Africa’s debt spree: Precursor to a new debt crisis?

As Ghana’s newly elected President Nana Akufo-Addo, draped in a splendid multi-coloured “kente” silk robe, took to the podium last December during his inauguration, the newly elected leader told the world that the West African country was “open for business again.”

Some analysts and multilateral financial institutions have warned that Africa could be on the verge of a debt crisis reminiscent of the 1980s and 1990s, when external debt ballooned from $140bn in 1982 to over $270bn in 1990, ultimately proving unsustainable.

90s crisis revisited?

At first glance there are strong parallels. During the commodity boom of the 1970s international creditors lent liberally to African countries. Interest rates in the industrialised countries were at particularly low levels, making them attractive markets for developing countries to borrow money.

When the oil and commodity price bubble burst in the late 1970s to early 1980s, it caused a global recession which depressed export earnings around the world. Despite this some African countries continued to borrow money rather than cut expenditure.

The crisis unfolded when international interest rates rose from low or negative levels in the 1970s to over 8% in the early 1980s, contributing to the lost decades of the 1980s and 90s.

The crisis was finally resolved through initiatives like the Heavily Indebted Poor Countries (HIPC) initiative, launched in 1996 by the IMF and World Bank. Coupled with extensive lobbying by African policymakers this resulted in widespread debt forgiveness across Africa in the mid 2000s, effectively wiping the slate.

The current surge

While debt levels have been rising for several years, there has been a step change in the last 12 months, driven by the commodity slump-induced slowdown. In November Egypt took out a $12bn loan from the IMF, the biggest ever regional loan approved by the lender, to pull its economy back from the brink, amid rising inflation and public anger over a lack of reforms.

Nigeria is borrowing heavily, having already issued a $1bn Eurobond this year, with more planned. President Muhammadu Buhari has just announced the country will be taking on almost $7bn in debt from China and the World Bank to finance railway infrastructure and reconstruction efforts in its insurgencyhit north, respectively.

Other countries piling on the debt include Kenya, Zambia, Uganda, Tanzania and Angola. So strong is the apparent demand that the World Bank has recently announced a record $57bn in credit for sub-Saharan Africa over the next three years.

Some analysts are nervous

“The lessons of the danger of commodity dependence and external debt have not been heeded,” says Tim Jones, senior policy and campaigns officer at Jubilee Debt Campaign. 

“The response to the crisis since 2015 has been the same as in the 1980s and 1990s, with the IMF and World Bank [lending] money to enable the high interest to private lenders to be paid, rather than a debt reduction being required of those reckless private lenders.”

“Lenders are only too willing to lend without ensuring that the money is being well spent on diversifying away from commodity dependence into more sustainable forms of economic activity, which create more jobs.”

Others have downplayed immediate concerns about a return to a 90s style debt crisis. On the whole African economies are more durable than they were

Something that has undoubtedly changed since the 90s is the balance of global economic and financial power.

in the past, argues John Ashbourne, Africa economist at Capital Economics.

“It is true to say that the direction in the past few years has seen debt rates increasing, but in very few countries do we see debt levels that were back to where they were before the debt relief of the early part of the century, with Ghana and Senegal being two notable ones,” says Ashbourne.

“African economies are in a much better place than they were in the 1990s, I don’t think that comparison is reasonable today.”

China as a donor

Something that has undoubtedly changed since the 90s is the balance of global economic and financial power, especially the ascent of the Chinese economy. Already an ever-present force in financing the continent’s infrastructure, China is rapidly making the transition to becoming a major donor in the region.

Speaking at the Forum on China-Africa summit in December 2015, Chinese President Xi Jinping pledged $60bn in financial support to help African economies weather a volatile global economy, with $35bn being handed out in the form of loans.

Delegates including South African President Jacob Zuma and Zimbabwean President Robert Mugabe welcomed the announcement, calling it a “win-win” partnership. The apparent generosity was tinged with caution about how the loans were allocated, with most of the funding going to nations where China had resource interests such as oil-rich Angola and Sudan.

This reflected a more circumspect approach by China argues Jyhjong Hwang, a senior research assistant at Johns Hopkins University’s China-Africa Research Initiative (CARI).

“From 2000 to 2007 there was a lot of generous Chinese spending in Africa and it was also the first few years of their foray into giving large loans to African governments,” she says. “They’re more careful these days, and more discerning about who they are lending to and whether they will be able to recuperate their lendings.”

According to CARI, between 2000 and 2014 China provided loans to African countries worth $89.9bn, with the China Development Bank accounting for 13.7%, China Export-Import Bank providing 59.6%, and other state-owned enterprises and Chinese contractors providing 13.6%.

The top five recipients of Chinese loans during the corresponding period were: Angola ($21.2bn), Ethiopia ($12.3bn); Sudan ($5.6bn); Kenya ($5.2bn); and the Democratic Republic of Congo ($4.9bn).

Despite China’s more cautious approach, its banks remain exposed to countries at risk of default, according to Hwang. 

“Chinese lending in Africa is usually done in opaque countries such as Angola, Ethiopia and Sudan, so we have both parties not being transparent about the deals that they have agreed on,” Hwang says. “Therefore it is difficult to ascertain with certainty just how significant the debt load is and therefore, how serious the problem is.”

“[However], Eximbank and the Development bank are both policy banks that are state-backed so the Chinese government is not too concerned about the two institutions failing,” she adds.

With China pushing its landmark “One Belt, One Road” initiative, a $1 trillion trading network spanning Europe, Asia, the Middle East and Africa, and the China-led Asian Infrastructure Investment Bank gaining global prominence – recently announcing plans for deeper collaboration with the World Bank, for example – borrowing from the East Asian giant can be expected to continue.

Towards a new debt trap?

It is too soon to determine whether Africa is walking into a new debt trap. The global context has changed significantly since the 1990s making a like-for-like comparison questionable. Reforms have taken place in many governments across the continent, arguably making them more resilient to some of the pitfalls of the past. It must also be remembered that borrowing is a necessary part of the development process, not an inherent danger.

The big questions for economies in the region in the coming years will be whether policymakers have learned the lessons of the last few decades, and whether they can respond appropriately and in time to stave off any potential long-term risk.

Taku Dzimwasha