Build, not borrow: Economic development in Africa

Authors’ note: This article reflects publicly available information as of November 3, 2025. Future-state funding estimates are highly subject to change pending further donor country announcements and iteration on existing budget proposals.

Africa is at a crossroads. Already grappling with constrained domestic resources and structural headwinds, including decades of underinvestment, the continent is facing an additional pressing challenge: stark cuts to official development assistance (ODA). ODA has long played a stabilizing role in the budgets of several African countries, yet the risk of its withdrawal is dwarfed by the continent’s fiscal deficit, which is six times larger than the projected decline of ODA.¹

This fiscal crunch, exacerbated by ODA withdrawal, highlights the fragility of Africa’s fiscal model, but it can also be a catalyst for course correction. African countries have an opportunity not only to fill the budget shortfall left by the withdrawal of ODA but also to consider reforms that narrow budget deficits and build long-term resilience. Our analysis finds that the opportunity is considerable, spanning revenue mobilization, efficiency, strategic systemic shifts, and growth. But to what degree are African countries set up for success?

Many of the interventions required to mobilize revenue and improve efficiency are proven solutions that can be implemented in the near term. This article explores the key steps governments can take to deliver cash flow within budget cycles and signal credibility to markets and investors. To help each country sequence relevant reforms and actions based on their structural realities, we also offer a framework of four country archetypes.

Using this framework, African leaders can look to build, not borrow, a more prosperous tomorrow. A proactive agenda founded on evidence-based consensus and executed synergistically by relevant stakeholders could ensure that African countries pivot from aid transactions to build durable, market-ready public finance systems that fund sustainable and inclusive development and improve lives and livelihoods across the continent.

Africa’s squeezed fiscal space: A $200 billion gap

In 2023, African governments generated approximately $572 billion in revenue and recorded $785 billion in expenditure, leaving a fiscal gap of roughly $200 billion (Exhibit 1).² As governments seek to meet this shortfall, public external debt has climbed to roughly $746 billion—about 25 percent of the continent’s gross national income.³ And with 22 countries in debt distress or at high risk of debt distress, the margin for error is small.⁴ Interest payments now consume nearly one-sixth of government revenues, the highest burden among developing regions, with many governments allocating more to creditors than to classrooms.⁵

In 2023, African governments’ revenue and expenditures left a fiscal gap of roughly $200 billion.

Hurdles in domestic revenue mobilization, challenging financing conditions, and structural headwinds (including narrow productive bases, large informal sectors, and underinvestment) compound the challenge.⁶ While growth across the continent is projected to reach 4.4 percent by 2026, fiscal fragility will likely persist without diversification and stronger domestic capital markets.⁷

On top of this, publicly announced cuts to ODA suggest that global aid could decrease from 2023 levels by between 19 and 29 percent, with Africa alone losing up to $30 billion (Exhibit 2). Critical development areas such as health and emergency response, which together account for 42 percent of total ODA funding in Africa, are particularly exposed.⁸McKinsey analysis based on OECD Creditor Reporting System data for 2023, government budget documents, Institute for Health Metrics and Evaluation Financing for Global Health Database, Global Polio Eradication Initiative Historical Contributions, and data from the World Bank and the Center for Global Development. These materials reflect general insights based on available information as of August 15, 2025, that has not been independently verified and is inherently uncertain. Future results may differ materially from any statements of expectation, forecasts, or projections. For further methodological details, see “A generational shift: The future of foreign aid,” McKinsey, May 6, 2025.

These cuts highlight the precariousness of several African countries’ fiscal models. Forty-two out of Africa’s 54 countries rely on ODA for more than 10 percent of their government revenues.⁹ Nigeria, for example, receives $3.8 billion in at-risk funding that will be difficult to replace quickly, with implications across core sectors.¹⁰ The high concentration of aid intensifies the risk: In 2023, 35 percent of ODA came from multilateral institutions, with major contributions from the US government. An additional 21 percent flowed through bilateral agreements from the US government.¹¹

Global reductions in official development assistance could cut up to $30 billion of aid to Africa annually.

