The continent, despite its immense potential and resources, struggles with a daunting challenge – an escalating debt burden. As African nations continue to develop strategies for economic growth and development amid rising debts, it begs the question: Who is to blame for the overwhelming debt, and what purposes are these nations borrowing for?.
Government borrowing has been instrumental in funding public investments, contributing to substantial improvements in human development indicators. However, the rising trajectory of public debt poses a threat to these achievements, diverting resources from critical sectors like education, healthcare, and infrastructure. According to the IMF, in 2017, Sub-Saharan Africa experienced a significant increase in public debt, reaching 57% of its GDP by the end of the year, reflecting a 20-percentage-point surge.
Africa’s public debt is projected to remain elevated above pre-pandemic levels in 2024 and 2025, posing risks for countries struggling to service international loans, according to a U.N. official. At the United Nations Commission for Africa (UNECA) conference, Adam Elhiraika, the agency’s director of macroeconomics and governance, highlighted that eight countries are currently in debt distress, with 13 expected to be at risk.
The debt-to-GDP ratio is a straightforward yet effective metric that compares a country’s total debt to its economic production, measured by its GDP, expressed as a percentage. This metric provides a quick overview of the country’s debt burden relative to the size of its entire economy. A low debt-to-GDP ratio is generally interpreted as a positive sign of economic stability. When a nation’s debt is significantly smaller than its GDP, it signifies that the economy generates ample income to meet its debt obligations. Conversely, a high ratio suggests potential challenges in repaying debts.
As per a report from the United Nations Development Programme, 24 out of the 54 lower-income countries facing a high risk of debt distress are located in Africa, including Nigeria and Egypt, which are the two largest economies on the continent. In November of the previous year, Cairo entered into a $3 billion bailout agreement with the International Monetary Fund (IMF). The report attributes vulnerabilities to primary balance deficits, which measure the disparity between government spending and tax revenue.
Economic shocks, including the COVID-19 pandemic, Russia’s invasion of Ukraine, and rising U.S. interest rates, have strained cash-strapped, debt-laden governments in Africa. The debt-to-GDP ratio stood at 62.5% at the end of 2022, doubling from 57% in the decade leading to 2020. Without a change in fiscal trajectory, this ratio could rise by 10 percentage points in the next five years, according to an IMF report. The fiscal deficit for Africa deteriorated to 4.6% of GDP in the previous year, expected to widen further to 5% in 2024.
The current strength of the U.S. dollar, the highest in two decades, is putting pressure on lower-income nations that heavily rely on oil imports and borrow in dollars to finance public services, often incurring exceptionally high-interest rates. While the United States and the United Kingdom have recently been able to borrow at interest rates below 1 percent, private lenders are charging African countries interest rates ranging from 7 to 10 percent.
The International Monetary Fund (IMF) has identified Africa’s top 10 indebted countries, each characterized by their respective Debt-to-GDP Ratios:
Cabo Verde (109.7% Debt-to-GDP Ratio)
Cabo Verde, a small island nation off West Africa, tops the list with a debt-to-GDP ratio of 109.7%, primarily due to the impact of the COVID-19 pandemic on its tourism-dependent economy. The government faces the challenge of managing escalating debt while fostering economic recovery.
Mozambique (92.4% Debt-to-GDP Ratio)
Struggling with a debt crisis since 2016, Mozambique maintains a debt-to-GDP ratio of 92.4%. Despite efforts to restructure debt and implement reforms, the nation grapples with fiscal challenges influenced by global economic uncertainties and domestic obstacles.
Congo Republic (91% Debt-to-GDP Ratio)
The Congo Republic has accrued a debt-to-GDP ratio of 91%, primarily driven by its reliance on oil exports. Challenges arise from volatile oil prices and the imperative to diversify the economy, necessitating strategic policy interventions for fiscal stability.
Sierra Leone (82.6% Debt-to-GDP Ratio)
Sierra Leone faces a debt burden of 82.6%, reflecting post-conflict recovery challenges. Balancing debt management with investments in critical sectors is crucial for sustainable economic growth.
Ghana (81.5% Debt-to-GDP Ratio)
Once celebrated for economic progress, Ghana now contends with an 81.5% debt-to-GDP ratio. High fiscal deficits and external debt underscore the need for prudent fiscal policies to mitigate risks and maintain stability.
Mauritius (78.9% Debt-to-GDP Ratio)
A financial and tourism hub, Mauritius grapples with a 78.9% debt-to-GDP ratio. Achieving a balance between sustaining economic growth and addressing rising debt levels is essential for long-term fiscal stability.
Malawi (77.4% Debt-to-GDP Ratio)
Despite strides in economic development, Malawi faces a 77.4% debt-to-GDP ratio. Resolving this challenge requires a multifaceted approach, combining prudent fiscal management with investments in critical sectors.
Angola (77.1% Debt-to-GDP Ratio)
Heavily reliant on oil, Angola contends with a 77.1% debt-to-GDP ratio. Economic diversification and effective debt management are crucial to withstand oil price fluctuations and build a resilient financial future.
South Africa (75.8% Debt-to-GDP Ratio)
Despite being an economic powerhouse, South Africa grapples with a 75.8% debt-to-GDP ratio. Structural issues, political uncertainties, and the lingering effects of the pandemic necessitate coordinated efforts to stabilize the economy.
Senegal (72.1% Debt-to-GDP Ratio) and Rwanda (72.1% Debt-to-GDP Ratio):
Senegal and Rwanda share a 72.1% debt-to-GDP ratio, highlighting challenges in economic development. While Senegal faces infrastructure financing issues, Rwanda focuses on balancing debt with ambitious development goals.
Most of the overwhelming debt in Africa has roots in poor governance and unsustainable borrowing practices. Some African countries inherited high levels of debt, but there are other external economic factors such as commodity price fluctuations and global economic downturns. Corruption and poor governance in certain nations lead to the misallocation of borrowed funds, exacerbating debt problems. Still, the question remains, should Africa continue to suffer from the worst impacts of borrowing from foreign nations?.
