The 4th virtual meeting of the “Amplifying Africa Voices Initiative”, a group of African policy institutes co-convened by the African Center for Economic Transformation (ACET) and the Finance for Development Lab (FDL), reflected on the current debt situation in African countries. The previous two meetings covered climate finance and the reform of Multilateral Development Banks.
Discussions focused on structural questions, including why and how many African countries went back to debt distress situations. Reasons are both internal and external. At the same time, the fragmented creditor landscape and the high cost of borrowing could create an unnecessary crisis, for which global institutions and existing mechanisms, in particular the Common Framework, are not sufficiently equipped to manage.
Debt in Africa: How did we get there again?
In the 2000s and 2010s, high growth in developing countries allowed to ignore emerging debt challenges following a successful HIPC initiative. Since 2016, however, a decline of trend growth and a series of major economic crises have brought debt challenges to the fore.
INCREASING DEBT LEVELS, BUT STILL BELOW HISTORICAL HIGHS
Since the first large scale debt restructuring process (HIPC and MDRI), public debt in African countries has escalated, reaching $645bn in 2021 compared to $233bn in 2010. Its structure has also changed, with domestic debt playing a much more prominent role than in the past – though with wide variations across countries.
Nonetheless, compared to the HIPC period, public debt remains relatively low. From an external point of view, it is also far from the main determinant of flows: in 2019, debt accounted to around 30% of capital flows to African countries ($24bn), but FDIs ($32bn) and grants ($30bn) actually dominated.
Figure 1 - Public debt in Sub-Saharan Africa
Participants in the Amplifying Africa’s Voice dialogue noted an internal lack of governance to explain some of this debt accumulation. These include a deterioration of public financial management systems, a lack of transparency, and poor returns on investment. But “push factors” have also played an important role, such as Chinese loans driving large infrastructure investment of variable quality, a low rate environment and a stagnation of concessional finance. All this led some countries with access to markets to issue expensive Eurobonds while commodity price volatility exposed them to boom and bust dynamics.
The case of Zambia, presented by the Zambian Institute of Policy Analysis and Research (ZIPAR), illustrated those “pull” and “push” factors, including the issuance of expensive Eurobonds whose use of proceeds were opaque, large loans by Chinese finance institutions, all this happening amid declining growth. Those flows were financing investments, sometimes with poor returns, but also a growing civil service workforce, with no increase in tax revenues. ZIPAR presented key factors behind the dramatic accumulation of debt between 2010 and 2020, leading to a default in 2020. A summary of a forthcoming paper is available here.
The consequences of the case of Zambia are also important and should worry other countries: the deal has been too slow and contentious. The delayed publication of the IMF Staff-Level Agreement led to frustration among creditors, both official and private. In the end, it relies on austerity and provides little on renewing the growth model. It has become more urgent than ever to find compromises that are specific to Zambia, and to draw the lessons of past delays to catalyse broader reforms.
VULNERABILITIES ARE CLEARLY SHOWING
Recent macroeconomic shocks have exacerbated fiscal and external vulnerabilities for many emerging and frontier economies, namely the COVID-19 crisis, the Russian war in Ukraine, and fuel and food price shocks.
Experts in the Amplifying Africa’s Voice dialogue suggested that liquidity more than solvency has been the main concern. Debt to GDP remains low compared to other regions, as do other metrics such as debt to revenues. However, debt service has been increasing rapidly, and private as well as official sources of finance of the past decade are drying up. Since 2020, net transfers have been decreasing. For some creditors such as China and commercial lenders, net transfers are negative, i.e., more money is leaving Africa as debt service than money coming into Africa as loans. This is due to the types of financing raised by African countries in the 2010s, with a turn to Eurobonds that had shorter maturities and no concessionality. The problem lies in the refinancing risk it is creating. For many countries, yields are above 10%, implying a de facto lack of market access. Repayments walls under the form of large payments appeared and often lead to defaults.
Table 1: A simple typology of debt problems
A NEW APPROACH TO DEBT RESTRUCTURING PROCESS IS NEEDED
In addition, increasing financing needs for developmental purposes, and investment in climate mitigation and adaptation are stretching an already limited fiscal space in many African countries. Climate financing alone requires $2 trillion per year, notwithstanding financing needs for developmental purposes, or to absorb inflationary shocks.