Seizing the moment: Turning constraints into opportunity

Calculating Africa’s $200 billion public-finance opportunity

This analysis used available data on African public finances and applied evidence-based assumptions to quantify the potential gains from enhanced revenue collection and improved spending efficiency.

The $125 billion revenue opportunity

Africa’s tax-to-GDP ratios remain below the World Bank’s 15 percent minimum threshold for growth, signaling an $85 billion annual opportunity to increase tax revenues by optimizing existing taxes and customs.¹ An increase of even one percentage point could yield $30 billion annually, or $150 billion by 2030.² Nontax revenues, such as improved state-owned enterprise performance and monetization of government assets, could add $40 billion.³McKinsey analysis. We assigned a quartile-based rank to all African countries based on each country’s nontax revenue as a share of GDP, comparing with other African countries of the same International Monetary Fund income classification. We then evaluated the resulting revenues from countries below the fourth quartile from increasing their nontax revenue as percent of GDP metric by one quartile. These levers mirror the fiscal initiatives commonly used by peer emerging economies.

The $75 billion efficiency opportunity

Governments can optimize expenditures and use their resources more efficiently to maximize the value of each dollar spent across four key categories:

Procurement. Up to 25 percent of global procurement budgets are lost due to inefficiencies and irregularities in financial management.⁴ Addressing these leakages through measures such as pooling procurement to improve volume and timing, renegotiating supplier contracts, and adopting open contracting systems could save $25 billion annually.
Capital expenditures. African governments spend about 13 percent of GDP, or $160 billion, on capital projects.⁵ Prioritizing high-value projects, improving project design, and adopting digital tools such as e-procurement could unlock $35 billion in annual savings.⁶
Transfers, subsidies, and pensions. Redirecting inefficient subsidies to targeted programs, such as cash transfers, and reducing leakages through tools such as biometric validation could save $5 billion annually.⁷
Debt service costs. With debt service costs exceeding $160 billion in 2024, refinancing or renegotiating debt could save $10 billion annually.⁸

In 2023, African governments saw a fiscal gap of about $200 billion in total.

As the situation evolves, governments and other stakeholders are seeking to mobilize additional revenue to sustain programmatic impacts in this resource-constrained environment. They also have an opportunity to use the momentum to build greater self-reliance for the longer term. Our analysis suggests that four mutually reinforcing strategic levers—domestic resource mobilization, cost optimization, strategic system evolution, and economic growth—can help put public finances in Africa on a more sustainable footing, with the potential to generate more than $200 billion over the coming decade (Exhibit 3, and see sidebar “Calculating Africa’s $200 billion public finance opportunity”).

African governments have an estimated $200 billion opportunity to transform public finances, largely by increasing revenues.

Africa’s fragile starting point impedes the raising of domestic resources

The current state of Africa’s economies will influence the timing and practicality of action. Ultimately, a country’s path toward growth can be determined by three pillars: its fiscal and debt capacity, its access to financial markets, and its productive capacity. Additionally, the crosscutting factors of institutional capacity and policy agility determine how quickly countries can translate financing opportunities into tangible outcomes. On all these measures, the vast majority of African countries face challenges.

Narrow fiscal headroom: Nineteen countries, including Angola and Ethiopia, face a dual burden of high debt service and low domestic revenues, leaving little fiscal space to absorb shocks. Another 27 countries, including Togo and the Democratic Republic of Congo, also struggle with low revenues despite lower debt costs. Furthermore, by 2025, 25 African countries had exceeded the 20 percent debt-service-to-revenue risk threshold, with some, such as Mozambique, spending more than 50 percent of revenue on debt.¹² Only four countries—Botswana, Morocco, Algeria, and Namibia—combine low debt service with relatively strong revenues, placing them in a comparatively resilient position.

