Africa is on the brink of losing close to $40 billion in external financing by 2025, a projection by the African Development Bank (AfDB) has predicted.
The looming financing shortage is partly caused by the decrease in aid from leading donors, a shift in Africa’s development financing.
In its most recent African Economic Outlook 2025 report, the AfDB sounded an alarm regarding the dwindling rate of Official Development Assistance (ODA) to the continent of Africa. The report particularly states that 17 DAC donor countries, headed by Germany and the United States of America, are cutting back on their aid disbursements. The countries contributed a sum of around 18 percent of the overall aggregate aid of the continent for the three-year stretch between 2021 and 2023.
Africa can expect a 12 percent cut in aid from these DAC members if trends hold to 2023. That is a net reduction of approximately 7 percent in total foreign aid flows or approximately $4.2 billion, assuming other donors hold the size of their contributions constant at current levels. The estimated loss of $39.84 billion is larger than the net domestic product of Comoros, Guinea-Bissau, and São Tomé and Príncipe combined, and it indicates just how bad things are.
Severe Impact on Africa’s Most Fragile Economies
This anticipated reduction in overseas financing is also likely to be most detrimental for poor African countries with highly foreign-aid-dependent budgets. The AfDB was quick to point out that ODA remains the pillar of such economies, and reductions will increase fiscal imbalance, undermine social services, and undermine development in the most financially vulnerable nations.
Though remittances are the most reliable source of finance flow from outside to Africa, they have not escaped stress in global finance. Remittances to Africa dropped by 6.2 percent in 2023 from $97.1 billion in the previous year to $91.1 billion. The drop is attributed to coming mainly because of exchange, not a reduction in remitted money. The actual purchasing power of transfers fell when they appreciated relative to the US dollar, reducing what reaches recipients.
Although remittances smooth consumption at the household level and serve as shock absorbers during financial shocks, institutions such as transfer charges, regulation mechanisms, and economic openness in the recipient countries also shape their performance.
Aid Cuts Reflect Shifting Global Priorities
The AfDB report also indicates that the declining trend of aid disbursement began after the brief spike in 2020, when development aid increased by 30 percent to support Africa’s war on COVID-19. Disbursement has been declining consistently since then. In 2023, DAC member ODA to Africa was $35.9 billion, a near 3 percent decline from last year, following an already 6 percent decline in 2022.
Noteworthy is that the United States alone provided more than 40 percent of the total aid in 2023, while the recent austerity in the country has meant that future gifts can again decline. Budget restraints and slower growth in the donor countries’ domestic economies have constrained the governments’ finances, and foreign aid budgets are being pinched. Africa Must Strengthen Its Domestic Economic Base
The AfDB encourages African nations to actively respond to these types of changes by formulating their own domestic macroeconomic frameworks. Policy stability development, export capability enhancement, and domestic value addition stimulation are highlighted as measures needed to reduce vulnerability to external shocks and to long-term financial resiliency.
With foreign aid declining, Africa’s ability to mobilize domestic resources and build resilient economic institutions is more important than ever.
