THE ECONOMIC DEVELOPMENT IN AFRICA REPORT st January 2014 Chapter 4 Policies for Accelerating Investment in Africa: National and Regional Aspects

For stimulating domestic investment to achieve high, sustained and transformative growth in Africa requires  boosting the quantity of investment,  ensuring that it goes to priority sectors of an economy, and  improving the productivity or quality of investment.

I. Boosting the level and rate of domestic investment  A flexible approach to macroeconomic policy is needed  Adopt a discriminating treatment of domestic demand that distinguishes between consumption and investment expenditures and gives priority to the latter.  Strong public investment is a prerequisite for strong private investment. Boosting public investment is therefore a central element of the strategy for stimulating domestic investment.

 The priority in expenditures must be to fill the gap in public infrastructure in key areas such as power generation and transmission, transportation, water and telecommunications.  On the revenue side, fiscal policy needs to become more innovative. Development of domestic-currency infrastructure bonds, which can among other advantages, help reduce African countries dependency on foreign currency-denominated public debt.

Improving financial intermediation to enhance access to affordable credit  provision of partial guarantees by the State to commercial banks to encourage them to lend to entrepreneurs for investment financing.  Strengthening support for the establishment of private credit bureaux, public credit registries, and movable collateral registries.  promote intra-African investment in the banking sector in order to create larger consumer markets for African banks

Reversing the policy bias against public investment- The policy bias against public investment is largely responsible for the secular decline of public capital formation over the past decades, which accounts for most of the decline in domestic investment. Strengthening infrastructure development Reducing inequality in income and asset distribution Improving governance for investment Promoting the development of regional value chains

II.Ensuring that investment goes to priority sectors  Agriculture and manufacturing are identified as priority sectors which are crucial for job creation and promoting inclusive and sustained growth. Role of industrial policy in redirecting investments in these sectors is very important.  central banks can adopt a refinancing (discount) policy that favors lending for investment by setting a differentiated discount rate that is lower for bank advances dedicated to financing investment in strategic sectors or activities.  asset reserve requirement formula can be used whereby banks can choose to satisfy their reserve requirement by either lending to finance investment in priority sectors or hold sterile cash as reserves at the central bank.

 Assessment of bankability for SMEs must be more flexible with regard to guarantee and collateral requirements and focus more on prospects for income generation.  Direct government involvement may also be necessary in some activities, such as infrastructure, to encourage the private sector to invest in these areas.

III. Improving the productivity or quality of investment  Improve productivity of private investments by easing binding constraints that affect competitiveness of enterprises which include skills shortages, poor infrastructure, low access to finance, and high costs of factor inputs.  Improve the quality and efficiency of public investments

Better project selection and delivery for reducing inefficiencies Getting more value out of existing infrastructure- improving asset utilization and better maintenance of assets More targeted public investment is needed- allocate more to public investments which are productivity-enhancing (e.g., infrastructure) rather than utility-enhancing (e.g., expenditures on national defense and parks).

Open for Discussions