Repeated crises have led to an increased involvement of the IMF, which has been increasing its programs in Africa. Twenty-six countries have an IMF program, in addition to a program of lending to Rwanda under the Resilience and Sustainability Trust. MDBs have also expanded lending.
But the sustainability of such surges is uncertain. Ethiopia, Zambia and Ghana are in the midst of a debt restructuring, whilst many others are under high risk of debt distress. As of March 2023, 24 countries were at risk. The complexity induced by the changing composition of creditors has undermined current debt restructuring processes. New debt restructuring and management processes are needed to provide African economies with the necessary fiscal and policy spaces.
THE WORLD SHOULD PAY ATTENTION
The Amplifying Africa’s Voice discussion on debt focused on the reforms needed to avoid another wave of debt. Three topics were highlighted:
- The “productivity of debt”
An influential view from Ndulu and O’Connell, 2021 is that debt accumulation also contributed to a more productive economy for African economies since the 2000s. Large financing needs to fund infrastructure and developmental purposes as well as the rising costs of climate vulnerability will not disappear, and a significant share will remain on governments’ balance sheet. However, growth effects have sometimes disappointed, or were not translated into government revenues or exports. Some countries in debt distress suffer from chronic public financial mismanagement and corruption. In other cases, security spending is a large, unavoidable cost which bears heavily on public finances. How to make debt more productive and for international organisations to recognize the burden of conflict, are important agendas for the future.
- Transparency and debt management need to improve.
Governments need to improve control on spending and borrowing. More frequent and accurate data is necessary, including contingent liabilities or PPP-linked debt. Opaque loans sometimes lead to more costs down the line. More research should go into what works to strengthen debt management capacity.
- Finally, governments and international organisations need to improve their surveillance frameworks.
There is a broad confusion between the different types of debt risks, and indicators. Debt to GDP ratios may be less useful in today’s complex world and need to better include factors such as exports or public revenues. Growth assumptions are often unrealistic. A broad review of the risks is necessary, both narrowly focusing on reforming Debt Sustainability Analyses (DSAs) and a broader understanding of the risks. The search for an “optimal” level of debt and domestic/external balance is also important, especially for countries with large domestic markets like Nigeria or Kenya.
At the same time, participants in the Amplifying Africa’s Voice dialogue noted that short-term tensions require the full attention of policymakers. While the topic of debt in African countries is a key concern for policymakers, both in the region and globally, with frequent mentions in G20 communiqués, there have been few concrete advances recently. The World Bank and the IMF themselves have suggested reforming the Common Framework by clarifying timelines and offering a single definition of “Comparability of Treatment”. Those reforms would allow more transparency in the process and give more agency to debtors. At the same time, the IMF could lean more on its ability to lend into arrears – private or official.
The fact that tensions on debt remain mainly due to the lack of liquidity is important too. The need for liquidity is urgent, but its sources so far have been drying up: SDR reallocation has been disappointing, multilateral development banks have reached the limit of their capacity, barring important reforms to their financial models. In addition, if debt rescheduling is necessary, are IMF tools adapted to such cases? How to prevent the diversity of creditor groups from stopping deals which could benefit everyone? Those questions should be treated at the highest level.
Yet, the “Summit for a New Global Financial Pact” announced by French President Emmanuel Macron to be held June 2023 does not have a separate track, or objectives, on debt reduction. Amidst concerns on climate financing, the debt agenda risks being forgotten. There are economic and geopolitical reasons for this as debt forgiveness is expensive for lenders and it creates geopolitical tensions across OECD countries and non-traditional lenders such as China. But ignoring debt would be a grave error. Countries in Africa need a stable debt framework to make progress on the SDGs and address global public goods such as climate. Advocacy and inventive policy solutions to this short-term challenge are required.
Amplifying Africa Voice is an initiative of the African Center for Economic Transformation (ACET) and Finance for Development Lab (FDL) to improve knowledge sharing and joint analysis among African economic policy institutes on the global financial architecture agenda. The fourth technical session on African perspectives on the debt crisis was held on March 15, 2023 and gathered nearly 20 African policy institutes from across all the regions and several experts of development finance.