Growing with Debt in African Economies: Options, Challenges and Pitfalls

The public debt in Africa started to increase sharply again after 2013 in the wake of the commodity price boom, reversing the gains from the heavily indebted poor countries (HIPCs) initiative. Almost all African countries experienced both an increase and change in the composition of public debt. The shift away from concessionary to market-based loans from private institutions further aggravated the debt burden due to high interest rate and short maturity period. In the aftermath of significant debt cancellation provided to 30 Sub-Saharan African (SSA) countries in the context of the HIPCs and the Multilateral Debt Relief Initiative (MDRI) in the early- to mid-2000s, the median public debt-to-GDP ratio fell from 85.3% in 2001 to 34.3% in 2011. These initiatives, together with resilient growth and improved solvency, provided an additional space for new borrowing. Despite these developments, recent trends show that countries have taken up more debt, driving the median public debt-to-GDP ratio to about 58% by 2019. The advent of the Covid-19 pandemic further accelerated the debt burden across Africa where the median debt-to-GDP ratio is expected to reach close to 70% (African Development Bank, 2021). By contrast with the debt crisis of the 1980s and 1990s, sustainability concerns are not region-wide (IMF, 2018; African Development Bank, 2020). Fiscal policies are, however, under pressure as many countries across the region contend with elevated interest burdens and continued weakness in commodity export markets. The Covid-19 pandemic further caused significant recession with estimated real GDP growth of −2% in 2020 for Africa with a resultant deterioration of the primary budget deficit from about 1.5% in 2019 to 3.5%, which is significant (African Development Bank, 2021). While external debt burden indicators are still below levels that triggered debt distress in most countries in the earlier periods, risks of a renewed cycle of debt crises and economic disruption are growing, with several countries’ risk of external debt distress deteriorating, particularly in the wake of the COVID-19 pandemic. For instance, out of the 36 Poverty Reduction and Growth Trust (PRGT)-eligible SSA countries for which debt sustainability analyses (DSAs) were conducted between 2008 and 2018, 44% (or 16) were classified as either ‘in debt distress’1 or facing ‘high risk’ of debt distress in 2018, from 31% (or 11) in such categories at the end of 2011 to 56% (or 20), which was conducted in 2020, partly driven by the COVID-19 pandemic.2 The main drivers of debt build-up, however, vary across countries and include exogenous shocks, weak fiscal management and macro-economic policy frameworks to support growth; changing composition of debt towards more expensive sources of financing; and high levels of public spending among other factors (World Bank 2018; African Development Bank, 2021). Table 1 presents the magnitude of the long-term association between external debt (% of GDP) and its close correlates for African and low-income countries for the period 1990–2018. Results suggest trade shocks (captured through terms of trade shocks), growth in real per capita GDP, current account deficits and tax mobilisation efforts play a significant role in the variation of external debt situation in Africa. Economic fundamentals, such as real per capita GDP growth, external balance and government capacity to mobilise revenue, explain over 80% of the variation in external debt due to observed factors reported in Table 1. Selected Covariates of External Debt (% of GDP) in Africa (5-year average for 1990–2018) Note: Table 1 reports pooled regression of external debt as % of GDP for the period 1960–2018 on selected covariates, which were averaged over five period intervals with robust statistics. Source: authors’ computations based on data from World Economic Outlook (various issues), IMF. *p < 0.05. ** p < 0.01. ***p < 0.001. Selected Covariates of External Debt (% of GDP) in Africa (5-year average for 1990–2018) Note: Table 1 reports pooled regression of external debt as % of GDP for the period 1960–2018 on selected covariates, which were averaged over five period intervals with robust statistics. Source: authors’ computations based on data from World Economic Outlook (various issues), IMF. *p < 0.05. ** p < 0.01. ***p < 0.001. Against this background, this special issue combines four papers presented during the June 2019 Plenary Session of the African Economic Research Consortium (AERC) biannual research workshop held in Cape Town, South Africa, on the theme ‘Growing with Debt in African Economies: Options, Challenges and Pitfalls’ and a fifth paper featured in the December 2017 Biannual under the theme ‘Governance for Development in Africa’. The first paper by Vera Songwe and Christine Awiti on ‘African Countries' Debt: A Tale of Acceleration at Multiple Speeds and Shades’ propose a novel approach to monitor debt burden and argues that, instead of the levels, what matters is the speed of debt accumulation that could determine the path of debt to more sustainable debt levels. They also find that there is heterogeneity in country debt accumulation and that policies to ensure sustainable debt will need to be country specific. The second paper by Benno J. Ndulu and Stephen A. O’Connell on ‘Africa’s Development Debts’ notes that the debt management challenges that are now emerging for borrowers and lenders differ in important ways from those of the past. They argue in the paper that development assets are at risk—including advances in human capital and infrastructure and an improved investment environment—if these challenges are not managed well. They further note that preserving and enhancing these