As public debt steadily climbs in Africa many are concerned about a gradually unfolding debt crisis similar to the situation in the early 2000s.
At the same time Abebe Aemro Selassie, director of the Africa Department at the IMF, argues that much of the debt is manageable and external shocks combined with aggressive development spending have largely been responsible for the build-up. Both, it seems, will be buffered by the continent’s renewed growth.
In the early 2000s many African countries, through a spate of heavy borrowing, had fallen into considerable debt. Repayments began to eclipse growth and many governments ground to a halt under debt servicing, unable to provide basic services for their citizens.
As the calls for debt relief grew louder multilateral finance institutions heavily engaged in African lending including the International Monetary Fund (IMF), the World Bank and the African Development Bank assembled an initiative to ease some of the pressure. The Heavily Indebted Poor Country Initiative (HIPC) and related Multilateral Debt Relief Initiative unburdened 36 countries of debt, including 30 countries in Africa. As the continent breathed a sigh of relief the mutual assurances were clear: never again.
However, average public debt in Africa reached 57% of gross domestic product (GDP) in late 2017 – almost doubling in just five years. Interest payments on debt have increased from 4% to 11% of government revenues – levels not seen since before the HIPC programme. Indeed, African sovereigns in the last few years have been on a “debt binge” with issuances in 2017 10 times the level of 2016.
Last year’s record $18bn in eurobond issuances is well on the way to being overshadowed in the first half of this year, fuelled by investors in search of high yields. While central bank governors argue that the borrowing will translate into meaningful gains and can thus be repaid, many have painful memories of the early 2000s and wonder where the binge will end. Mozambique, for instance, defaulted on debt repayment last year, sparking concern that it may not be the only one.
Up until 2016 most African countries were posting healthy year on year growth rates. From 2003 to 2016 GDP in Ethiopia more than doubled while Rwanda, Ghana, Mozambique and Zambia came extremely close. For the past two years, however, growth has slowed. “The commodity price decline has had a very severe shock at least for the commodity exporting countries,” explains Selassie. “As you would expect in these cases output has been impacted, revenues have been impacted, exchange rates have depreciated and the result of all of this is debt levels have gone up in relation to GDP.” Nigeria, Angola and South Africa are good examples.
However, he notes that not all African countries were severely affected by the commodity crash. For those not reliant on commodity exports borrowing has gone up in tandem with spending. “You’ve seen aggressive spending to try and address development needs. In these cases the increase in debt to GDP was planned.” Countries like Ethiopia, Côte d’Ivoire, Senegal and Kenya come to mind. These countries have been investing heavily in infrastructure, services and agriculture as a means to boost growth. In this manner, many see the borrowing as a sustainable and necessary drive forward.
Another factor is what Selassie calls the “migration of debt”. In these cases debt, which wasn’t previously factored into publicly available estimates, is identified and then moved to the sovereign balance sheet, he says. Examples include undisclosed loans like the Mozambique case (see below) or public-private partnerships (PPPs) that have not worked out as envisaged.
These considerations contextualise the borrowing and reveal a heterogeneity not necessarily picked up by the media, explains Selassie. “It’s important to put things in perspective,” he says. “Out of 45 countries in sub-Saharan Africa it is only 15 countries who have high levels of debt distress or are in debt distress.” Six countries – Chad, Eritrea, Mozambique, Republic of Congo, South Sudan and Zimbabwe were judged to be in debt distress by the IMF at the end of last year. “The rest of the debt levels are manageable,” he adds.
Indeed Selassie argues that the slowdown in Africa’s largest economies like South Africa and Nigeria has painted a warped picture of the continent and has significantly lowered the IMF-predicted 3.4% growth rate for 2018. In relation to this figure debt servicing looks challenging at best.
Yet, at the same time, it’s worth remembering that Italy, Singapore, Belgium and the US are among the top 17 countries with public debt, according to the World Economic Forum’s Global Competitiveness Index 2017–18. Japan, a G7 country, tops the list at 239.2% of GDP or around $8.9 trillion. Africa’s debt, then, does not look so out of place as long as its economies are growing at an adequate rate and debts can be repaid without diverting funds from spending in other key sectors.
The IMF has repeatedly stressed the need for African countries to raise their domestic revenue in order to stay on top of debt. “Our recommendation is to minimise the impact on spending cuts,” says Selassie. “To engage in a lot more revenue mobilisation. There’s quite a lot of scope for increased tax collection as well as promoting greater investment.” Nigeria’s tax-to-GDP ratio, for example, stands at just 6% – the lowest in Africa. Compared to most OECD countries, which push tax rates at anywhere up to 50%, Africa’s earnings from its citizens are remarkably low.
For those in acute debt distress, however, a more immediate strategy is needed. Evidently the six African countries already mentioned must pursue some sort of restructuring strategy. South Sudan’s debt-to-GDP ratio now stands at 111% while Mozambique’s has hit 110.1%. “Where debt is unsustainable some re-profiling is unavoidable,” admits Selassie.
This need is made even greater when considering that borrowing terms are expected to become less favourable in the medium term as the growth spurt in advanced economies tapers off. Refinancing, then, may shortly become more costly. Late last year Nigeria smartly refinanced $3bn worth of maturing naira-denominated short-term Treasury bills with dollar debt at more favourable interest rates. Finance minister Kemi Adeosun said the government could borrow at a cost of 7% overseas, roughly half the interest rate it currently pays locally. Evidently this is no long-term solution but each country in debt distress must find a way to spend the least amount possible servicing debt before beginning to tackle the structure of its economy.
Undisclosed debt and transparency issues have also presented problems on the continent. Selassie, however, denies that a pattern is emerging. “Two examples don’t make a trend,” he says. The IMF director is referring to Mozambique and the Republic of Congo, which were found to have undisclosed debt by the multilateral lender.
In the Republic of Congo the debt was due to state-owned enterprises borrowing from commodity trading companies that lent money guaranteed by future oil revenues to the government. This debt then migrated to the sovereign balance sheet when oil prices dropped and the Central African country is now locked in talks with the IMF, which is encouraging tough austerity measures and debt restructuring in return for a bailout. Chad tells a similar story. Debt became unmanageable after loans from oil traders – whose repayment was based on healthy oil revenue – soured after prices dropped.
Selassie argues that the fault is not through design. “Debt shocks have either been because growth has been weak or you have a shock,” he says. “It is exogenous. It is not policy induced.”
Poor management in Mozambique
On the other hand Mozambique’s not-so-distant narrative as an emerging powerhouse, backed by significant gas reserves, has been thoroughly derailed by poor debt management. Maputo defaulted on its foreign debt last year after around $2bn worth of loans, previously undisclosed to the IMF, were revealed in 2016.
The money was privately borrowed from European and Russian banks between 2013 and 2014 to revamp the country’s fishing sector. An audit published last year found that $500m of the money is unaccounted for. Since that point the country has struggled and the IMF expects Mozambique to default on foreign debt until 2023.
However, as Mozambique’s particularly perilous situation is mostly the result of shady internal politics and poor decision-making, concerns that it may be the first in a line of sovereign defaults could be exaggerated. As Selassie reminds us, most other debt crises are a result of external shocks – beginning to tail off as Africa starts to grow again – and hence perhaps Mozambique is an isolated case and should not be confused with the rest of the continent.
Although concerns over Africa’s rising debt level are without doubt justified, the reasons are better explained by external shocks or crucial development spending, which, so long as Africa continues to grow, could find a way of balancing themselves out.
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