In more detail
To achieve a low-carbon future, address climate change, and embrace the energy transition, countries in Africa have been focused on securing and diversifying their supply chains, addressing their infrastructure gaps, boosting climate-resilient projects, and facilitating sustainable trade. This is driving an increased demand for working capital that traditional lenders are unable to provide. The inherent tension between the need to finance transactions and the cost of funds has opened the market to new and innovative financing options.
Export credit agencies
The volatility in the capital markets in Africa is leading to the increased availability and competitiveness of Export Credit Agency (ECA) - supported funding as a diversified source of liquidity for deals. ECAs have an essential role to play in supporting trade in Africa, and their government backing means they are able to act as guarantors for private investment funds, reducing risks in the process. The role of ECAs in facilitating deals in Africa is also evolving. For example, there are an expanding number of ECA programs and products covering projects related to the trade in renewables, raw materials, and critical minerals in Africa.
Geopolitical challenges and a growing demand for clean energy have led the major players to look at how they can build and finance alternative supply chains for critical minerals. Driven by the energy transition, the demand for critical minerals is expected to rise sharply, more than doubling by 2030 and quadrupling by 2050, with annual revenues reaching USD 400 billion, according to the International Energy Agency's World Energy Outlook 2022.
As one of the world's top producers of many critical minerals, Africa has a big role in powering the global energy transition. The increasing interest of the major players in Africa's supply of raw materials is evident in recent policy announcements from the European Union (the Critical Raw Materials Act) and the United States (the Inflation Reduction Act). Both the EU and the US have emphasized the need to mitigate commodity supply chain risks and develop strategic agreements with countries that are able to supply responsibly sourced critical minerals.
At present, the majority of Africa's critical minerals are exported in the form of ores or concentrates. Certain countries in Africa, including Namibia, Ghana, and Zimbabwe, have imposed export restrictions on some of their unprocessed critical minerals, such as lithium, noting that they are losing income by exporting the minerals as raw materials and that they are planning to develop the capacity to process these minerals locally.
The African Export-Import Bank (Afreximbank) is stepping in to facilitate critical mineral projects in Africa, acting as a financial and technical partner to ensure that African countries move up the critical mineral value chain. For example, Afreximbank and the United Nations Economic Commission for Africa recently signed a Framework Agreement with the Democratic Republic of Congo and the Republic of Zambia to establish Special Economic Zones that will facilitate the processing of their critical mineral resources to produce Battery Electric Vehicle and related services.
The African Continental Free-Trade Area (AfCFTA), implemented in 2021, has also acted as a strong impetus for African governments to address their infrastructure gaps, enhance and streamline supply chains, improve climate policies that fulfill net zero commitments, boost manufacturing capacity, and overhaul regulation relating to trade, cross-border initiatives, investment-friendly policies, and capital flows. It is expected that the trade in critical mineral commodities in Africa will benefit from these reforms and that, among other factors, this will result in African countries undertaking a more active role in the sustainable processing of metals and minerals, better capitalizing on the continent's vast mineral resource base.
On a continent-wide scale, Afreximbank is a key player in the finance and promotion of African trade and one of the architects of the AfCFTA. Afreximbank and several other development banks have increasingly been bridging Africa's trade finance gap through increased lending and alternative products to support market participants. Trade remains a key driver of Africa's social and economic development, and banks such as Afreximbank and the African Development Bank (AfDB) have sought to stay on top of market developments and provide sustainable solutions to boost intra-African trade.
Recently, it was announced that Afreximbank would increase intra-African trade funding to USD 40 billion by 2026, up from USD 20 billion in 2021. This would be in the form of an AfCFTA Adjustment Fund to facilitate and provide support through financing, technical assistance, grants, and compensation to state parties and private enterprises to effectively participate in the AfCFTA.
Since the establishment of AfCFTA, there have been other significant developments for intra-African trade, including the launch of the Transaction Guarantee Instrument, the Pan African Payment and Settlement System, and the Base Fund of the AfCFTA Adjustment Fund. A year ago, Afreximbank Trade Payment Services was launched to facilitate "the settlement of international trade on open account terms on behalf of identified African financial institutions and their clients." This was developed specifically to address African banking challenges, exacerbated by the withdrawal of international banks, mainly due to stringent regulatory and compliance requirements but also due to rising costs.
Traditional lenders have also been scaling back in terms of funding infrastructure gaps in Africa. Baker McKenzie's report, New Dynamics: Shifting Patterns in Africa's Infrastructure Funding (report), pointed to infrastructure gaps in energy provision, internet access, and transportation that have resulted in an urgent imperative to identify and enable new sources of financing outside traditional lenders and international partners. Such gaps must be addressed to facilitate the construction of climate-resilient, sustainable infrastructure and enable the free flow of trade, including in critical minerals, across the continent.
The report outlined how Development Finance Institutions (DFIs) are increasingly anchoring the infrastructure ecosystem in Africa because they can shoulder political risk, access government protections, enter markets that others cannot, and are uniquely capable of facilitating long-term lending. However, the amount of capital needed is significant, and DFIs cannot bridge it alone. Private equity, debt finance, and specialist infrastructure funds are primed to enter the market, and multi-finance and blended solutions are expected to grow in popularity as a means to de-risk deals and support a broader ecosystem of lenders.
Developing countries are among the most vulnerable in the world to the effects of climate change, especially with regard to adapting to weather extremes and finding solutions that address food insecurity and energy and water scarcity. The availability of climate financing to assist developing countries with the transition to a low-carbon, climate-resilient future has been a hot topic in Africa for some time. In 2022, a number of countries pledged to increase their climate finance commitments, including France, Germany, the Netherlands, and the United States (US). The AfDB noted that around USD 1.6 trillion in financing is required by 2030 to assist Africa in adapting to and mitigating the risks of climate change, as well as for African countries to effectively implement their "Nationally Determined Contributions" under the Paris Agreement.
Transition finance, in the form of green, social, and sustainability-linked bonds, has become another well-established method of financing climate-resilient projects and the energy transition. There has been a rise in demand for sustainability-linked loans that incentivize borrowers to achieve pre-determined environmental, social, and governance targets. The essential foundation for transition finance is the development and agreement between the parties on a detailed, credible, and testable long-view transition plan to engender confidence that the activities being financed are meaningfully contributing to the net-zero target.
There will be continued growth in non-bank activity in Africa going forward as a result of new credit mitigation products coming to market and an increase in appetite from established market participants, such as DFIs and ECAs, to create products that are not tied to existing arrangements that may have limited the type of finance available. With the growing demand for critical minerals to support the energy transition and the need to support the development of sustainable infrastructure and trade across the continent, DFIs and ECAs will be instrumental in unlocking capital, bolstering private investment in sustainable projects, and fostering local production in Africa.