Africa’s cost of capital crisis is driven not only by economics but by deep-seated perceptions and global financial structures that systematically overprice African risk. As G20 leaders meet in Johannesburg, the extent of this distortion becomes impossible to ignore. Despite the progress made in infrastructure and development, African countries face borrowing costs far higher than comparably rated economies elsewhere.
Between 2016 and 2021, African governments, facing a contraction in concessional lending, turned to capital markets and paid an estimated $56 billion more in interest than they would have under traditional aid terms. This sum exceeds the continent’s total foreign direct investment in 2023, highlighting a significant challenge in financing Africa’s future.
The Global Nature of the Crisis
This issue is not confined to Africa. Globally, 3.4 billion people live in countries where debt servicing outstrips government spending on health and education. In Africa, three in five citizens live in such economies. The systemic issue lies in the way credit rating agencies assess risk, focusing on historical volatility and political risk, often based on outdated narratives that fail to reflect actual economic performance. This feedback loop results in higher interest rates for African countries, regardless of their underlying financial health.
As Serah Makka, Africa executive director at the ONE Campaign, pointed out, “When countries pay inflated interest rates driven by outdated perceptions, they are forced to choose between paying creditors or paying teachers, nurses, and engineers.” She emphasized that lowering the cost of capital is not just a charitable act but a smart economic move, benefiting both Africa and the global economy.
The Disconnect Between Risk Pricing and Reality
The disconnect between risk pricing and reality is stark. Infrastructure investments in Africa have outpaced major global equity indices over the past two decades, showing strong returns. Yet, sovereign borrowing costs remain persistently high. This paradox is driven by perceptions of risk rather than the actual economic performance of African countries.
With official development assistance falling by 7.1% in 2024, and further cuts expected, concessional finance is becoming increasingly scarce. As a result, the cost of capital has become a critical factor in whether African countries can afford to invest in infrastructure, health systems, and education. The so-called “African risk premium” is not an abstraction—it is a structural barrier to development, with quantifiable consequences for millions of people.
The G20’s Role in Addressing the Imbalance
The ONE Campaign argues that the G20 has the authority and opportunity to correct this imbalance. Reforms should focus on:
- Transparency in risk assessment,
- Greater African participation in global financial governance,
- Expanding the use of risk-mitigation instruments,
- A renewed commitment to concessional finance for countries that need it most.
This summit comes at a pivotal moment, as the global financial system faces increased scrutiny. The question is whether the G20 will use this opportunity to recalibrate a system that has long penalized Africa’s potential, or whether the status quo will persist. The reality is clear: the current system, where Africa pays more because it is seen as less important, is neither sustainable nor just.
