Africa's heavily indebted countries face tough trade-offs between paying down high debts, supporting high and growing development needs, and stabilizing domestic currencies.
Government debt has increased in at least 40 African countries over the past decade. As a result, some countries face an unfavorable combination of high debt, increased development spending needs amidst budget shortfalls, and unfavorable exchange rate pressures.
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These issues have become more pressing since 2022, when sustained high inflation prompted major central banks around the world to launch the most aggressive monetary tightening campaigns in decades. When central banks raise interest rates, monetary policy tightens.
Since then, global interest rates have risen further, repayments on external loans have skyrocketed, and the debt burden built up over the past decade has increased. Additionally, some countries with deteriorating debt situations are enduring large exchange rate depreciations and struggling to stabilize the value of their currencies.
My view, having studied Africa's development challenges for many years, is that Africa's development challenges present many countries with a triple dilemma that is difficult to overcome. Addressing any of these issues also puts others at risk.
Here are some examples.
- Halting public debt growth and limiting exchange rate depreciation will make it more difficult to meet larger public spending needs
- Promoting public debt reduction while supporting additional spending risks increasing the burden on the domestic currency.
- Prioritizing higher spending needs and easing monetary tensions risks incurring additional government debt.
Steps can be taken to expand policy space to address these challenges while mitigating difficult trade-offs. These measures include prioritizing public spending measures to increase growth rates, solving revenue collection problems facing all African countries, and restructuring unsustainable government debt.
Rising government debt and policy dilemmas
As government debt has increased significantly over the past decade, a triple dilemma has become apparent. As shown in Figure 1, the median government debt has more than doubled since 2012, reaching 61% of GDP as of 2023.
Initially, the decade of historically low interest rates following the 2008 global financial crisis, which made it easy to borrow large amounts of cheap money, contributed significantly to the surge in debt.
Since then, countries' debt trends have deteriorated sharply. Factors include the coronavirus pandemic, which caused 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 rising borrowing costs is particularly acute for governments, given that public debt accounted for nearly 60% of the region's total external debt in 2022 (Figure 1). Nineteen countries, including Ghana and Zambia, are already in debt crisis (meaning they are unable to meet their fiscal obligations) or are at high risk of debt crisis.
Ghana's public debt has more than doubled since 2012, reaching 85% of GDP. Zambia's rate rose further, reaching 98% in 2022.
Ghana and Zambia have defaulted on their external debts, along with Ethiopia, raising fears of a broader sovereign debt crisis across the continent if more countries fall into debt crisis.
Some face a high risk of falling into a debt crisis. Kenya is on the brink of fiscal crisis, with debt steadily increasing to 70% of GDP. South Africa is also facing increasing public debt, which has nearly doubled in the past decade and now stands at 74% of GDP.
Still, reducing large amounts of debt is not easy. Development needs are growing after financial resources were depleted by increased spending due to the pandemic and fallout from Ukraine.
The International Monetary Fund estimates that countries in sub-Saharan Africa will need to increase spending by at least 20% of GDP to meet sustainable development goals on health, education and infrastructure by 2030. . Adaptation to climate change is expected to add billions of dollars each year. For the continent.
Coffers are also being depleted as more funds are spent repaying expensive loans. This has the added effect of depleting foreign exchange reserves, meaning overburdened countries will also have to deal with currency depreciation.
Debt interest payments as a percentage of Kenya's revenue rose from 11% in 2014 to more than 20% from 2020 onwards. As a result, the ratio of reserves to external debt depleted from 47% to less than 20% during the same period. This has put pressure on the Kenyan shilling, which lost more than 19% against the US dollar last year.
In the case of Ghana and Zambia, debt interest payments increased further. In Ghana, they were about 45% of income. In Zambia, it is about 39%. By 2022, reserves have fallen to 22% in Ghana and 10% in Zambia.
This resulted in a significant depreciation of Ghana's cedi and Zambia's kwacha.
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South Africa's debt interest payments increased at a relatively modest pace from 2021 onwards, to around 15% of revenue, but maintained a higher reserve share of around 35%. This is why the rand's depreciation was not as steep as in the other three countries.
Currency depreciation also increases external debt servicing costs. As a result, reasonable debt can quickly turn into unmanageable debt.
Declining government revenues are also increasing debt risk.
Revenue collected in 2023 was 16% of GDP in Ghana, 17% in Kenya and 21% in Zambia. This is significantly lower than the median of 27% found in other developing countries. This median is in line with South Africa, but rising social transfer costs, including welfare subsidies and subsidies to state-owned enterprises such as electricity company Eskom and transport company Transnet, have led to a decline in public debt amid slowing growth. increasing upward pressure.
what can be done
Several steps can be taken to reduce the trade-offs that countries must make.
First, governments should prioritize growth-enhancing public spending measures.
These include significant spending on education, health, infrastructure and other investments that promote quality growth. Accelerating economic growth is likely to increase government revenue for debt repayment.
It also means allocating more spending to first-generation reforms. These are structural reforms that alleviate major constraints on growth. For example, long-standing governance reforms remain important in African countries, which generally lag behind other countries in the region on a variety of measures of governance quality, including the rule of law, curbing corruption, and government accountability.
Second, countries need to solve the problem of revenue collection. Although growth leads to an expansion in the size of the economy that generates additional revenue, low levels of domestic revenue collection limit the ability of governments to service debt and finance critical social and growth sectors. .
Across Africa, several countries, including South Africa, Nigeria, Ghana, Zambia, Kenya and Ethiopia, are combining efforts to boost revenue growth. These include new levies, increased taxes, the inclusion of more stores on the taxpayer register, widening the tax base, strengthening tax administration and other revenue-enhancing measures.
Finally, the government needs to restructure its debt portfolio. If a debt crisis is unavoidable, debt restructuring can reduce the amount owed to creditors by reconsidering the amount and timing of future principal and interest payments. Chad has reached an agreement to restructure its external debt under the G20 Common Framework for Debt Resolution in 2022. This is an initiative aimed at supporting low-income developing countries with unsustainable debt burdens. Since then, Ghana and Zambia have also begun debt restructuring negotiations under the G20 Common Framework.
Other heavily indebted countries struggling to repay their debts may be forced to do the same, amid growing concerns about slow progress on the Common Framework.
Jonathan Munemo is Professor of Economics at Salisbury University.
This article is republished from The Conversation under a Creative Commons license. Read the original article.