Presently, 19 African countries have exceeded the 60% debt-to-gross domestic product (GDP) threshold prescribed by the African Monetary Co-operation Programme (AMCP) for developing economies, while 24 have surpassed the 55% debt-to-GDP ratio suggested by the International Monetary Fund (IMF). More worryingly, using the IMF debt service-to-revenue threshold and benchmark, only two out of the 16 countries facing a high risk of debt distress have the capacity to pay it off. The debt increase raises concerns among bilateral creditors and international financial institutions, as several countries continue to take on more debt to manage debt burdens and poor macroeconomic conditions. This is taking place on the back of two prominent debt relief initiatives, the Heavily Indebted Poor Country (HIPC) initiative and the Multilateral Debt Relief Initiative (MDRI), which offered $99 billion in debt relief, addressing about 40% of Africa’s total public debt.
Several factors are driving Africa’s rising debt, including deteriorating macroeconomic conditions and rising fiscal deficits on the back of poor growth, exchange rate volatility, adverse climatic conditions, political instability (in some countries) and the 2014 commodity price shock.
Over the last decade, the structure of Africa’s debt profile has changed considerably. There has been a shift to market-based loans and a decline in concessional loans as a share of external loans, from 66% in 2005 to 54% in 2016. This has increased debt-servicing costs for African countries. While China has emerged as a dominant financier relative to other creditors, there has been an overall downward trend in the total value of loans that China has offered the continent since 2013. Nonetheless, there are important differences and implications for African borrowers in the approaches of Development Assistance Committee lenders versus that of China.
This paper draws on comparative debt management strategies across the region, highlighting both challenges and best practices, specifically Nigeria and Morocco. Fiscal authorities in both countries and beyond employ key strategies, such as issuing bonds on the longer end of the spectrum in, to finance long-term projects that have the capacity to generate adequate revenue. In addition, borrowing is skewed towards external debt and a variety of debt instruments are being issued to mitigate the crowding out of the private sector and capturing a wider set of creditors. In addition, other non-conventional methods are being deployed to reduce the size of debt. Several countries are increasingly mobilising domestic resources through voluntary tax compliance schemes and efforts to formalise their economies, while improving the efficiency of public expenditure. However, challenges such as the quality of cost–risk analysis, viable and independent debt management offices and data inefficiencies still exist. In view of the continent’s development needs and socio-economic challenges, alongside current fiscal constraints, sovereign debt financing is inevitable. However, achieving debt sustainability while working towards meeting the Sustainable Development Goals and attaining macroeconomic stability is critical. While the current debt situation at 46% of GDP in 2017 in no way corresponds with the 116% debt-to-gross national income ratio of 1995, the paper makes several recommendations to manage Africa’s debt burden in a more sustainable manner:
- Maintain and promote prudent macroeconomic principles to curb and closely manage rising debt servicing costs.
- Promote economic diversification and expand revenue generation to reduce the effect of commodity price shocks on fiscal stability.
- Develop and deepen domestic debt markets to curtail the dependence on external loans and avoid exchange rate risks, while carefully managing the structure of debt.
- Explore other domestic financing options, such as expanding the tax base through efficient tax collection, leveraging private sector capital through public–private partnerships and using various debt instruments.
- Establish autonomous, well-resourced and functional debt management offices, enhance debt-recording systems, improve data transparency and invest in debt management and risk strategies.
- Explore the capacity-building and technical assistance offered by multilateral development banks (MDBs) to develop sound debt management institutions.
- Enhance engagement between lower-income countries and MDBs to overcome their reluctance to access concessional loans despite the long maturity and low interest rates on offer.
Authors: Adedeji Adeniran, Mma Amara Ekeruche, Olalekan Samuel, Bodunrin, Abdelaaziz Ait Ali, Badr Mandri & Ghazi Tayeb