Shallow access to affordable capital: By 2021, private creditors held 44 percent of Africa’s external debt, up from 30 percent in 2010.¹³ Sovereign borrowing costs for African countries averaged nearly 10 percent between 2020 and 2024, compared with 0.8 percent in Germany and 2.5 percent in the United States, effectively shutting 21 countries, including Sudan and the Republic of Congo, out of international markets, while 22 rely on nonconcessional funding.¹⁴ Even the more investable economies, such as Egypt and Senegal, face high sovereign yields, which deter refinancing and long-term investment.¹⁵ Domestic markets are equally thin: Only 21 countries have issued Eurobonds, just two (Botswana and Mauritius) have investment-grade ratings,¹⁶ and many still lack meaningful access to sovereign debt.¹⁷

Narrow productive capacity: Raw commodities account for more than 60 percent of exports in 46 countries. Thirty-seven economies, including Ethiopia and Comoros, have fragile, undiversified exports; 11, including Senegal and Namibia, have some private sector depth but concentrated exports; and only five, including South Africa and Egypt, combine diversified exports with robust private sectors. Manufacturing has stagnated below 13 percent of GDP, on average, in Africa, with five countries (Nigeria, Egypt, South Africa, Algeria, and Morocco) accounting for the majority of the continent’s manufacturing output.¹⁸

Together, these realities create a constrained starting point for many countries. However, they also highlight where reforms can yield the greatest payoff.

A map of the territory: Four archetypes to understand the relative starting points of African countries

Methodological note: Determining country archetypes

To categorize African countries’ starting positions, this analysis used a structured, six-step, archetyping framework:

Defining the structural foundations that determine a country’s starting point: Each country’s capacity to mobilize stable domestic revenues and maintain sustainable debt was assessed. ODA reliance and institutional strength were deprioritized because they do not influence the core solution pathway.
Identifying metrics that enable consistent benchmarking across countries: More than 25 metrics were reviewed to assess their ability to accurately reflect a country’s starting points. Together with public-finance experts, nine metrics were prioritized: debt service as a percent of government revenue, sovereign bond issuance, product export concentration, an export commodity dependence index, government revenue, FDI and private development finance, nonconcessional finance inflows, domestic credit to the private sector, and exports, with the last five as a share of GDP.
Determining performance thresholds: Performance thresholds were determined for each metric. Where possible, we leveraged international benchmarks; alternatively, regional averages were calculated and reviewed with expert input. Mauritania and Eritrea were removed from the analysis due to data limitations.
Defining an initial set of overarching archetypes to accurately assess current situations across the continent: Based on the subarchetypes, six initial overarching archetypes emerged.
Conducting a qualitative review leveraging country experts and AI-driven deep research to account for evolutions, considering latest available data points and data hallucinations: An additional qualitative cross-check was conducted across the pillars to validate the subarchetypes as follows: For most metrics, the latest available data was 2023; data illusions skewing the data were corrected; and missing data was complemented with desk research.
Refining overarching archetypes: The four remaining archetypes after the qualitative review were checked and refined.

While the fiscal opportunity is clear, the path to realizing it will differ across countries. Africa is not a single fiscal story: Some nations face urgent stabilization challenges while others are positioned to accelerate reforms or sustain gains through strategies that prioritize sustainable and inclusive growth, a core objective for many countries. To help each country sequence practical and relevant reforms, we have defined four archetypes—groups of countries that share similar structural starting points, capacities, and choices—that can serve as a framework for action (Exhibit 4, and see sidebar “Methodological note: Determining country archetypes”).

African countries can be grouped into four distinct archetypes based on structural starting points, capacities, and choices.

