Africa's Economy to Grow 3.9% in 2025, AfDB Reports

"If Africa invests in itself, leverages its strengths, and governs its resources wisely, boundless possibilities lie ahead," the report concludes.

ABIDJAN, Ivory Coast – Africa is poised for accelerated economic growth in 2025 and 2026, projected to outpace the global average and most other regions, yet challenges persist that underscore the urgent need to harness the continent's vast domestic capital, according to a new report released Tuesday, writes Winston Mwale.

The African Economic Outlook 2025 report, prepared by the African Development Bank Group, highlights Africa's paradox of strong growth potential alongside slow and uneven socioeconomic transformation.

Against a backdrop of unprecedented global circumstances, including seismic shifts in trade policies of major economies and significant aid cuts by development partners, the report emphasizes that external dependency is not a viable development strategy for Africa.

"It is possible for Africa to develop with pride if it could effectively mobilize and efficiently use its abundant capital potential," the report states. Africa is described not as poor, but as a continent rich in resources constrained by underutilized capital.

The 2025 African Economic Outlook serves as both a diagnosis and a roadmap, demonstrating that deep, properly sequenced reforms could unlock an additional $1.43 trillion in domestic resources annually from diverse forms of capital: fiscal, natural, financial, business, and human.

This potential figure exceeds Africa's estimated $1.3 trillion annual financing gap to achieve the Sustainable Development Goals by 2030.

Economic Outlook and Challenges

Despite multiple shocks, including rising global uncertainty fueled by escalating trade wars and heightened financial market volatility, Africa's real GDP growth is projected to accelerate to 3.9% in 2025 and strengthen to 4.0% in 2026.

These projections, however, reflect slight downgrades from earlier estimates due to the expected impacts of increased trade tariffs announced by the United States and associated uncertainties.

Nevertheless, 21 African countries are expected to achieve output expansion exceeding 5% in 2025, with four countries (Ethiopia, Niger, Rwanda, and Senegal) potentially reaching the 7% growth threshold considered necessary to address poverty and achieve inclusive growth and sustainable development.

The report notes significant cross-regional variations in economic performance and prospects, influenced by factors like resource endowments, reforms, strategic investments, and the asymmetric effects of global shocks.

East Africa, for instance, is projected to be the fastest-growing region, driven by commitment to reforms and public infrastructure development. Central Africa's growth, conversely, is hampered by ongoing conflicts and declining hydrocarbon production in some countries.

On the demand side, growth remains anchored by household consumption, while the services sector is the main driver on the supply side.

Investment levels in Africa (21.7% of GDP in 2023) lag the world average (26.0%) and East Asia and Pacific (34.9%), often due to policy uncertainty, poor infrastructure, and weak governance.

Public investment has played a significant role, but private investment growth has been modest and contracted in 2023 due to elevated policy uncertainty and macroeconomic imbalances.

Africa continues to face persistent macroeconomic challenges, including high inflationary pressures, elevated debt vulnerabilities, and potential external financial flow volatility.

Average annual inflation for Africa reached 18.7% in 2024, significantly higher than global trends.

While some central banks are transitioning to a more accommodative stance as inflation is projected to decline, many countries still grapple with supply-side constraints that traditional monetary policy tools have found ineffective.

Nigeria's inflation, for example, is primarily driven by supply-side issues in agriculture, with monetary and exchange rate variables having limited impact due to weak policy transmission.

Fiscal deficits, though narrowing due to consolidation measures, remain above conventional targets for macroeconomic convergence.

Public debt levels have risen, and while a systemic debt crisis is contained, vulnerabilities linger due to high global interest rates and currency depreciations.

The report highlights that the number of countries in debt distress has ranged between seven and nine since 2021, and many countries previously at low risk have been downgraded.

Leveraging Africa's Diverse Capital

The core message is clear: Africa must leverage its domestic capital effectively.

• Fiscal Resources: Enhancing tax administration through digital technology is key to mobilizing additional fiscal resources. The report estimates that by matching the current revenue-to-GDP ratio in Latin America and the Caribbean, Africa could raise an additional $469.4 billion annually. Addressing inefficiency in public spending, which is higher than the average for the world and other regions, is also crucial. Weak governance, corruption, poor project selection, and inadequate monitoring contribute to this inefficiency. Well-directed public investments, particularly in infrastructure and social services, can also act as a lever for growth and mobilize tax revenues through multiplier effects.

