By Wole Oyebade

The racked-up debt burden is stifling African economies and mortgaging prospects of a brighter future. Worst is the poor handling of its debt distress and negotiation in the face of skewed global financing architecture. But if the countries must turn the corner, new strategies recently agreed by the Debt Management Forum for Africa (DeMFA) can no longer be an afterthought, the writer reports.

‘Those who go a-borrowing, go a-sorrowing’ is a traditional cliché that has diminished in contemporary relevance. Today, not borrowing for infrastructure investment or development guarantees fiscal sorrow in an increasing world of imperative economic interdependence. Modern economists are unanimous that it is not borrowing that is the problem, but for what purpose, and sundry terms and conditions. Globally, countries routinely draw from local and multilateral institutions for various reasons. To fund high-value infrastructure for economic growth and high return on investment that defrays their debt at maturity. Such sound borrowing plans are channelled at long-term investments of over 10 to 15 years with economic impacts, backed by active liquidity management plans to pay back the debt. Paying back debts also helps to develop a strong investment grade to attract future loans at very competitive and concessional terms and deepen the domestic debt market to create stability in the country’s debt portfolio. On the contrary, several African countries have been contracting loans allegedly channelled to the wrong investments in the mode of vanity projects, consumption purposes and building roads that lead to nowhere. Besides the faulty methods, they mainly attract high-interest short-term loans for long-term investments. The implication is that the debt burden in Africa has surged to 170 per cent in the post-COVID-19 era, compared to 2010 figures, weighing on public financing, infrastructure and the Gross Domestic Product (GDP). African Ministers of Finance, at a recent launch of the Debt Management Forum for Africa (DeMFA) and Inaugural Policy Dialogue on ‘Making Debt Work for Africa: Policies, Practices and Options’ in Abuja, reckoned that several African countries, more than before or seen in other parts of the world, are in debt distress and need of urgent strategic interventions. The gathering, organised by the African Development Bank Group (AfDB), was unanimous that besides the need for a review of the skewed global financing architecture, there is a lot more African countries could do in terms of plugging leakages, leveraging domestic markets and maximising natural resources to avail critical finances for socioeconomic development.

A stifling debt bubble Indeed, there is a tendency for African governments to focus more on debt servicing than improving the standard of living. The reason is that Africa’s public debt has surged by 170 per cent since 2010, reaching $1.15 trillion in 2023. Recall that most debts were contracted during a protracted period of low-interest rate regimes in the global market at the beginning of this century. The post-COVID-19 era spike in the cost of debt servicing and interests on new loans due to structural issues in the global debt architecture, recent global and domestic shocks, and weaknesses in Africa’s macroeconomic fundamentals. Vice President and Chief Economist, Economic Governance and Knowledge Management, AfDB, Prof. Kevin Urama, noted that Africa’s debt service costs have risen sharply, diverting resources from infrastructure investment, thus constraining future GDP growth and economic transformation. Specifically for 49 African countries, average debt service cost rose sharply from an average of 8.4 per cent of GDP in 2015–19 to 12.7 per cent in 2020–22.

According to the African Economic Outlook Report (AEO) 2024, African countries were estimated to have spent around $74 billion on debt service last year (up from $17 billion in 2010), of which $40 billion is owed to private creditors, representing 54 per cent of total debt service. Currently, 22 African countries are either in or at high risk of debt distress (compared to 13 in 2010). “Refinancing risks could further increase going forward, especially for countries with large bullet redemptions,” Urama warned. The Chief Economists said further that the implication is that while developed countries could sustain high levels of debt with low debt service burdens, developing countries in Africa, particularly the most vulnerable ones, are devoting an increasingly large proportion of their fiscal resources to servicing public debt, and worsening poverty rate. Amid the deepening debt challenges for countries, external financial flows to Africa have suffered from tightening global financial conditions and other domestic and external factors. “Foreign direct investment (FDI), official development assistance (ODA), portfolio investment and remittances—fell by 19.4 per cent in 2022, reversing a strong immediate post-pandemic recovery in external flows. This leads to what I call the paradox of debt and development financing in Africa,” Urama said. However, the market failures in the global financing and debt architecture are not entirely to blame for Africa’s fiscal and debt challenges. There are well-known domestic drivers of the cost of capital which countries need to address. According to estimates, Urama mentioned that corruption costs Africa $148 billion every year and about $90 billion leaves the continent yearly in the form of illicit financial flows. “In total, some estimates show that African countries lose above $1.6 billion daily in capital outflows due to the combined effects of the high-risk premiums, international profit shifting, illicit financial flows, corruption, etc. Measured annually, this could reach about $587 billion – more than three times the total external financial inflows to Africa yearly. Plugging these leakages is therefore critical to addressing domestic resource mobilisation and debt sustainability challenges in Africa,” Urama said. Director of Macroeconomic Policy, Forecasting and Research Department at the AfDB, Dr Anthony Simpasa, noted that the debt management initiative has become more critical for responding to persistent headwinds, building economic resilience and accelerating the continent’s development today. Simpasa noted that the debt-to-GDP ratio is already 60 per cent, with a public investment efficiency gap of 39 per cent. “That means that the funds (borrowings) are not well utilised. We are talking of $174 billion in debt servicing in 2024, far more than the continent spends on education, 13 per cent of gross revenue, unlike 9.9 per cent between 2015 and 2019. That money could have gone into infrastructure and investment in social needs’ cost. African countries borrow to pay or refinance existing debt instead of financing development.”

