DEEPER INTO DEBT

Africa’s crippling 20th Century debt trap could be on its way back

Quartz africa
Quartz africa

Amidst reports of the downturn in commodity prices and the effect of China’s slowdown on Africa, there’s another dent to the “Africa Rising” mantra: the rising levels of government debt in African countries.

This year, Africa’s sovereign debt levels rose to 44% of GDP, a 10% jump from five years ago when Africa’s debt-to-GDP ratio stood at 34%.

In the 1970s and 1980s, Africa faced a debt crisis (pdf). This prompted the adoption of structural adjustment austerity programs—spearheaded by the World Bank and IMF— which were meant to stabilize African economies. Eventually African countries were given a lifeline through various debt relief programmes like the Heavily Indebted Poor Countries Initiative (HIPC) in 1996 and the Multilateral Debt Relief Initiative (MDRI) in 2005, which wrote off existing debt in exchange for economic reforms.

Speaking at the EY Strategic Growth Forum on Africa in Johannesburg yesterday (Nov. 4), Razia Khan, head of Africa research at Standard Chartered Bank, said that while many African countries initially sought out debt in international markets to finance government expenditure—in areas like infrastructure— they had accumulated a lot of debt that was becoming difficult to service due to high borrowing costs.

“African countries have had notable access to capital markets, but the build-up of public debt in recent years is troubling. To give you an example, the benchmark GDP-t0-debt ratio for African countries is generally 40%, but you have many countries like Ghana for example who far surpass that,” says Khan.

Until recently, Ghana was lauded as one of Africa’s fastest growing economies. But the west-African country has had to battle with the depreciation of the Cedi, its currency, increased power outages and low commodity prices. In April this year, the IMF approved a $918 million loan to help Ghana to boost economic growth and job creation, “while protecting social spending.” To help refinance some of its existing debt, the country also launched a $1.5 billion Eurobond last month.

Khan predicts that the IMF will increasingly play an extended role in African economies, as many will battle with debt management strategies.

Razia Khan
Standard Chartered’s Razia Khan (Reuters/Luke MacGregor)

“Returning to basics is going to be crucial. Ultimately, governments needs to spend better. Look at South Africa, another country with rising debt levels, but is failing to tighten up. In 2011, you had a public sector wage negotiation in 2011 that was meant to stabilize wage levels, but as we’ve seen in the recent medium term budget statement, the country couldn’t contain the rising wage bill, opting to use up its contingency reserve to make of for the shortfall,” said Khan.

Khan added that improving economic growth and managing existing government revenue better—by priotizing government expenditure—are the two ways in which African countries could prevent from slipping into further debt.

“We need to sustain Africa’s growth, but for that we need fiscal discipline. The winners will be the countries that implement reforms and tighten up their belts speedily, and the losers will be those countries that have to borrow more when they’re already highly indebted,” said Khan.

Despite the headwinds in African economies this past year, the former president of the African Development Bank, Donald Kaberuka, remains bullish about Africa’s prospects. “I dont’ buy into the narrative of “Africa Rising” or its opposite—both are too simplistic. Africa has changed and continues to do so, there will be ebbs and flows, but what is crucial is for us to confront our challenges head on, ” said Kaberuka.

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