A study published by United Nations Trade and Development (UNCTAD) has revealed that The Gambia is among African countries that spent more on interest payments than on key sectors like health and education between the years 2019 to 2021. It is important to note that the periods of 2019 to 2021 are the period the world had to grapple with Covid-19. Gainako will be publishing a detailed look into the implications of the study and whether the trend has improved or declined.
A sequence of shocks beyond its borders diminished Africa’s ability to develop and led to fast-increasing debt levels
With nearly 1.4 billion people or approximately one-sixth of the world’s population, Africa’s importance in the global economy is growing. Yet, since the turn of the century, the continent has been faced with several shocks that have arisen largely beyond its borders.
Beginning with the global financial crisis of 2008 and, more recently, the COVID-19 pandemic and the war in Ukraine, Africa’s vulnerabilities have been brought to light. Subsequently, the continent’s need to increase its resilience and independence from the rest of the world has taken on greater importance.
Each of these recent crises has limited Africa’s growth potential and lowered its ability to climb up the development ladder. As a result, African debt, both continentally and nationally, has been rising. And while debt serves a critical function for development, the rate at which debt is rising has constrained growth and limited many African countries’ ability to cope with future crises or invest for development.
In 2022, public debt in Africa reached USD 1.8 trillion. While this is a fraction of the overall outstanding debt of developing countries, Africa’s debt has increased by 183% since 2010, a rate roughly four times higher than its growth rate of GDP in dollar terms.
Nearly 40% of this debt is held by countries in Northern Africa, many of which have been confronted with higher food prices and lower availability of goods because of the conflict in Europe. Egypt, for example, which holds USD 421 billion in public debt, received over 75% of its wheat imports from Russia and Ukraine in 2021 – a dependency that combined with its already high debt has limited its ability to continue to source critical food and other imported products.
Africa’s increased debt is not solely a result of the conflict in Europe. Indeed, the additional need to source personal protective equipment (PPE), pharmaceutical products, medicines, and vaccines, amongst other goods, during the COVID-19 pandemic became a major impetus for higher levels of debt.
In fact, in 2020 there were 27 countries in Africa with a ratio of debt to GDP above 60%, a level seen as a threshold for sustainability, compared to the year before the pandemic when 18 countries had debt levels above that threshold. While this number receded to 24 by 2022, compared to other developing countries, those in Africa have been slower to reduce their levels of debt. From a regional perspective, Central Africa is the only region with an average debt level below the 60% threshold in 2022.
As the cost of servicing debt increases so does the risk of debt becoming unsustainable
As Africa’s debt continues to rise, the continent is being confronted with a global financial architecture that is misaligned with its needs. This is happening at a time when the amount it owes to creditors outside of its borders has also grown. Having a growing share of debt outside of its borders increases the risk of the burden of that debt becoming unsustainable as global financial pressures have weakened local currencies and increased the cost of servicing that debt in real terms.
As a percentage of GDP, Africa’s share of external debt has risen from approximately 19% in 2010 to nearly 29% in 2022. Simultaneously, its external debt as a share of exports has risen from 74.5% to 140% over the same period. This latter point is important in Africa since many countries are reliant on exports, especially exports from the extractive industries with little value-added. The imbalance between debt and exports has made it more difficult for Africa to service its external debt as its ability to obtain foreign currency has grown at a rate lower than its debt-servicing costs.
Africa’s creditor composition is also becoming more complex. Whereas historically a large share of African debt was held by multilateral or bilateral creditors, such as the Paris club, today the share of private creditors holding African debt has grown significantly. In 2010, only 30% of African debt was held by private creditors. By 2021, this figure had increased to 44% of its debt. The share of private creditors grew faster in Africa than other developing regions.
This raises several issues. First, a timely and orderly restructuring of Africa’s debt is limited by differing interests and creditor concerns. Since private creditors may be banks or other market-based lenders, their interest in extracting more market-based returns differs from more traditional, concessional-based financing. Having a bigger share of private creditors also raises the price of African debt since many private loans are made on market terms. Second, coordination amongst creditors is limited since there is no formal creditor coordination mechanism to bring together all private actors. And third, many creditors and nations are reluctant to undergo debt-sustainability talks since the stigma associated with restructuring could limit a country’s ability to find sources of future funding. In the case of banks or other private creditors, the potential of losses for interested parties also lessens the likelihood of debt restructuring agreements.
