AAFRICAN FINANCES ministers trying to manage the debt must curse their luck. First, the pandemic has damaged their finances. In December, a pandemic-inspired program to suspend interest payments to bilateral creditors ended. He had delayed the debt problems but had not solved them. In February, Russian tanks rolled into Ukraine and nervous investors began to abandon African government bonds. In March, the Federal Reserve began raising interest rates, which will make financing more expensive everywhere. Meanwhile, China, a big economic partner on the mainland, is struggling with its own real estate debt problem and lockdowns to slow covid-19.
It all took a toll. In 2015 the IMF estimated that eight countries in sub-Saharan Africa were in debt distress or at high risk. Zambia defaulted in 2020. In March, the IMFThe list had grown to 23 countries. African governments owe money not only to rich countries and multilateral banks, but also to China and bondholders.
The good news is that few countries in sub-Saharan Africa are due to make large principal repayments to private creditors this year. It is therefore unlikely that there will be bond defaults in sub-Saharan Africa in 2022, even if countries elsewhere miss payments, says Gregory Smith, an economist and fund manager. In Sri Lanka, for example, protesters occupy the entrance to the president’s office and the government canceled exams for millions of schoolchildren because it could not afford paper to print them on. The bad news is that African countries have some of the highest interest bills in the world relative to income. This leaves less for spending on education and health. It could also portend bigger problems in 2024, when big loan repayments are due.
In 2010, amid a commodity boom and after significant debt cancellation for many poor countries, African governments spent on average less than 5% of their revenues servicing foreign loans. By 2021, that figure had risen to 16.5%, according to the Jubilee Debt Campaign, a NGO. This figure is higher than the 12.5% average for other emerging markets. In Ghana, external debt costs consume 44% of government revenue, estimates the IMF. Cameroon, Ethiopia and Malawi all disbursed about a quarter of the revenue.
For oil exporters such as Angola and Gabon, rising crude prices are helping. In Angola, the local currency soared with oil. Nigeria, paradoxically, could find itself in a more difficult situation as oil prices rise. Although it exports the product, it also burns money on fuel subsidies, which rise with the price of oil. It issued a $1.25 billion seven-year bond in March, but at a high interest rate of 8.4%.
The war in Ukraine has pushed up the prices of metals and minerals, which has helped exporters. Yet this will be offset if more expensive fuel drains their foreign exchange reserves, which are scarce for many. On average, about 60% of the debt of sub-Saharan countries is denominated in foreign currencies. Mozambique’s foreign currency borrowing amounts to 113% of GDP. There and in Angola, Rwanda and Zambia, every 10% drop in their currency increases the debt-to-GDP six to 11 points, according to Capital Economics, a consulting firm.
These problems stem from a stubborn fact. Debt-financed spending by African governments has not generated enough economic growth, tax revenue, or export earnings to comfortably service the debt. The pandemic is largely to blame, but a lot of spending has been ineffective. In Ghana, for example, it spikes in election years and a lot goes to salaries and handouts.
Few remedies appeal. Egypt, Ghana and Tunisia may need IMF bailouts. These are unpopular, especially in Ghana, where the government has staked its reputation on good financial management.
Governments could try to restructure their debts. When Africa’s cost of debt was previously so high, rich countries agreed to large write-offs. Last year the g20, a group of major economies, has set up the Common Framework to help countries at risk of default. In theory, the scheme forces private creditors to suffer the same blow as public lenders, which may explain why they want nothing to do with it. The result is stasis. Only Chad, Ethiopia and Zambia applied, and none made it past the talks. Ethiopia had their credit rating reduced after applying, which made it difficult for others to try.
Some hope to solve their problems without outside help. It will be painful. To stabilize its debt, Ghana must find savings or taxes to the tune of 6% of GDP, estimates Capital Economics. Ghana promised to cut discretionary spending by almost a third and ignored street protests to impose a tax on electronic payments. The cedi, the local currency, has fallen by around a fifth against the dollar this year. In an attempt to stem the slide, the central bank recently raised interest rates by 2.5 percentage points to 17%, its biggest jump on record. Most Sub-Saharan African Countries Need to Cut Spending or Raise Taxes to Avoid Debt Problems, Says IMF.
Many governments prefer to bet on economic growth and debt-fueled spending that they hope will boost it. Yet if that doesn’t work, the fallout will be brutal. Ask the Sri Lankans. ■
This article appeared in the Middle East and Africa section of the print edition under the headline “Debt and Denial”