Building on insights from two recent McKinsey reports,¹⁹ eight common levers across the pillars of fiscal headroom, access to capital, and productive capacity have had demonstrable success in building self-sustaining public finance landscapes, which can also inform African countries’ routes to resilience. These levers are as follows: stabilize and create predictable debt, raise traditional domestic revenues without hurting growth, broaden nontax and innovative public revenues, use market-based financing instruments wisely and predictably, attract capital through innovative and catalytic finance, create productive investments, expand formalization and business participation, and stabilize trade and external earnings (see sidebar “A common toolbox: Eight levers to build fiscal strength”).

A common toolbox: Eight levers to build fiscal strength

Stakeholders can deploy eight moves across the pillars of fiscal headroom, access to capital, and productive capacity to build a more self-sustaining public finance landscape. These moves are relevant across archetypes, but they may have different sequencing and priority based on each country’s requirements.

Three levers apply to the first pillar, fiscal capacity and debt sustainability (leverage domestic resources):

Stabilize and create predictable debt. Predictable debt service frees up fiscal space for development priorities, lowers risk premiums, and prevents procyclical austerity in downturns. It can also improve access to markets and concessional windows on better terms. A country can adopt a disciplined approach to public borrowing, with clear debt limits and strategies, transparent reporting (including on state-owned enterprises and government guarantees), longer maturities in local currency, and state-contingent clauses that pause payments during shocks.
Raise traditional domestic revenue without hurting growth. Fiscal space can be expanded by streamlining and broadening the base. Potential examples include value-added-tax compliance, property and excise, rationalizing exemptions, digitalizing administration (such as through e-filing, e-invoicing, e-customs), and sequencing reforms to protect micro-, small, and medium-size enterprises and vulnerable households while rewarding compliance.
Broaden nontax and innovative public revenues. Fiscal inflows can be diversified by enhancing the returns from state-owned enterprises, optimizing user fees and fines, and introducing value-based licensing regimes. Governments can also monetize underutilized public assets, converting idle resources into steady fiscal contributions while professionalizing management practices.

Two levers apply to the second pillar, financial market development and access (access additional, affordable, resources):

Use market-based financing instruments wisely and predictably. Additional capital can be accessed through the disciplined issuance of sovereign bonds (for example, Eurobonds, sukuk, and diaspora bonds) and structured public–private partnerships. Municipal and subsovereign bonds can fund infrastructure, while predictable issuance calendars and clear rules anchor investor confidence and reduce borrowing costs.
Attract capital through innovative and catalytic finance. Countries can attract new types of investors by deploying innovative instruments such as green, blue, or social bonds; carbon credits; and impact-linked securities, as well as by leveraging catalytic mechanisms such as guarantees, political risk insurance, and blended-finance structures. These can reduce risk premiums, create demonstration effects, and help transition a country from deal-by-deal financing toward scalable capital flows.

Three levers apply to the third pillar, productive capacity and economic development (grow stronger resources):

Create productive investments. Expenditures can be shifted into high-multiplier assets, including reliable power, logistics corridors, digital backbones, industrial parks, and workforce skills while enforcing value-for-money project selection based on maximizing value for money and delivery (using, for example, standardized public–private partnerships, independent appraisal, and capital-expenditure-to-outcomes tracking).
Expand formalization and business participation. A country can encourage its informal sector to formalize by implementing mechanisms such as one-stop digital registration, tiered or presumptive tax regimes, e-invoicing, interoperable payments, procurement access, and portable social protection. Such mechanisms reward registration and scale-up to solve the challenge of a narrow tax base and low firm productivity.
Stabilize trade and external earnings. Foreign exchange crunches that destabilize prices, budgets, and debt service can be addressed by diversifying export baskets into higher-value goods and services, fixing trade logistics and standards, deploying export finance and insurance, and regionalizing value chains to anchor demand.

The four archetypes can guide decision-makers to match the right levers to the right contexts, detailing waypoints along the path to self-reliance based on the country’s capacity to act. The logic builds with each step: Stability buys time, delivery builds credibility, and depth secures resilience, while skipping steps risks eroding fragile gains and investor trust.

