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DFIs: How can they help Africa’s unemployment crisis?

Feature, Policy analysis

More and more young people are entering the job market every day in Africa. And job creation today is essential to creating a better future for all. But across the continent, government’s aren’t stepping up to ensure that youth can secure jobs. That’s why we launched our Jobs Now Africa campaign, to outline the scale of this urgent crisis and encourage the public to urge governments and non-state partners to prioritise job creation. A big part of that job creation is utilising development finance institutions (DFIs). 

Here is a closer look at how.


Creating decent jobs in Africa

Ten of the largest global bilateral development finance institutions play a critical role in creating decent jobs on the continent, according to a new report published by ONE and the African Centre for Economic Transformation (ACET). 

These are important in supporting the efforts to rebuild the economy of a vulnerable continent. With 15 million decent jobs needed annually in Africa, the new research shows that even before the COVID-19 pandemic hit, 1 in 3 African workers lived in extreme poverty, earning less than $1.90 per day. At the peak of the crisis, about 20 million formal and informal jobs are estimated to have been lost, with millions more workers falling into extreme poverty due to wage cuts and inflationary pressures. Africa’s working-age population is expected to increase by 450 million between 2015 and 2035, and if the current trend continues, Africa’s youth will carry pervasive and devastating consequences. 


Why DFIs?

In 2021, G7 DFIs, the International Finance Corporation, the private sector arm of the African Development Bank, European Bank for Reconstruction and Development, and the European Investment Bank announced that they were committed to investing $80 billion in the private sector over the next five years to support sustainable economic growth in Africa. In the midst of a severe economic crisis following the coronavirus pandemic, DFI investments are more important than ever. These institutions are not only instrumental in supporting long-term economic growth, but have emerged as crucial enablers of economic recovery. But DFIs have to do more to transform African economies, including:


Take risks that lead to transformation for job creation

The overarching way in which the future of jobs are constrained is through the high risks associated with the structural changes needed. Innovation in digital technologies and the green economy have great potential to create jobs and future-proof the continent from further job losses and economic breakdown. Despite the potential of these new and growing sectors, they are often too risky for commercial financiers like banks. Similarly, agricultural transformation requires investment in new and unproven productivity enhancing business models and technology, whilst informal workers and micro,small and medium enterprises(MSMEs)  and harder to reach economies are all associated with a greater risk that the investments will go bad. As of 2018, low-income countries received only 6.4% of DFIs and multilateral development banks (MDBs) commitments. In an ever-evolving world, it has become evident that low-income countries cannot be left behind and this is exactly why DFIs have a role in their transformation.


Transfer of standards and skills

DFIs are in a distinctive position to execute capacity building or skills transfer in conjunction with a transaction. This can be through the partnership with local financial institutions structuring a deal in a new sector, which can then be replicated without the DFI, or more targeted capacity building through the use of technical assistance (TA). The development impact of a transaction, for instance for women, youth and marginalized groups, can be greatly increased by such TA funds, and DFIs should routinely assess opportunities and look to increase its funding.


Measure and share impact, including for investments in financial institutions, for accountability and learning

Most DFIs do collect information about their impact on job creation and they coordinate among themselves to try to ensure that indicators align. However, this needs to happen faster and universally. Moreover, this report has been unable to build a complete picture of how DFIs are improving the quality of jobs and whether they are targeting those most in need of them, including youths, women, and rural workers. External reports also don’t have data on how financial institutions are using funds and the jobs they are creating, therefore we do not know the impact on MSMEs, informal workers, and even green jobs. Without this information, other DFIs cannot effectively invest to meet their own development impact priorities and citizens cannot hold DFIs to account for them.

DFIs should be seen as a key strategic agent to finance and rebuild the post-pandemic economy in a manner that ensures sustainability and resilience by investing in projects and developing sectors that can provide decent jobs for Africa, particularly its young people. 

DFIs have the ability to absorb the risk that the private sector and other sources of development finance can’t, create the skills and capacity, laws, and regulations, and provide the proof of concept needed to trigger further investment from the private sector. With the rise of entrepreneurial culture and the establishment of small businesses on the continent, DFIs are now more crucial than ever.

Want to help address the jobs crisis in Africa? Add your name to the people’s CALL TO ACTION on jobs in Africa now!.