These risks are reflected in Africa’s high borrowing costs, where the continental average cost of financing is 11.6%, a rate 8.5 percentage points higher than the risk-free rate of the US benchmark. And while borrowing rates are somewhat reflective of each country’s individual situation, some countries like Tunisia, Egypt, and Nigeria face prohibitive costs to financing, barring them from financial markets and making them more vulnerable to further shocks and reliant on the global conversation of debt sustainability and restructuring.
Further, higher borrowing costs and increasing debt reverberate across countries’ ability to finance development. Countries must dedicate a greater share of their budget toward servicing and paying down debt.
In Africa, this trend has worsened in recent years. The number of African countries where interest payments comprise over 10% of their revenue has risen from 9 in 2010 to over 20 in 2022, a rate faster than Africa’s developing peers. A higher share of revenue dedicated toward debt servicing is problematic in that it diverts resources from areas Africans need most including health, education, development and social support. Especially in the wake of the COVID-19 crisis, a retreat in the relative share of spending in these sectors has the potential to exacerbate the situation of Africa’s vulnerable populations.
Every dollar Africa spends on debt servicing is one less dollar available for development spending. Over the past decade, developing countries have seen interest payments increase by approximately 64%. In Africa, interest payments have increased by 132% over the same period, at the detriment of spending on education, healthcare and investment.
Between 2019 and 2021, a remarkable 25 African countries, nearly half of the continent, spent more on interest payments than on health. Seven African countries spent more on interest payments than on education and an additional five countries spent more money on interest payments than on investment.
This is concerning, as education, health and investment are some of the areas hardest hit by recent crises. For example, in the context of the COVID-19 pandemic, as lockdowns persisted and in-person interaction was limited, the negative impacts to education were felt across the continent as many students have not had the opportunity to partake in virtual learning. In the healthcare sector, the inability of many African countries to source, and pay for, personal protective equipment (PPE) and other medical supplies led to increasingly negative health outcomes.
More than half of Africa’s population lives in countries that spend more on interest than education or health
Africa’s most vulnerable have paid the price for circumstances largely out of their control. Nearly 57% of the African population, or about 751 million people, live in countries that spend more on interest payments than in the sectors that have been of critical concern during recent crises.
Reforms covering both multilateral as well as private creditors are key to allow Africa to develop sustainably and lift some of the world’s most vulnerable out of poverty
Reforms covering both multilateral as well as private creditors are key to allow Africa to develop sustainably and lift some of the world’s most vulnerable out of poverty.
Addressing Africa’s debt sustainability issues will not only help make Africa more financially sound, but it will contribute toward the continent achieving sustainability and meeting the UN’s Sustainable Development Goals (SDGs). More crucially, it will provide a way forward for African development to lift some of the world’s poorest people out of poverty. To put Africa on a more sustainable pathway several things can be considered:
- Reform and strengthen the G20 Common Framework: The framework, created to address debt insolvency issues for developing countries to both Paris Club and newer creditors has yet to provide a solid platform for debt restructuring.
- The framework should be expanded to incorporate private sector creditors and smooth challenges of coordination amongst creditors
- To avoid technical disputes and accelerate debt restructuring, the framework should consider establishing a mechanism to ensure a fair and equitable treatment to all participating creditors. This can be achieved through a ‘comparability of treatment’ formula.
- A debt and development finance architecture fit for purpose:
- Review the IMF-World Bank Debt Sustainability Analysis, to incorporate solvency and SDG financing requirements.
- Enhance the international debt architecture, through the introduction and strengthening of collective action clauses, anti-vulture fund legislation, and state-contingent debt instruments.
- The IMF must reconcile the duality of its operating model and bilateral support to countries to play a greater role in promoting the stability of the international economy.
- Review the IMF quota formula for special drawing rights (SDRs) linking access to both income and vulnerabilities of developing countries.
This study was first published on the UNCTAD Website in the link below.
https://unctad.org/publication/world-of-debt/regional-stories