The landscape of African financial markets continues to evolve amid global pressures and domestic reforms, with key stakeholders working to strengthen market infrastructure while addressing persistent challenges.
The eighth edition of the Absa Africa Financial Markets Index, which launched in October 2024 at the International Monetary Fund and World Bank annual meetings in Washington DC, lays out a story of clear and widespread progress. Scores increased for 82% of the 29 countries in the index, marking the highest proportion since its inception in 2017.
Panellists at the launch event, which included representatives from three central banks, the IMF and the International Finance Corporation, highlighted the resilience of African countries in dealing with a difficult financial and economic environment, both globally and domestically. The discussion also revealed both the progress made and the hurdles that lie ahead for the continent’s economic development.
‘Cautious optimism as we go forward’
The macroeconomic context on the continent remains challenging, though signs of improvement are emerging across several key indicators. According to Catherine Pattillo, deputy director, Africa department at the IMF, the region has seen meaningful progress in addressing macro imbalances, with inflation trending downward and fiscal positions showing improvement. Public debt, after a decade of continuous increase, has finally begun to stabilise – albeit at elevated levels. These improvements reflect the commitment of African nations to implement difficult but necessary reforms to restore macroeconomic stability.
These remarks corroborate findings from the 2024 AFMI report, which revealed that the macroeconomic environment in most countries has improved considerably compared to the previous years. Headline inflation rates fell in 10 AFMI countries, although in nine cases, rates remain high above 20%. Based on IMF projections, the growth rate is also expected to catch up to pre-pandemic levels. However, external debt continues to dampen prospects.
This was also mentioned by Claver Gatete, executive secretary, United Nations Economic Commission of Africa, where he noted ‘more than one in three countries in Africa were in or at risk of debt distress’ and ‘the rapid rise in external debt continues to place a considerable strain on many economies’. Pattillo echoed this, adding that the region faces a ‘funding squeeze’, with domestic and external financing conditions remaining tight despite improving global financial conditions.
Policy and structural reforms to mitigate uncertainty
In response to challenging financial conditions, African nations are implementing various reforms to stabilise their economies and strengthen market infrastructure. These improvements span across foreign exchange markets, monetary policy decisions and corporate creditworthiness assessment frameworks.
Michael Atingi-Ego, deputy governor, Bank of Uganda, emphasised how global financial challenges have driven improvements in legal standards and enforceability in the country. He noted how in order to preserve the level of reserves and maintain stability in the exchange rate, the Bank of Uganda went beyond monetary policy measures to consider standard master agreements. He explained how these reforms ‘promoted the trading in the swaps and promoted the support for the interbank foreign exchange market, interbank foreign and money markets’.
Tanzania’s experience illustrates the challenges many nations face, especially when the country grapples with severe market dryness, particularly for essential imports like oil. In response, as noted by Yamungu Kayandabila, deputy governor, Bank of Tanzania, the country implemented a new code of conduct for its FX market and is working under an IMF Extended Credit Facility programme to improve market transparency and price discovery.
Elsewhere, to improve transparency, Ethiopia has introduced a more flexible exchange rate system to boost export competitiveness, address persistent foreign exchange shortages and attract foreign direct investment. Central banks in Nigeria, Egypt and Zimbabwe have also undertaken FX reforms to improve access in order to attract capital.
ESG initiatives for innovation and co-operation
Panellists at the launch agreed that green finance and environmental, social and governance initiatives have emerged as a promising area for market growth and innovation across Africa. The 2024 AFMI report also revealed that 23 countries now implementing ESG measures in their financial market infrastructure.
Atingi-Ego outlined how Uganda is taking significant steps to expand its ESG footprint, with plans to broaden its fixed income market beyond traditional securities, to include green bonds, sukuk, Panda bonds and diaspora infrastructure bonds. At an organisational level as well, the Bank of Uganda has institutionalised ESG principles across the financial sector in its strategic plan for 2022-2027, and it aims to become a sustainable central bank.
In southern Africa more broadly, regional co-operation is driving ESG development. The Southern African Development Community is actively discussing ways to incentivise both investors and issuers to incorporate ESG principles into their financing activities. Zafar Parker, head of financial markets at the South African Reserve Bank, notes that discussions are underway about incorporating ESG principles into debt issuance within the next few years. A key debate remains on whether ESG initiatives should be private sector-led or government-driven, with some suggesting that government-issued green bonds could help build momentum for private sector participation.
The combination of regulatory reforms, infrastructure development and innovative financial instruments is gradually creating more robust and resilient markets. As countries continue to address structural challenges while embracing new opportunities in areas including ESG, the continent’s financial markets are positioned to play an increasingly important role in supporting economic development and improving living standards for its growing population.
Arunima Sharan is Senior Economist, Economic and Monetary Policy Institute at OMFIF.
Watch the launch of the 2024 Absa Africa Financial Markets Index report here.