assets should be a central objective of domestic policy actions, inhibitory debt restructurings and institutional approaches to debt distress. The third paper on ‘Debt, Growth and Stability in Africa: Speculative Calculations and Policy Responses’ by Shantayanan Devarajan, Indermit Gill and Kenan Karakülah attempts to answer three questions that are being asked with increasing urgency to avoid another debt crisis. The first question: has the quality of institutions and policies of African countries, critical to sustaining higher levels of debt, improved since the debt relief of the early 2000s? Second, will debt markets get to know emerging Africa well enough before the next crisis? Third, have the resolutions of recent defaults in Africa been orderly so that debtor governments are not herded into traps set by foreign creditors? Their analysis suggest that the answer to all three questions is a ‘no’. The paper recommends preventive measures that involve full transparency in debt accounting, greater realism in growth forecasts and diligence in matching the region’s seemingly limitless public investment needs with weak public sector capacity to manage infrastructure investments to avoid another debt crisis. The fourth paper by Michael Atingi-Ego, Sayed Timuno and Tiviniton Makuve on ‘Public Debt Accumulation in SSA: A Looming Debt Crisis’ discusses recent debt trends and evaluates performance of DSA conducted in a sample of SSA countries over the period 2008–2016 to provide insights on risk of debt distress in SSA. The paper finds the existence of systematic optimism bias in past DSA vintages resulting from optimistic macro-economic projections that underpin the DSAs. As a result, the DSAs for the sample countries analysed projected higher debt-carrying capacities, which in most cases led to a faster pace of debt accumulation during this period. This was compounded by the fact that average interest rates on new debt commitments were rising faster relative to GDP growth rates while the necessary fiscal adjustment to counter this development remained insufficient. The fifth paper by Amdou Boly, Maty Konte and Abebe Shimeles on ‘Corruption Perception and Attitude Towards Taxation in Africa’ presented at the 47th Plenary Session complements the above papers by providing compelling evidence on the role of widespread perception of corruption among Africans in the mobilisation of taxes, which as shown in Table 1 plays a critical role in managing debt burden. The first paper by Songwe and Awiti focuses on debt sustainability for African countries. It begins with an analysis of the debt path for Africa in general and then for specific countries. Debt in African countries rose over the past few years, but the growth rate in the 5 years to 2018 was fast paced at an average of 9.3% in Africa. Songwe and Awiti argue that monitoring of debt through speed of debt, and thereafter adjusting structural indicators accordingly, can strengthen debt sustainability for African countries. They note that debt paths are not homogenous and that different countries follow different paths. Therefore, policies for debt sustainability should be applied on a country by country basis. The paper notes that other than the IMF/World Bank, and now the China Road and Belt Initiative Countries Debt Sustainability Frameworks, most debt monitoring is carried out through debt level thresholds. However, rather than monitor debt levels, focus should be on monitoring the speed of growth of debt, which can be instrumental in informing authorities how quickly they are approaching debt level thresholds and if borrowing is sustainable. While the speed of debt indicates whether borrowing is heading towards unsustainable levels, adjusting for structural indicators can steer debt back into a more sustainable path. Songwe and Awiti suggest a two-step approach that can be utilised by policy makers to monitor debt and then make adjustments, if need be, to ensure sustainability. First is keeping track of the speed of growth of debt and ensuring growth remains below 5% per annum. In countries where debt grew at less than 5% in 2018 such as in Guinea, Lesotho, Madagascar and Tanzania, debt levels remained below 40%. Second, where growth exceeds 5%, then adjustments to structural indicators can be adopted such as (a) a reduction in the flow of debt is desirable, that is, fiscal deficit can either be lower, or countries can adjust to have fiscal surpluses; (b) countries should negotiate for the most favourable borrowing conditions, that is, debt tenor should be long while interest rates should be as low as possible; and (c) promote policies that encourage exports to earn foreign currency, or alternatively, issue local currency bonds. The paper observes that such corrective measures are easier to put in place with an early warning system. Songwe and Awiti propose an early warning system for debt accumulation that should allow policy makers to put in place corrective measures before the situation becomes one of debt distress. Under the corrective framework, governments have more flexibility on the policy options to be adopted and can chose between a wider variety of fiscal policy options from working to increase tax revenues, adoption of counter cyclical measures to create buffers, implement and abide to strict fiscal rules to correct the acceleration of debt. Further, managing the cost of debt can strengthen debt sustainability for African countries. Songwe and Awiti give the following example to illustrate this: First they observe that Zambia issued a Eurobond in 2014 at a yield of 8.625%, 3 percentage points higher than its bond issuance in 2012, for an amount 30% higher (IMF, 2015). In the 3 years following the bond issue, Zambia’s interest rate payment grew by about 46%. Similarly, for