Alarm bells over Africa’s rising debt levels
Publish date: 12 February 2024
Issue Number: 1063
Diary: IBA Legalbrief Africa
Government debt has risen in at least 40 African countries over the past decade. As a result, some are experiencing a bad combination of high debt, elevated development spending needs amid budget shortfalls, and unfavourable exchange rate pressures. In an analysis in The Conversation, Jonathan Munemo notes that these issues have become more pressing since 2022, when persistently high inflation prompted major central banks around the world to embark on the most aggressive monetary tightening campaign in decades. ‘Since then, global interest rates have climbed even higher, triggering a jump in repayments on external loans and adding to debt burdens accumulated over the last decade. In addition, some countries with worsening debt situations have endured large exchange rate depreciations and struggled to stabilise the value of their domestic currencies. My perspective, shaped by years of researching Africa’s development challenges, is that this presents many countries with a triple set of dilemmas that’s not easy to navigate. Tackling any of one of these issues imperils the others.’ Munemo notes that stemming the rise in public debt and containing exchange rate decreases would make it more difficult to meet bigger public spending needs. Also, pushing for lower public debt while supporting extra spending risks putting more strain on domestic currencies. And prioritising higher spending needs and easing currency strains runs the risk of inviting extra government debt.
‘The triple dilemma unfolded as government debts rose substantially over the past decade. ... median government debt has more than doubled since 2012 and amounted to 61% of GDP as of 2023. At first, historically low global interest rates in the decade after the global financial crisis in 2008 contributed powerfully to burgeoning debt by making it easy to borrow large amounts of cheap money. The debt trends of countries have worsened sharply since then. Factors have included the Covid-19 pandemic, which triggered a cost-of-living crisis, and Russia’s invasion of Ukraine, which contributed to a rapid rise in global interest rates. In Africa, the pain from higher borrowing costs is particularly acute for governments, given that public debt represented nearly 60% of the region’s total external debt in 2022 (Figure 1). Nineteen countries, including Ghana and Zambia, are already in debt distress (meaning they are unable to meet financial obligations) or at high risk of debt distress.’ The author notes that Ghana’s public debt has more than doubled since 2012 and amounts to 85% of GDP. ‘Zambia’s went up much higher and stood at 98% as of 2022. Both Ghana and Zambia, along with Ethiopia, have defaulted on their foreign debt, sparking fears about a broader sovereign debt crisis on the continent if more countries fall into debt distress. Others face high risk of debt distress. Kenya is on the edge of financial distress after its debt increased steadily to 70% of GDP. South Africa also faces elevated public debt, which has almost doubled over the last decade and currently stands at 74% of GDP. And yet trimming high debts won’t be easy. Development needs are high after coffers were drained by higher spending tied to the pandemic and fallout from Ukraine.’