Debt again threatens African stability

By Gregory Simpkins

In the United States, the annual struggle over exceeding the debt limit has begun early. Republicans in the House of Representatives pledge to hold fast at not raising the debt limit – at least without concessions on future spending. In this country, the question is not just on how much is being spent, but also on what spending is used for. Government shutdowns due to the refusal to raise the debt limit are temporary, and government workers always receive back pay. In fact, the U.S. government never really shuts down; however, some programs or tourist sites are closed to make a political point.

American politicians push the situation to the crisis point, but inevitably reach a deal. All sides want to spend tax-derived dollars for something. The question is how long will it take to reach that deal where both sides get enough of what they want? This country has significant untapped resources and incredible innovation. The government also can print money – although this reduces the value of the existing currency. Unfortunately, such solutions do not come as easily for African countries.

Problem

Debt has long been a problem for African countries. The Heavily Indebted Poor Country (HIPC) initiative was launched in 1996 by the International Monetary Fund (IMF) and World Bank to ensure that no poor country faced a debt burden it could not manage. Since then, the international financial community, including multilateral organizations and governments, have collaborated to lower to sustainable levels, external debt burdens of the most heavily indebted poor countries. In 1999, after a comprehensive review of the initiative, the IMF was able to provide faster, deeper, and broader debt relief and strengthened the links between debt relief, poverty reduction and social policies.

In 2005, to help accelerate progress toward the United Nations Sustainable Development Goals (SDGs), the HIPC Initiative was supplemented by the Multilateral Debt Relief Initiative (MDRI), which allows for 100 percent relief on eligible debts by three multilateral institutions: the IMF, the World Bank, and the African Development Fund (AfDB) for countries completing the HIPC initiative process. The debt crisis on the continent seemed to be abating with all the international assistance being provided.

However, a decade later, the IMF judged that 8 countries in sub-Saharan Africa were in debt distress or at high risk of it. The level of external debt rose sharply since 2015, but not all countries handled the debt crisis the same, as their capacity to cope with the challenge differed greatly. Some were forced by circumstances beyond their control to resort to loans to meet government expenses, while others took out loans as an unsuccessful gamble on prices for their commodities remaining high.

Between 2015 and 2020, the public external debt stock of sub-Saharan countries increased by 67.5 percent to US$454 billion, according to the World Bank. An analysis of financial indicators for 36 sub-Saharan countries showed that in a third of them, public external debt doubled in the space of 5 years, rising from a cumulative stock of US$89 billion at the end of 2015 to US$191 billion at the end of 2020. In absolute terms, the largest increases were in Angola (+US$25.3 billion in additional public debt between 2015 and 2020), Kenya (+US$21.67 billion) and Nigeria (+US$20.8 billion). Three Francophone countries were in the top 10: Côte d’Ivoire, where debt increased by 138 percent to US$22 billion, Senegal (+155 percent to US$17.2 billion) and Cameroon (+94 percent to US$15.3 billion).

In many cases, this increase was explained by the financing of these countries’ infrastructure needs, while multilateral development banks covered only a marginal share of the needs of African states – about 3 percent of investments between 2012 and 2016, compared to 15 percent provided by Chinese financing and more than 40 percent paid for by African governments, according to the Brookings Institution. The low mobilization of local and fiscal resources also explained this continued recourse to external debt. Moreover, in several countries, this increase in public investment was accompanied by a clear increase in foreign direct investment. In Côte d’Ivoire, for example, the stock of foreign direct investment rose from US$9.95 billion in 2018 to US$12.24bn in 2020, according to a study by the French bank Crédit Agricole.

According to the Brookings Institution African Growth Initiative (AGI), the increase in public debt was accompanied by a rise in its cost, due in part to the higher proportion of private lenders in the pool of these countries’ creditors, which multiplied debt issues on international markets. Furthermore, one-third of the debt of low-income countries was issued not at fixed rates but at variable interest rates. This proportion was only 15 percent during the period 1990-2015, according to AGI estimates. In addition to the dollar-exchange-rate risks faced by these countries, there were also interest-rate risks. Indeed, in several countries in the region, the annual cost of servicing debt rose disproportionately compared to the evolution of the debt stock. For example, according to AGI calculations, this cost increased by 355 percent in the case of Côte d’Ivoire – that was a two-and-a-half times increase in the public external debt stock, from US$420 million in 2015 to US$1.9 billion in 2020. In the case of Senegal, this increase was proportionally even greater (+423 percent to US$1.4 billion).