Kenya and Ghana that issued about four Eurobonds between 2013 and 2018, interest payment made up almost half of the fiscal balance. Hence, lower cost of debt reduces fiscal pressures and strengthens debt sustainability. to the the of debt also and tenor of debt for economic investment in public infrastructure and in private sector However, high cost of debt and short maturity to unsustainable debt where on investments to be For instance, to in export that were expected to increase the of foreign currency to debt. However, export growth has been than expected to rate that could to more expensive debt in the Further, the paper notes that that greater transparency of such as and of could increase the of of public This can to significant from borrowing. transparency in debt for debt could ensure more in the of debt as well as strengthen the development of local markets. the paper observes that for debt to African countries The Africa region has on average one of the to GDP is for increase in of up to of GDP on Africa, in lower fiscal deficit and to lower growth rates of debt. debt monitoring such as the speed of debt create an early warning with to challenges before debt becomes The paper by Ndulu and O’Connell observes that the debt management challenges that are now emerging for borrowers and lenders differ in important ways from those of the past. They argue in the paper that development assets are at risk—including advances in human capital and infrastructure and an improved investment environment—if these challenges are not managed well. They further note that preserving and enhancing these assets should be a central objective of domestic policy actions, debt restructurings and institutional approaches to debt distress. Ndulu and O’Connell note that in contrast with the debt crisis of the 1980s and 1990s, concerns are not region in SSA and the policy for growth remains They further observe that a long period of favourable borrowing has to an with interest rates now growth rates at the in most countries and to risks on issued to The pace of new borrowing also to have fiscal adjustments to a more borrowing However, there are risks with the of debt over the past The paper argues that debt after of and debt is an for debt are not but also from sources and new and are to more interest rates and as well as to new challenges of there are development assets at after of investment and growth, in policy and public infrastructure and in human capital that in most countries to a of private Ndulu and O’Connell observe that in debt and significant in the composition of countries to particularly as a of are set to from This need to be more in country with a to that to the of external market-based and that are of in a The approach to debt management is to this The paper notes three main challenges that SSA countries have still to contend with in the context of elevated debt. The first concerns those countries under from debt that are of the from the infrastructure investments and they The is to maturity to adjustment that by capital infrastructure assets of for and or primary deficits with the resultant macro-economic A of and managed to over through restructurings and for in interest for will be particularly high in 2020, there is a of across African countries and the other countries are local currency debt with foreign currency debt to of lower interest rates for the However, this up for expected borrowing by for this can be in a situation of high to distress. The second to the of which in the of and make this more of are more now than they were in the the increasing of private and the of a of the a of The third to risks in of greater to market-based external Countries facing to domestic capacity for analysis of the drivers of interest rates and risk The context not a capacity for policy but more an capacity to and with Ndulu and O’Connell end by a of for This paper attempts to answer three questions that are being asked with increasing urgency to avoid another debt crisis. The first is whether the in public debt-to-GDP in Africa during the past are of in institutions and policies or they were made by and the The second is whether African governments are for the of private debt markets that to not and countries with and weak economic The third is whether the of current crises on the that a crisis will not the of public assets and of The find that the answer to all three questions is a ‘no’. then what can be this They provide in of three from the long to The first is to commodity price as shocks, not to The second is to the cost of in countries where the cost of is high before a policy of increasing domestic to the external debt burden. The third is to make that the maturity of loans the of infrastructure this is important for African countries that are on lenders such as China and The paper by a and First is that as African through to the of debt distress or crisis could be to what has been experienced so the in the South Africa, and into debt the of a region-wide economic crisis will The is what next debt crisis will fiscal crisis of the 1980s indebted governments could not back foreign creditors? crisis in the private borrowers could not back foreign lenders due to a of and in the private borrowers and indebted governments lenders both at and The paper that next crisis will be This is both African are different in they more on than those in and and the is not the as was a In the Africa was a low-income region that on the of is a region with the of South and This will make both and in ways that have not been the of African debt will be a for and African can the between how managed its and what the have to In the years, the get to know a more about the between will be necessary to that Africa is a not a The paper notes that