Africa struggles with debt

Africa is entering its third sovereign debt crisis since independence and the outlook remains challenging, according to the Economist.

A year ago, Ghana’s Finance Minister Ken Ofori-Atta avoided saying his country needed IMF aid. But now Ghana is about to join a $3 billion IMF program. Once approved by the IMF, based on guarantees from bilateral creditors, it will immediately receive $600 million.

Further disbursements will depend on Ghana’s progress in reducing its debt. Similarly, Zambia is in default on its sovereign debt and is struggling to meet the terms of its debt restructuring. It is expected to reach a deal next month.

The cases of Ghana and Zambia signal a new era of “austerity” in Africa, where public debt is at its highest in decades, according to the Economist .

Africa has experienced two periods of rising public debt since independence. The first was in the 1980s and 1990s, leading to a crisis that eventually forced rich countries to write off their debts. The second was in the 2000s and 2010s, when African countries sought to raise more capital than they could from aid and cheap loans from multilateral institutions.

Chinese financiers lent $160 billion to African governments between 2000 and 2020. Domestic capital markets were also tapped. Between 2010 and 2020, Africa’s domestic debt rose from an average of 15% of GDP to 30%.

People buy drinking water in Kanyama, Kenya. Photo: Simon Townsley

African politicians insist that borrowing is necessary to invest in schools, health clinics and roads. But many countries have borrowed too much, or have misappropriated the money they have received. As a result, they are now forced to tighten their belts under the supervision of multilateral financial institutions if they want to be bailed out.

In 2022, public debt to GDP in sub-Saharan Africa averaged 56%, the highest since the early 2000s. That’s not high by rich-world standards, but it’s almost overwhelming in Africa, where interest rates are much higher.

Furthermore, 40% of the region’s debt is external, leaving countries vulnerable to exchange rate fluctuations. This year, African countries’ spending on external debt servicing (both principal and interest) will account for 17% of government revenues, the highest level since 1999, according to Debt Justice.

Money to cover other needs has dwindled. In 2010, the average sub-Saharan country spent 70 percent more per capita on health than on foreign debt ($38 versus $22). By 2020, spending on debt servicing was 30 percent higher. In the current debt crisis, countries fall into one of three categories, according to hedge fund manager Greg Smith, author of the book on African debt, Where Credit is Due.

First are “emerging Africa,” which includes some of the continent’s wealthier nations, such as Mauritius and South Africa. They can still borrow on capital markets, albeit at higher interest rates. The second group, which includes about 35 countries, is “poor or conservative Africa.” These countries are either too good to need much borrowing (like Botswana) or too bad for most to want to lend to foreigners.

Third are “frontier Africa,” a group of about 15 countries that are among the continent’s most promising but also the most troubled. The Greg Smith Foundation estimates that they need to borrow about $30 billion a year to service their existing external debt. Ghana and Zambia, two frontier countries that have defaulted, show how much more complex it will be to resolve the debt crises of this era.

Even if other frontier countries avoid default, they are still in trouble. Kenya recently failed to pay its civil servants on time. “Salary or default? Choose,” said David Ndii, economic adviser to President William Ruto.

Ethiopia, Africa’s second-most populous country, has had little access to aid and capital markets since it descended into civil war in 2020. Like Ghana and Nigeria, the Ethiopian government borrowed heavily from its central bank, weakening its currency and fueling inflation. Now that the war is over, it wants the IMF to help before a $1 billion Eurobond debt payment comes due at the end of 2024.

Nigeria is heavily indebted, accounting for 96% of government revenues last year. Part of the reason is that the government has recently been making very little money from oil due to rampant theft, low production and fuel subsidies. In Ivory Coast and Senegal, debt accounts for a quarter of government revenues.

The ideal solution to debt is economic growth. But the outlook for Africa is bleak. In April, the IMF cut its growth forecast for sub-Saharan Africa this year to 3.6%, just a percentage point above population growth. Austerity demands could slow growth further.

Some experts recommend that African countries raise more taxes. Tax revenues in sub-Saharan Africa average 13 percent of GDP, compared with 18 percent in other emerging economies and 27 percent in rich countries. That ratio has not increased in a decade.

Twenty-one countries already have loan agreements with the IMF, and the number is expected to grow. China’s loan disbursements to Africa have fallen to about 10% of their peak in 2016. From 2012 to 2021, international aid to sub-Saharan Africa accounted for 3% of the region’s GDP, down from 4% in the previous decade.

The Eurobond market may reopen, but interest rates will be higher than in the 2010s. The lowest Eurobond rate achieved by Ghana, the richest country on the west African continent by GDP per capita, is 6.4%.

The region would struggle even more if global geopolitics were to shift. An IMF analysis earlier this month said sub-Saharan Africa was most at risk if the West and China split into two different trading blocs. In a “severe scenario,” the region’s GDP could fall by 4%.

Africa is richer than it was in the 1980s, and its leaders are more talented and ingenious. But global upheaval has made the task of getting out of debt more painful and difficult than before, according to the Economist .

Phien An ( according to The Economist )

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