US fund cuts dim Africa's future power plans

From the newsletter

The US is withdrawing its funding support for the African Development Bank (AfDB) and its concessional financing arm, the African Development Fund (ADF), a $550 million annual cut. This comes at a time when the AfDB and the World Bank are committing $40 billion to connect more Africans by 2030. The ambition now hangs in the balance.

• The Trump administration has been restructuring its policy to reduce its budget for foreign aid. Earlier this year, they shut down one of the main financing arms for African governments, USAID, affecting the Power Africa initiative.   

• Yet, Africa is targeting an acceleration of its electrification efforts, aiming to connect 300 million people by 2030 and planned this with US support in mind. But now they have to go back to the drawing board. Will there be an alternative solution?

More details

• The AfDB appeared to be charting a new course for financing renewable energy projects in Africa with bold energy commitments made earlier this year. However, this long-standing African financial institution now faces a challenging path forward. The timing of the US funding cuts is particularly worrying as the AfDB prepares to launch its next fundraising cycle, ADF-17, targeting $25 billion for 2026–2028. That's nearly triple the amount it raised in the previous round, where the US contributed $568 million.

• Despite this setback, the situation also presents a potential turning point. AfDB President Akinwumi Adesina has long championed a structural reform that would allow the Fund to access international capital markets. If approved, this plan could allow the ADF to raise an additional $27 billion in funding. This approach has worked before with the International Development Association (IDA), the ADF's equivalent. In 2017, IDA secured $33.5 billion from markets to supplement donor pledges.

• However, this won't come easily. It will require political approval, even from its main funders like Germany, France, and the UK. To date, their pledged support has remained consistent. At the 2024 AfDB meeting in Nairobi, Kenyan President William Ruto pledged $20 million and called for African self-reliance and trust in their own institutions. Several others followed, including Benin ($2 million), Sudan ($3 million), and commitments from the Gambia, Ghana, Liberia, and Sierra Leone.

• A lot is at stake for African countries. They risk job losses and unfulfilled climate commitments outlined in their Nationally Determined Contributions. Previous funding rounds have worked well in bettering not just the energy sector but also others like transport and water. For example, ADF-16 connected more than 500,000 people to electricity, provided clean water and sanitation to over 1 million people, and improved transport for more than 2.5 million people. In 2023, it created 700,000 jobs.

• While the US exit can be interpreted as a negative sign for renewables, it creates a vacuum for other developed countries and lending institutions to explore. The European Union is among the latest to seize this opportunity. In March this year, it committed to funding South Africa's energy transition with a $5 billion loan. This is more than what the US had committed.

• Recent investments in renewables in Africa point to a mature market that investors can target. The energy access gap affecting 600 million people presents a significant opportunity. AfDB estimates that Africa needs $402 billion per year through 2030 to meet key development goals, including infrastructure, energy, healthcare, and education. But currently, it receives less than 5% of global energy investments. 

Our take

• It is high time for African countries to proactively champion structural reforms within the AfDB. Enabling the institution to directly access international capital markets is no longer an option, but a necessity to bridge the widening financing gap. The sheer scale of demand for development funding on the continent requires innovative financing solutions.

• African governments can also work to promote stronger regional economic integration to create larger markets and attract more intra-African investment, which can then be channelled through the AfDB. The African Continental Free Trade Area (AfCFTA) is a crucial step in this direction.

• However, Africa cannot do much on its own. It needs more partnerships with the outside world. Developed countries like Germany, France, the United Kingdom, and Japan, which have consistently supported the AfDB, now have a unique opportunity to step up and fill the void left by the US.