Archetype 1: Stabilize—restore balance under debt and revenue pressure

This archetype is typified by high debt burden (30 to 50 percent of government revenues), low government revenues, limited capital market access, or a fragile productive base. Example countries are Nigeria and Angola.

Countries with this archetype can prioritize pursuing debt relief or restructuring, strengthening tax administration, and rationalizing subsidies. For example, Nigeria lifted value-added tax (VAT) from 5 percent to 7.5 percent to expand receipts, and Angola introduced VAT and trimmed fuel subsidies to raise non-oil taxes.²⁰ On this pathway, ODA can be reimagined to act as short-term stabilization and a springboard to exit. By front-loading support that digitalizes tax administration, broadens the base, and strengthens debt management, countries can progressively finance themselves.

Archetype 2: Build—fortify a low and volatile revenue base before debt stress emerges

Countries in this archetype have low government revenue, limited capital market access, or a fragile productive base (with a more sustainable debt situation). Example countries are the Democratic Republic of Congo, Niger, and Tanzania.

These countries can start by mobilizing domestic tax and nontax resources more effectively while fostering an environment that attracts investment and spurs growth. They can expand the tax net and improve compliance while formalizing the informal economy. Tanzania, for example, implemented structural tax reforms, including a simplified income tax law, which increased collections by about 3.5 percentage points between 2000 and 2009.²¹ The country continues to modernize its tax administration and broaden its tax base through improvements in compliance and reductions in exemptions.²² As in Archetype 1, on this pathway, ODA can be reimagined as short-term stabilization and a springboard toward self-financing.

Archetype 3: Accelerate—leverage emerging market access to refinance and reform

Countries in this archetype experience high debt service (often more than 25 to 30 percent of revenues), low government revenue, broader capital market access, and a robust productive base. Example countries include Egypt and South Africa.

The priorities in Archetype 3 countries are to make borrowing cheaper and safer, improve local financial systems, and boost key, investment-intensive sectors to increase tax income. For example, Egypt’s 2016 program—currency float, VAT, and fuel subsidy reform—helped reduce deficits and restore investor confidence.²³“IMF Executive Board approves US $12 billion extended arrangement under the Extended Fund Facility for Egypt,” International Monetary Fund, November 11, 2016; “Egypt Eurobond sale to cover FY 2017-18 financing needs,” Reuters, May 24, 2017; Operation Vulindlela: Phase 1 review: Progress in driving economic reform 2020-2024, South African Department of National Treasury, 2024; 2024 budget review, South African Department of National Treasury, 2024. In this archetype, ODA can be reimagined to encourage a country to make further important economic changes.

Archetype 4: Anchor—deepen and sustain resilience and crowd in private capital at scale

Archetype 4 is typified by resilient government revenue and debt base, broader capital market access, and a robust productive base. Morocco is one example.

Archetype 4 countries can maintain fiscal discipline, build buffers, and borrow selectively for high-return infrastructure and social investments. They can also lower the cost of capital by widening domestic investor bases, lengthening repayment terms in local currency, and maintaining a predictable borrowing schedule. Additional private finance can be raised via catalytic tools and instruments—including pipelines for public–private partnerships, guarantees, and green, blue, or social bonds—while project appraisal and delivery can be tightened to ensure value for money. On the real-economy side, countries can expand higher-value tradables and services, strengthen industrial ecosystems and skills, and keep growth inclusive to sustain legitimacy. For example, supported by strong revenues, prudent debt management, and International Monetary Fund support, Morocco has maintained international market access and secured a €1 billion Eurobond in 2020.²⁴ In Archetype 4 countries, ODA can be reimagined as an evolution toward partnership and derisking.

