AfDB Projects $39.84 Billion Decline in Foreign Funding to Africa By 2025 Amid Aid Cuts
The African Development Bank (AfDB) has projected a $39.84 billion decline in total foreign funding to Africa in 2025, largely driven by cuts in Official Development Assistance (ODA) from major donor countries.
The outlook, published in the African Economic Outlook 2025, warns that funding reductions from 17 of the largest Development Assistance Committee (DAC) donor nations will significantly affect financial inflows to the continent, with the United States and Germany leading the decline.
Between 2021 and 2023, African nations received approximately 18% of total aid flows from these 17 donor countries. If this trend persists in 2025, Africa will see a 12% decrease in aid from DAC’s largest donors compared to 2023, equating to a 7% drop in total aid inflows or $4.2 billion, assuming contributions from other donors remain stable.
To put this decline into perspective, the projected cut exceeds the combined GDP of Comoros, Guinea-Bissau, and São Tomé and Príncipe in 2023, highlighting the severity of the expected financial shortfall.
Implications for Low-Income African Nations
The decline in aid heightens the risk of severe funding constraints for many of Africa’s low-income countries, which rely heavily on external financial assistance to support their national budgets.
The AfDB report notes that ODA plays a critical role in sustaining these economies, and aid cuts will likely have disproportionate effects on countries where foreign assistance comprises a significant share of budget financing.
While remittances remain the most stable source of external financial flows for Africa, recent global economic shifts have reshaped how these funds are transferred.
Decline in African Remittance Flows
In 2023, remittance flows to Africa contracted by 6.2%, dropping to $91.1 billion, down from $97.1 billion in 2022. This reversal came after a two-year increase following the Covid-19 pandemic, likely reflecting valuation effects rather than a fundamental reduction in remittance inflows.
The report highlights that a strengthening US dollar has reduced the dollar value of transfers from source countries, amplifying the overall decline.
Unlike other external financial flows, remittances tend to be resilient to economic shocks, but they also display procyclical tendencies, meaning that they decline during economic booms and increase during downturns in recipient countries.
“Instead, remittances tend to be procyclical, declining (increasing) in periods of economic boom (downturn) in destination countries. They are also affected by structural factors such as transfer costs in source countries and economic openness in destination countries, and they can contribute substantially to the development of local African economies.”
The report emphasized the critical role remittances play in smoothing consumption during economic downturns. If efficiently harnessed, they could serve as an important source of financing for Africa’s economic transformation.
Global Aid Reduction Trends and Fiscal Constraints
The evolving landscape of global aid distribution is expected to have a profound impact on ODA flows to Africa. The report highlights that aid reductions led by the United States Agency for International Development (USAID) signal an ongoing downward trend in development assistance, following a sharp 30% surge in 2020 aimed at bolstering Africa’s response to COVID-19.
In 2023, total aid flows from DAC countries to Africa amounted to $35.9 billion, with the United States contributing more than 40% of that total. However, overall ODA to Africa declined by nearly 3% in 2023, following a 6% contraction in 2022, illustrating a steady decrease in financial assistance despite rising development needs.
What you should know
- The report attributes this decline to fiscal constraints in major donor countries. As global economic growth remains subdued, ODA flows to Africa are expected to remain depressed, further complicating efforts to address the continent’s urgent financial needs.
- The report stresses that while external economic pressures drive exchange rate fluctuations and aid reductions, Africa must focus on strengthening its domestic macroeconomic fundamentals to mitigate volatility.
- It added that improving export capacity, value addition, and policy stability will be crucial for reducing exchange rate instability and long-term financial vulnerability.