Not for lack of trying

African countries and their finance ministers are just as pained by the debt cul-de-sac. They also complained that the more they tried to ease the burden, the higher the hurdle imposed by their foreign creditors. Director-General of the Debt Management Office in Nigeria, Patience Oniha, complained about the role of the credit rating agencies and some unfair risk assessments of the African countries, which are less risky than other regions. At the panel on credit rating in Africa, Oniha noted that the discretionary modus operandi of the assessors often leaves their hosts hard done by. She recalled that Nigeria was in 2022 downgraded by one of the three credit rating agencies. “There was no review on their side. It was just based on our decision or announcement of bond exchange, which is just a risk management strategy and does not mean a default. And that was it. The discretionary element in their parameter is high, especially fueled by their distrust in our ability,” she said. Oniha added that feedback from the agencies’ findings is usually rapid “with less than 24 hours to respond, which is just not fair, and often never changing their positions”. Prof. Daniel Cash of Aston University in the UK observed that unfair ratings are not unique to African countries but had been with Europeans until they started getting their ratings done on the continent and by their regulations.

“You have to be pan-African in your approach. It is largely for Africans to support themselves in tackling this problem and not keep seeking help from outside,” Cash said.

DeMFA consensus

Apparently, in agreement, Urama said that enough African countries see credit rating agencies and foreign experts as gods. “What happens when a credit rating agency does not like a government? Is it just a question of bias? What of the intra-African biases among fellow African countries? We need to reduce biases among ourselves. “We have instruments that can help us on this continent, but do we use them? We keep running to creditors’ experts for advice, but they will always do so on their terms. “Similarly, negotiations from African countries can be very frustrating. One country went to Copenhagen with a large entourage, and in the middle of the negotiation, the officials were busy shopping. Later, they came to ask, ‘Prof., have they finished?’ The truth is that negotiating debt on behalf of a country is a very serious assignment, and officials should take them responsibly.”

Assistant Director, Debt Contraction, Ministry of Finance, Zambia, Patrick Mfungo, harped on the imperative of in-country legal framework on borrowing and transparency in the process. Mfungo noted that some creditors are not multilateral but often demand to be treated as such during negotiations. “It is therefore important to review and update legal frameworks to guide this process. In Zambia, we have included the National Assembly in what we do. We have enacted new laws that make it statutory to sanitise borrowing plans and reject those that are not of maximum interest. It is part of the legal requirement to publish the debt report and make it public,” he said.

Director of the African Development Institute of the AfDB, Dr Eric Ogunleye, added that from the shared experience on debt burden and management at the two-day forum, African countries are unanimous on the need for an urgent Debt Management Forum for Africa (DeMFA) that is focused on routine policy dialogue to find homegrown solutions in dealing with the common problem. Ogunleye noted that the AfDB is already offering support to African countries in the management of debts, including the creation of an African Credit Rating Agency, capacity development, technical assistance, and training for the countries. He noted that there was a discussion on the use of the African Legal Support Facility, which the AfDB has already created to help the countries renegotiate their loans fairly. “That is the facility they could fall back on to provide them with legal framework and support to help them through a fair process. We all only need to leverage on what we have within instead of running to our creditors for help,” he said. Overall, there was an emphasis on prudent management of resources, especially the need for African countries to be more self-reliant in growing what they consume, exploring endowments to meet their needs, and adding value to natural wealth to optimise gains that can finance and meet today’s needs. It is a truism that ‘tax is debt that the public pay today; while debt is the tax the public pay tomorrow’. Between the divide is the role of good fiscal discipline that not only maximises the abundant local resources to satisfy today’s appetites but also saves the country from the hassles of indebtedness and the pains of going a-sorrowing. In this article