Debt sustainability in Africa under the spotlight again

Africa has been a major focus of attention since the pandemic and, more particularly, Russia’s invasion of Ukraine. The twin shocks and their consequences – obstacles to the movement of people and goods, skyrocketing energy and food prices, plus monetary policy tightening – have revealed structural weaknesses of African economies, either by exacerbating them or manifesting them. In this respect, over-indebtedness and food insecurity – with their economic, political and social ramifications – are the chief hallmarks.

In 2020, during the first year of the Covid-19 pandemic, growth in the African economy receded on back of plummeting commodity prices and remittances, and the collapse of tourism in a number of countries. More generally, the unrelenting hindrances to external and internal mobility of persons and merchandise, on top of a disorganised international and domestic transport system, contributed largely to the recession.

On top of this were the effects of the war in Ukraine, which at times dovetailed with those of the pandemic, doubling the consequences. Cereal, oil and fertiliser supply glitches, along with spiking fuel product prices, harmed the financial situation of African states, especially amid global monetary tightening and US dollar appreciation. Commodity pressures also sparked inflation, which contributed widely to food insecurity, and sparked social and political unrest.

Fiscal and current account balances deteriorated as a result. These two problems harmed the continent’s major economies, which had previously been robust, and highlighted the weaknesses in their growth models. Their heavy dependence on imports (food, energy, intermediate products and equipment), their reliance on abundant and cheap financing, and their low fiscal revenues have greatly contributed to these difficulties.

The instances of debt or a higher risk of over-indebtedness have increased across the continent, which houses more than half the cases witnessed worldwide. Despite adopting the G20’s Common Framework for Debt Treatment (CF) in 2020, processing the continent’s debt is being complicated by the growing number of creditors at the negotiating table since 2000, notably the arrival of China, bond debt holders and global trade operators. In order to ease their foreign exchange risk, certain governments have sought to issue debt in their own currency, but the move has been counterbalanced by investors demanding higher yields to offset their own exchange rate risk.

These situations have forced governments to turn to the IMF and other multilateral bodies in the attempt to obtain – at best – funding at concessional terms and at times to restructure debt. In return for IMF assistance and the like, governments must implement harsher economic policies that harm growth, worsen the cost of living problem and at the same time limit imports. African citizens have sometimes responded to these economic setbacks by staging protests (often violently) and coups d’État, instigating rebellion and committing criminal acts.