Taking an archetype view, it’s clear that the distribution of both vulnerability and opportunity across Africa is skewed. Thirty-six countries (Archetypes 1 and 2)—home to nearly three-quarters of Africa’s population but generating less than half of its GDP—face constrained fiscal space, low domestic revenue, and limited market access. In contrast, the sixteen countries in Archetypes 3 and 4, which together account for more than half of the continent’s GDP but less than a third of its population, exhibit greater fiscal resilience and diversified financing options.

Aid flows mirror this divide: Three-quarters of all ODA is concentrated in Archetypes 1 and 2, underscoring the scale of dependence in countries least equipped to absorb external shocks (Exhibit 5).

ODA flows mirror the level of exposure to debt in African countries, with about 75 percent of ODA concentrated in Archetypes 1 and 2.

A call for synergistic action

Africa’s fiscal squeeze is severe—but not insurmountable. The road ahead requires clarity on priorities, disciplined sequencing, and a common toolbox of reforms executed collectively by relevant stakeholders.

Five key stakeholder groups are likely to be critical:

National public institutions—from finance ministries and central banks to budget authorities and social protection agencies—can advance fiscal reform and inclusive growth by launching flagship interministerial programs that reinvest verified gains in public services and ensure money reaches priority investments swiftly. For example, a revenue gains reinvestment facility could finance high-return tax, customs, and spending-efficiency upgrades and then recycle a share of independently verified revenues and savings. A national investment fast-track program could offer a single front door for investors and ministries, with standard permits and templates for public–private partnerships and built-in derisking. These programs could help to create a visible track record of delivery, fund targeted social protection and human capital investments, and signal investor credibility that lowers borrowing costs and crowds in private capital.
Regional blocs and institutions in Africa can act as integrators and accelerators in cases of clear investment returns, especially for cross-border infrastructure projects. For example, a regional corridor platform—with one rule book, one front door, and a pooled derisking window—supported by a dedicated team to ensure swift delivery, could help to shorten approvals, lower borrowing costs, crowd in private capital, and function as a public-finance instrument. Corridor VAT and excise, transit fees, and wheeling charges could be routed through ring-fenced regional accounts linked to national treasuries. If executed effectively, the results could include quicker clearance at borders and earlier revenue from cross-border assets.
The private sector can power jobs and productivity by mobilizing capital, transferring technology, and delivering a double dividend: competitive returns that expand opportunity and demand as well as social impact through partnerships that deliver infrastructure, services, and skills. For example, the Southern African Power Pools Regional Transmission Infrastructure Financing Facility—a $1.3 billion fund launched jointly by public utilities and private investors—is helping address regional infrastructure bottlenecks by investing in the power grid and creating transmission lines at scale.²⁵
Development finance institutions (DFIs) can design instruments that scale investments by cutting risk and compressing timelines. For example, they can use guarantees and political-risk cover with local-currency solutions and foreign-exchange hedging to raise private capital and lengthen tenors, in addition to directing blended finance to delivery systems (e-permitting or e-procurement) to shorten approval-to-close time. DFIs can also anchor pooled, revolving windows that recycle repayments and link concessional support to reform milestones. This approach can lower spreads, extend maturities, and build a coordinated, self-sustaining market architecture.
South–South partners can unlock symbiotic gains by expanding trade and market access through African Continental Free Trade Area–aligned deals, sharing technology and knowledge, and broadening the financing ecosystem through partnerships with the New Development Bank, AIIB, the Islamic Development Bank, and others. Such partners can also play a key role in the reallocation of special drawing rights to provide African countries with additional liquidity without increasing their debt burden.

Together, these five key stakeholders can turn today’s constraints into a springboard for self-sustaining public finance. Momentum is the missing ingredient. Actions by stakeholders are clear, and many are already underway, but there is an opportunity to accelerate. The imperative now is to align fiscal reform with social protection, human capital investment, job creation, and infrastructure delivery to unlock deeper market integration and scale growth. Africa has what it needs to redefine its fiscal future to move forward and deliver better.

From borrowing to building: A new fiscal path for Africa