Over extended

The Zambia default in 2020 was a wake-up call that debt indeed had returned as a broader concern in Africa. By March of that year, the IMF’s list of African countries facing a debt crisis had grown to 23 countries. African governments owed money not only to rich countries and multilateral banks but also to China and bondholders. Nevertheless, in an April 30, 2022, article in The Economist magazine, economist and fund manager Gregory Smith predicted that few countries in sub-Saharan Africa needed to make big principal repayments to private creditors. It was therefore unlikely, Smith said, that there would be bond defaults in sub-Saharan Africa in 2022, even as countries elsewhere missed payments.

In a June 15, 2022, article in The Africa Report, the cost of this debt was put into perspective by considering the state’s capacity to mobilize resources to service it, particularly its primary budget balance (excluding debt repayment). In the case of Ghana, for example, according to the IMF, the primary budget deficit was expected to reach -9.3 percent of gross domestic product (GDP), excluding repayment of external debt in 2020, compared with -4.3 percent in Senegal and -3.7 percent in Côte d’Ivoire. Angola had a surplus of 4.9 percent, while Congo-Brazzaville had a balanced primary budget.

Another approach cited in that article compared the cost of servicing these claims with other major budget items. According to data compiled by the Stockholm International Peace Research Institute, in 2020, the combined defense expenditure of Mali, Niger, and Burkina Faso was US$1.2 billion. By comparison, external debt servicing cost US$600 million – equivalent to half the amount of national security spending in these three Sahelian countries facing a jihadist threat.

Many West African countries were already over-­extended when 2020 began. Nigeria, Ghana, Côte d’Ivoire, and Senegal were the West African heavyweights that had a debt-to-GDP ratio of more than 100 percent between 2015 and 2020. The problem was complicated by a strengthening US dollar, making repayments on dollar-denominated foreign debt more expensive in local currency, and that was coupled with inflation aggravated by the war in Ukraine.

In Ghana, the currency plunged and yields on its Eurobonds surged because of investor concerns about the sustainability of the country’s debt. The decline in the cedi has pushed the annual inflation rate to a 21-year high of 40.4 percent in October on the back of soaring import costs, affecting both raw and processed materials and sparking protests by traders and consumers. Many Ghanaians suffered from price hikes that hit families particularly hard. They communicated their anger to politicians across the political divide, putting Finance Minister Ken Ofori-Atta’s job on the line. An attempt in Parliament to force his resignation was defeated as his party supported him so he could negotiate debt relief of up to US$3 billion in credit from the IMF. In July, the government made an about-turn by seeking IMF support after previously stating that such a step wouldn’t be necessary.

The Ghanaian debt crisis occurred despite it being a top cocoa and gold producer, with recently discovered and exploited oil and gas reserves. Its debt service payments remained high.

Slower growth

On top of all the economic challenges African countries have faced over the last few years, world output growth is projected to decelerate from an estimated 3.0 percent in 2022 to 1.9 percent in 2023, marking one of the lowest growth rates in recent decades, according to the recently released United Nations World Economic Situation and Prospects 2023, which presents a gloomy and uncertain economic outlook for the near term. Global growth is forecast to moderately pick up to 2.7 percent in 2024 as some of the headwinds will begin to subside. However, this is highly dependent on the pace and sequence of further monetary tightening, the course and consequences of the war in Ukraine, and the possibility of further supply-chain disruptions. The tepid global economic prospects also threaten the achievement of the 17 Sustainable Development Goals. The 2023 SDG Summit in September will mark the mid-point of the implementation of the 2030 agenda.

Indeed, African nations and their citizens have faced hard times, especially in recent years due to disease, weather, conflict, and other causes, including economic mismanagement. Aid intended to extricate African nations from the looming threat of debt default must create a path to greater self-reliance with aid based on the creation and implementation of plans for the sustainable use of such funds. But more importantly, in 2023 and subsequent elections, African voters must select governments that take care of public funds by preparing for potential crises and not gambling on prices for raw materials, whose prices historically fluctuate. Such savvy choices by voters is difficult in any country – be it the United States or Uganda.

Gregory Simpkins, a longtime specialist in African policy development, is the Principal of 21st Century Solutions. He consults with organizations on African policy issues generally, especially in relating to the U.S. Government. He also serves as Managing Director for the Morganthau Stirling consulting firm, where he oversees program development and implementation. He further acts as a consultant to the African Merchants Association, where he advises the Association in its efforts to stimulate an increase in trade between several hundred African Diaspora small and medium enterprises and their African partners.