Recognizing the impact of their policies and practices on aid effectiveness, donors have committed themselves to better harmonize their policies and practices on aid to enhance the development impact of aid in recipient countries. This has been reflected in a number of international declarations, including the Monterrey Consensus, Rome Declaration, Paris Declaration and, recently, the G-8 summit in Gleneagles.
All these declarations call for scaling-up more financial resources to developing countries and improving the delivery and management of aid to enhance its development impact in recipient countries.
Aid disbursements remain much below the 0.7 per cent ODA to GNI target donors have set themselves to achieve. The average ratio for DAC members was 0.26 per cent in 2004. However, a handful of countries have met the target.
With respect to aid effectiveness, donors have made considerable progress in untying aid to African countries. The percentage of aid from Development Assistance Committee (DAC) member countries to Least Developed Countries (LDCs) that was untied rose from 55 per cent in the period 1999-2001 to 68 per cent in 2004.
However, there are considerable variations in performance across DAC countries.
Some countries including Finland, Ireland, Luxembourg, Norway and the United Kingdom have successfully moved away from tied to untied aid, while others still have very high ratios of tied aid to total aid. Similarly, DAC countries have made substantial progress in increasing the proportion of grants in total ODA with the share of grants in aid rising from 49 per cent over the period 1980-1984 to 90 per cent in the 2002-2004 period.
Donor countries have also made considerable progress in meeting their commitments in the area of debt relief. African countries benefited from the MDRI announced at the G-8 Summit in Gleneagles. While this debt relief is a welcome development, it is, however, not sufficient to finance Africa’s myriad development priorities.
Domestic development financing As witnessed in other developing regions, particularly in East Asia, the mobilization of domestic resources plays a key role in financing investments in economic and social infrastructure, and hence, in tackling poverty.
However, the level of savings in SSA has been historically less than 20 per cent of GDP, which is considerably below the average of East Asia and the Pacific (35 per cent), Latin America and the Caribbean (21 per cent) and the Middle East and North Africa (26 per cent). At the same time, it is promising that there are a number of SSA countries, which have mobilized domestic savings. In fact, five countries, Algeria, Botswana, Republic of Congo, Gabon and Nigeria, have reached a savings ratio of more than 30 per cent. A key challenge facing these countries is how to translate these high savings into productive investment, especially in non-oil and non-mineral activities, to achieve sustained economic growth. Other African governments need to focus efforts on mobilizing both public and private savings.
As a consequence of low levels of savings in addition to limited private capital flows, investment ratios in SSA countries are lower than in other developing regions. For example, over the period 2000-2004, domestic investment as a proportion of GDP was 18 per cent in SSA compared to 31 per cent in East Asia and the Pacific.
In response to this challenge, African governments need to develop domestic capital markets, including bond markets and stock exchanges, which can play an important role in increasing both the quantity and productivity of investment. There are currently 21 stock exchanges in Africa, though these markets are still characterized by low levels of liquidity, lack of integration with regional and global markets, and a range of capacity and technology constraints. The regional integration of capital markets in Africa offers a solution to this situation, especially for the smaller economies. Overall, to accelerate capital market development, governments need to improve the capacity of all stakeholders, invest in infrastructure, and promote good governance.
To learn more about this author, visit United Nations Economic Commission for Africa's Website.
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