compiled by the Infrastructure Consortium for Africa (ICA), set up following the G8 Summit meeting in Gleneagles in 2005.

> 67 Annual PPI flows to the region tripled over the past decade (to $8.7 billion in 2006), outpacing recent ODA flows.

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