Scaling Innovative Finance For Growth In The Horn Of Africa

As we step into 2025, it’s a perfect time to reflect on the future of the Horn of Africa (HoA) and the opportunities ahead. In October 2024, we were part of the 22nd Ministerial Meeting of the Horn of Africa Initiative hosted by the World Bank Group (WBG), bringing together finance ministers from Djibouti, Ethiopia, Kenya, Somalia, South Sudan, and Sudan. Alongside ministers, development partners, and key regional players, we discussed the region’s economic challenges and explored the potential for innovative financial solutions towards a brighter, more sustainable future.

While the financial hurdles are clear—macroeconomic imbalances, high debt levels, and limited fiscal space—what became clear during this meeting was the collective commitment to turning these challenges into opportunities for growth and resilience.

The Financial Landscape

At the heart of challenges facing HoA countries is the financial fragility due to persistent macroeconomic imbalances. Discussions during the meeting highlighted that limited domestic savings, fiscal deficits, and rising debt have made it difficult for HoA economies to finance the growing investment needs, especially in social services and infrastructure. However, participants agreed that these challenges also present a unique opportunity for financial innovation. The region’s need for access to financial resources is urgent, and in 2025, the role of bold, innovative financing solutions becomes even more crucial.

Take Kenya and Ethiopia, for example. While they have access to international markets, they are grappling with steep refinancing costs and inflationary pressures. Somalia and Djibouti, on the other hand, are heavily dependent on concessional finance, while South Sudan’s oil-driven economy struggles to generate revenue beyond oil exports.

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Regional Innovative Financing in Action

The WBG and its partners are stepping up to the challenge with a variety of innovative financial instruments, paving the way for a more resilient and sustainable future. Here’s a glimpse of what’s already in motion and how it’s setting the stage for 2025:

Debt Financing: WBG’s Regional Infrastructure Financing Facility (RIFF) is already offering long-term concessional debt for crucial infrastructure and renewable energy projects. The upcoming Africa Green, Resilient, and Inclusive Housing De-Risking Facility (GRIHD) will focus on issuing local currency bonds, encouraging private capital inflows and boosting investor confidence.

Equity and Patient Capital: To complement debt financing, the Accelerating Sustainable and Clean Energy Access Transformation (ASCENT) Project is injecting equity into renewable energy ventures. This ensures a balanced financing mix and long-term financial sustainability, which will be essential in meeting the region’s ambitious growth targets.

Risk Mitigation: The Multilateral Investment Guarantee Agency (MIGA) is working to reduce credit and political risks through a single dedicated platform fostering public-private partnerships and encouraging foreign investment. In 2024 alone, MIGA supported over USD 10 billion in foreign investments across Africa, underscoring the potential for leveraging private sector participation.

Inclusive Insurance Solutions: The De-risking, Inclusion, and Value Enhancement (DRIVE) Project, which provides drought index insurance to pastoral communities, has already helped over 2.5 million individuals, predominantly women.

Policy Environment: A stable, predictable policy environment is essential to attracting investment. The Building Opportunities for Optimized Trade and Investment for Growth in East Africa (BOOST) Project is an exciting initiative designed to reduce trade costs and increase investment flows, supporting the implementation of the Africa Continental Free Trade Agreement (AfCFTA) in East Africa.

Technical Assistance and Capacity Building: The WBG’s ongoing technical assistance focuses on climate finance strategies and governance reforms. For instance, the IFC’s Climate Finance Competency Framework is helping institutions manage climate risks, ensuring that investments align with global sustainability goals.

A Path Forward: Embracing the Potential of Innovation

As we move forward in 2025, scaling up these innovations will be key to unlocking the region’s potential. Certain financial instruments, like guarantees and risk-sharing mechanisms, stand out for their scalability. These instruments avoid some of the challenges posed by limited absorptive capacity and help deepen local financial markets. They also encourage the use of local currency financing, which is especially important for HoA countries.

But it’s not just about financial instruments. The real magic happens when these tools are combined with sound macroeconomic reforms and sector-specific policy dialogues. To build a resilient and prosperous future, HoA countries must continue collaborating with development partners, private sector actors, and other stakeholders. Together, we can create a conducive environment for private investment, ultimately helping the region achieve sustainable growth.

The journey toward resilience is not without its challenges, but the opportunities are equally vast. As we step into the New Year, let’s focus on the path ahead, where innovation, collaboration, and forward-thinking solutions will be the driving forces for sustainable growth in the Horn of Africa. By combining innovative financing with robust policy reforms, we can unlock the region’s true potential. Together, let’s make 2025 a year of transformation and resilience.

Boutheina Guermazi is the Director for Regional Integration for Sub-Saharan Africa, the Middle East and North Africa, World Bank. Ahmed Rostom is a Senior Financial Sector Specialist, The World Bank. Michael Fuchs Is a Consultant on Financial Sector Development.

Contributed by BoutheinaGuermazi, Ahmed Rostom, &Michael Fuchs

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