the pace of debt accumulation has in SSA countries in recent years, concerns that could back debt It also notes that drivers of debt vary across countries and include exogenous shocks, weak fiscal management and macro-economic policy frameworks to support growth and changing composition of debt towards more expensive sources of and high levels of public The paper by further discusses recent debt trends and performance of DSAs conducted in a sample of SSA countries over the period on and the of the paper suggest existence of systematic optimism bias in past DSA vintages resulting from optimistic macro-economic projections that underpin DSAs. As a result, the DSAs for the sample countries analysed projected higher debt-carrying capacities, which in most cases to a faster pace of debt accumulation during this period. notes that this was not by the fact that average interest rates on new debt commitments were rising faster relative to GDP growth rates while the necessary fiscal adjustment to counter this development remained insufficient. policies by fiscal that were to the of the 2008 crisis have not been the of the and a in growth in countries. As a result, the risk of debt distress in the region has in the suggest the following policy from First is that the need for countries to and strengthen capacity of research and institutions for macro-economic and Countries should capacity needs and and from a of and the World Second, countries need to in terms of and the quality of institutions and policies as these are to debt-carrying include measures such as fiscal rules and institutions that policy to promote fiscal Third, to market-based has countries’ to in rate and interest rate as well as risk and in Therefore, countries should of public debt management such as management of such as from to manage these countries should create an to export A export with on that are to price is important in the of export to commodity price While debt as a of GDP is an of solvency, not the of governments to debt. that the capacity of governments to public debt is the ratio of debt to For African countries, this has been rising faster than the debt to GDP ratio as has not been with economic Hence, for many African fiscal sustainability among on more than in GDP in External Debt as a of is on capacity to tax which is The paper by analyses instead the of tax which the magnitude of to be The based on data from that about 36 countries in that over that not they should to the government with significant variation across countries and or to in the fiscal the was In countries these were over while the rate was in countries such as with rate of of the sample to of the in the paper for low was high perception of corruption the government system that the of the of the government in general and those of tax It is that is not due to perception of under the of and low level of by tax could also be an important for high of this that also from low to low capacity of tax authorities to the paper an The based on an approach suggest that high perception of corruption of the tax authorities could tax by as as which is and of significant structural in the between tax authorities and tax The four papers presented at the June 2019 Plenary Session on ‘Growing with Debt in African Economies: Options, Challenges and Pitfalls’ have several to the theme of the The show all African countries experienced an increase in public debt and change in its with a of countries now classified by the World Bank and as being at high risk of debt distress. In the pace of debt accumulation has in SSA countries in recent years with the main drivers of debt across countries. of the from the are as is the existence of systematic optimism bias in past DSA vintages resulting from optimistic macro-economic projections led to projected higher debt-carrying faster pace of debt This is compounded by the fact that average interest rates on new debt commitments are rising faster relative to GDP growth rates while the necessary fiscal adjustment to counter this development remained insufficient. As a result, the risk of debt distress in the region has in the past Second, the speed of debt matters and that monitoring the speed of debt could the path of debt to more sustainable debt levels. sustainability can be debt is to capital accumulation and in the of government to higher debt Third, there is heterogeneity in country debt and policies to ensure sustainable debt need to be country specific. development assets are at risk—including advances in human capital and infrastructure and an improved investment environment—if challenges debt are not well managed and that preserving and enhancing these assets should be a central objective of domestic policy actions, debt restructurings and institutional approaches to debt distress. preventive measures that involve full transparency in debt accounting, greater realism in growth forecasts and diligence in matching the region’s seemingly limitless public investment needs with weak public sector capacity to manage infrastructure investments should be so as to avoid another debt crisis. The that of on country macro-economic projections between investment and growth, of on DSA frameworks and and monitoring fiscal risks be important of in DSA for and policy They also capacity to quality of transparency and at institutional managing over and and debt management The paper presented at the December 2017 Plenary Session the above papers by evidence on that tax mobilisation efforts that are not critical for of governments to public debt, but also on borrowing to African governments can tax mobilisation by the of on government institutions by measures to corruption and the quality and of of public across all and other public African Economic Research Consortium Road Bank