• Natural Capital: Africa is endowed with abundant natural resources, including vast mineral reserves, arable land, forests, and water bodies. Properly valuing natural capital and integrating it into national accounts can reveal the potential size of economies; for instance, accounting for carbon sequestration could have increased Africa's nominal GDP by an estimated $66.1 billion in 2022. Challenges include underutilization, unsustainable management practices, weak governance, and illicit financial flows related to commodities. A critical recommendation is to move away from poorly designed mining concession agreements towards mineral development agreements that enhance ownership and generate value for citizens. Value addition and beneficiation of resources are crucial, as local processing can significantly increase returns and create jobs.

• Financial Capital: Deepening domestic financial markets, leveraging local institutional investors like pension funds and national development banks, and exploring innovative instruments like diaspora bonds are vital for mobilizing long-term finance. Sovereign wealth funds, though currently representing a small fraction of global capitalization, could provide additional resources if invested domestically. International capital is more likely to follow African capital, highlighting the importance of de-risking African investments.

• Business Capital: The transition of informal businesses into the formal economy presents a significant opportunity, potentially generating an estimated $125.3 billion in additional revenue annually. Africa has a strong entrepreneurial spirit, but it is hindered by high costs of starting businesses, regulatory burdens, weak human capital, and limited access to finance. Digitalization can play a transformative role in easing formalization and improving business activity. Leveraging the African Continental Free Trade Area (AfCFTA) is crucial for expanding markets, fostering industrialization, and catalyzing private sector growth.

• Human Capital: Africa's youthful population is one of its biggest assets, but strategic investments in education, skills development, and health are needed to unlock its full potential. While strides have been made, persistence gaps remain, particularly in areas like health outcomes and educational quality. Investing in human capital can yield substantial economic gains, including increased productivity, higher GDP, and improved life expectancy. The report also addresses the challenge of brain drain, suggesting that leveraging the diaspora through brain circulation, skill-based migration partnerships, and potentially taxing the income of skilled emigrants could offer benefits. Strengthening health systems and meeting spending targets like the Abuja Declaration target of allocating 15% of national budgets to health are also critical.

Governance and Institutions: The Conversion Factors

Institutions and the quality of governance are framed as the "conversion factors" that determine how effectively Africa's capital assets can be translated into development outcomes.

The report highlights a dilemma: many African countries have committed to reforms and established formal institutions to improve governance and the rule of law, but implementation remains slow, patchy, and selective.

Institutional weaknesses are evident in pervasive corruption, political instability, frequent policy reversals, and poor public sector performance.

These deficiencies directly hinder the mobilization and efficient use of both domestic and external capital. Illicit financial flows (IFFs) and profit shifting by multinational enterprises, often facilitated by weak governance and opaque international tax architecture, cost the continent substantial resources annually ($90 billion from capital flight, $275 billion from profit shifting).

State capture, where elites influence laws for personal gain, further aggravates these challenges.

Improving governance is crucial for enhancing fiscal resource mobilization and ensuring efficient spending. Reforms should focus on strengthening tax administration, curbing IFFs, enhancing transparency in public finance management, and improving the rule of law.

Specific recommendations include enacting mandatory public disclosure requirements for natural resource contracts and revenue payments, adopting open auction frameworks instead of closed-door negotiations for extractive contracts, enforcing domestic value retention through industrialization targets, and leveraging regional and international cooperation to combat tax evasion and BEPS.

Digitalization is seen as a powerful tool to enhance transparency and efficiency in revenue collection and public procurement.

Furthermore, addressing insecurity and domestic conflicts is critical, as they reduce the investment capacity, lower government revenue, increase military expenditures, and hinder private investment and trade.

Path Forward

The report emphasizes that unlocking Africa's capital potential requires bold, coordinated, and homegrown policy actions, supported by strong political commitment and the international community.

A fundamental mindset shift across African leadership and society is needed to move beyond external dependence and prioritize strategic self-reliance.

Policy recommendations span short-term measures focused on macroeconomic stability and debt management, and medium- to long-term structural reforms. Key areas include mobilizing private sector investments, promoting local content and franchising, sustainably managing natural and human capital, and accelerating regional economic integration through the full implementation of the AfCFTA.

Ultimately, the report argues that with effective institutions, good governance, and respect for the rule of law, Africa can better mobilize and efficiently use its abundant capital assets, close its financing gaps, reduce external dependence, and accelerate its trajectory towards sustainable and inclusive development.

"If Africa invests in itself, leverages its strengths, and governs its resources wisely, boundless possibilities lie ahead," the report concludes.

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