Fear that debt crises could return to plague African economies

The national debt debate in Africa today has become a topical conversation among the public, beyond the traditional audience of economists, government bureaucrats and deficit hawks.

While this is partly credited for improving financial literacy, there is a growing sense that most countries are borrowing too much, creating a serious mismatch and the ballooning debts could restrict economic growth in the continent in the long run. This is beyond the debt overhang concerns in 1997 that ushered the heavily indebted poor countries (HIPC) initiative.

Several African countries face debt distress, and some are in debt crisis. There are more than 40 sub-Saharan nations at risk of debt distress. We can cite a few countries to illustrate the average debt levels as a percentage of the GDP. They include Sudan 259 percent; Cape Verde 157 percent; Libya 155 percent; Angola 120 percent; Democratic Republic of Congo 102 percent, with the highest percentages.

Kenya’s 79 percent; Uganda 49.8 percent and Tanzania 39.2 percent provide a different category. Countries with the lowest percentage include Swaziland 15.5 percent, Burundi 15.9 percent, and Botswana, 18.2 percent. With over USD 720 billion total external public debt in Africa as of 2021, this is the region’s highest debt burden in a decade, and the figure seems to be surging.

Economic disruptions

 The pandemic has worsened the debt in the past two years, posing a challenge on whether African economies can sustain growth while still repaying national debts. In essence, efforts to kick-start recovery from the pandemic and mitigate the adverse impacts have accelerated the risks of a renewed cycle of debt crises and economic disruptions.

Economists have long predicted that such elevated debt levels would inevitably trigger an economic doom loop. This argument has both the quantity of debt and the targeted high-priced projects it finances. High debt levels would frighten Treasury bond investors, who would demand higher interest rates to lend their money to deeply indebted borrowers.

Meanwhile, the respective African governments would have to borrow more to keep up with their responsibilities if debt payments become more expensive. The national debt discourse in Africa, however, can also be viewed from a historical perspective.

Following significant debt cancellation to 30 sub-Saharan African countries in the context of the heavily indebted poor countries (HIPCs) and the Multilateral Debt Relief Initiative (MDRI) in the early to mid-2000s, the median public debt-to-GDP ratio fell from 85.3 percent in 2001 to 34.3 percent in 2011. Together with resilient growth and improved solvency, these initiatives provided a leeway for new borrowing.

Recent trends show that countries have taken up more debt despite these developments, driving the median public debt-to-GDP ratio to about 58 percent by 2019.

Today, African countries have experienced both an increase and a change in the composition of public debt. The shift away from concessionary to market-based loans from private institutions aggravated the debt burden due to the high-interest rate and short maturity period; this is a serious solvency challenge.

However, the main drivers of debt build-up vary across countries and include: exogenous shocks — weak fiscal management and macro-economic policy frameworks to support growth; changing composition of debt towards more expensive sources of financing; and high levels of public spending, among other factors.

There are fears of African countries exceeding their debt thresholds and should re-evaluate their policies for debt sustainability. In recent years, the pace of sovereign debt accumulation has increased substantially in sub-Saharan Africa, raising concerns among observers that this could bring back debt crises.

Economic disruptions

Growing debt has space in development economics, but what has become depressing in African economies is that financing development projects, especially infrastructure, has not raised the levels of capital accumulation. Economic transformation in African economies will be driven by capital accumulation, which is required to reach thresholds that allow a dynamic economic transformation. But what has prevented this? One answer is governance issues, an institutional failure problem.

To ensure debt sustainability without curtailing the growth curve, the common approaches used to assess debt-sustainability need to be complemented by country-specific analysis of debt dynamics, including economic fundamentals, institutional and policy readiness to manage debt effectively.

While the debt sustainability issue remains an important policy priority, equal attention needs to be accorded to the risk asset accumulation, both human and physical, if debt is not managed well. Furthermore, debt management rests ultimately on the capacity of the states to mobilise revenue from the public, which is significantly undermined by a widespread perception of corruption by governments.

In terms of policy considerations, the respective African governments should adopt the following recommendations:

First, countries need to continuously reform governance and the quality of institutions and policies. These are key to strengthening debt carrying capacity. Key considerations include adopting measures such as fiscal responsibility rules and institutions that constrain policy discretion to promote sound fiscal policies.

Second, countries should consider using active public debt management techniques such as liability management operations, including use of buybacks from secondary markets whenever opportunities arise, to manage these risks.

Finally, countries should create an environment conducive to diversifying export growth, this should be supplemented with negotiations to participate in the global value chain. 

Prof Ndung’u is the executive director at the African Economic Research Consortium