Tipping point: Finding long term solutions to Africa’s latest debt crisis

By Jacques du Preez

Analysis in brief: Africa has a long standing history of debt, the causes of which can be traced back to its pre-independence years. Although the onset of the global covid-19 pandemic has sent many African governments’ debt situations into a state of freefall, this crisis has been long in the making. The run-up to what is to become Africa’s present day debt plight began not long after the general African debt forgiveness of 2001 and is now recognised as a global economic issue. It has become clear that African economies need more than simply having their debts written off. The paper analyses how this unsustainable debt laid came to be and how the continent can navigate its own way out of the quagmire whilst still meeting its developmental objectives.

The Covid-19 pandemic is one of the largest crises to grip Africa in recent history, not merely in terms of mortality but in long lasting economic terms. Restrictions imposed by many African governments to contain the pandemic have hurt the continent’s already fragile economies more than the pandemic itself. Slumps in demand for vital commodities like oil have particularly left a sharp pinch in revenues, as the strain of government debts, which already stood at an unsustainable US$500 billion at the start of this year, threaten to plunge many African nations into bankruptcy. Unlike the last crisis of the late 1990’s which saw many African countries have all or most of their debts forgiven by their debtors, Africa cannot rely on the hope that its broad array of current creditors may collectively decide to grant blanket debt forgiveness. The continent therefore needs more than simply having its debt written off; African nations need to enhance their ability to foster local credit markets and improve the local legislative environment, in addition to changing their spending culture. Understanding the main drivers of economic indebtedness is also key to promoting the necessary political and fiscal reforms required to achieve sustainable growth. The run-up to what is to become Africa’s present day debt crisis began not long after the general African debt forgiveness of 2001 and was marked by three key events: 1) the uptake of a Eurobond debt market, 2) the influx of cheap and opaque Chinese credit, and 3) the commodity demand shocks in 2015 and currently in 2020.

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Contextualising Africa’s current debt crisis

As the millennium dawned and developments in the Far East drove commodity prices up, many newly-elected African governments found their revenues rising and local growth rates soaring in unprecedented ways. From this and other newly implemented financial reforms sprang the African Eurobond market through which African countries could borrow funds in international financial markets to finance their budgets and infrastructure investment plans, in lieu of foreign assistance and loans. This rush of borrowing has however not been cheap for many African economies in the face of diminishing revenues and commodity price declines. In the 2010s, Africa’s appetite for external debt was reignited by the heightened presence of Chinese injection in some of the continent’s largest development projects ever undertaken. This decade saw China begin to act on the continent’s multiple projects, one of which was the construction of the Belt and Road Initiative, an ambitious infrastructure project to link European retail centres and Chinese manufacturing hubs to African extractive industries in a seamless transportation network. Chinese state owned enterprises (SOEs) ventured across the African continent, offering financial support to vast portfolios of infrastructure investments at discounted rates which their Western competitors couldn’t hope to match. Yet, this came at a hidden cost. An unknown (though large) proportion of these credit offerings were reportedly done ad hoc, often arranged between Chinese SOE’s and local state companies without going through government channels. These credits were thus not registered with international bodies, meaning that foreign investment and even local governments were often in the dark as to how much was owed at any given time..

While the headwinds of strong commodity prices at the start of the 2010s made such risky debt policies feasible, the most recent commodity price shocks have entirely reversed the fundamentals that made such accumulation possible. Between June 2014 and January 2016, the S&P GSCI commodities index experienced a 57% decline as prices for key commodities, from industrial metals to crude oil, tumbled. The first visible cracks in African countries’ fiscus soon followed, with Mozambique declaring bankruptcy in early 2017. The following years saw major African economies like Algeria, Angola, Ghana, Kenya and Tanzania announce political reforms aimed at curbing corruption and bringing their dangerous debt loads under control. Africa’s precarious debt situation is best epitomized by the case of Zambia; highly dependent on copper exports, the country was able to leverage strong commodities growth until the mid 2010’s when a collapse in copper price resulted in a deepening budget deficit. By early 2020, Zambia’s foreign debt stood at US$11.7 billion, of which at least US$3 billion is owed to China. Incapable of repaying this debt and lacking few other options, the Zambian government has resorted to hiking mining royalties and making strong overtures towards nationalization, which would potentially drive investors further away and exacerbate the existing crisis. Should Zambia default, the resulting investor panic could ensure that critically vulnerable states like Angola, the Congo and Chad could well follow.

How Africa can flatten its current debt curve

Analysts have tentatively spoken of 2024/2025 as the crisis peak for Africa as this is when a sizeable chunk of the continent’s Eurobond debt is due. Although the global Covid slowdown has now moved that date forward, the next few months will be instrumental in finding a feasible response to the long awaited crisis. Action plans to tackle this crisis will need to incorporate key two objectives. Firstly, they must address the immediate concern of overspending, and secondly (also most importantly) they must change countries’ relationships to debt, from unsustainable and cyclical miscalculations to well-managed tools for diversified economic growth. In previous eras such prescriptions in the African context could be dismissed as mere fantasy, but the last two years have shown a pronounced outpouring of political will towards fiscal and economic reform, with macroeconomic stability and tighter spending at the forefront. Consider East Africa where both Kenya and Tanzania announced at the East African Community budget presentation in January 2020 that they would “cut their cloth to fit their size” and cut their spending to bring their debt under control. Nearby Ethiopia has similarly embarked on a political and economic reform plan since 2019 through which the country seeks to refine its budget and achieve the status of a diverse industrialized middle income economy by 2030. Further afield, Joao Lourenco’s government in Angola has embarked on a protracted legal campaign against the corrupt members of the former administration and promised to break up the monopolisation of SOEs in order to tackle the issue of overspending and economic diversification at the source.

The main concern with these strategies remains the impact of budget tightening on the continent’s long term development and the proliferation of domestic arrears. As it stands, African countries still fall vastly short in delivering on their mandate to ensure economic freedom for their citizens, and despite boasting some of the strongest growth rates in the world, most still fail to provide the requisite infrastructure and social support for the average African to attain economic mobility. Therefore, in order to compress their current debts, African nations will need to not only secure cheaper and sustainable credit from local creditors, but to be allowed enough time to recover. This means indebted African countries will need comprehensive debt suspension that allow them to repay their debts over a longer period and at lower rates. Moreover, although debt cancelation is currently not on the table, many African countries may require this at a later stage.

The way out: A roadmap to Africa’s debt-free fiscal future

In the current economic atmosphere, ensuring a debt-free Africa may seem unattainable. There are however a few paths that can lead to a better fiscal future for the continent, and improving the business climate, the local credit market, and the perception of risk in African countries is instrumental. The expansion of local credit markets is something that Africa has sorely undermined for years. A chronic shortage of reliable information and a prevailing attitude towards Africa as an inherently risk prone region, have forced both local and foreign creditors to be hesitant when purchasing local bonds, especially in the absence of incentives of higher yields in foreign denominated currencies as an added safeguard. Yet, the presence of a deep domestic credit market could ensure that indebted countries are able to stave off bankruptcy, where higher economic yields create higher savings which in turn allow local lending institutions to offer more credit. The larger the local pool of assets under management, the more local governments can borrow from institutional investors in their own local currencies.

Historically, the lack of formal financial infrastructure has made participation in financial markets impossible for most African countries, limiting the extent to which local credit markets could grow. Policies geared towards the financialization of local economies and the utilisation of the burgeoning African bonds towards local infrastructure development would go a long way to wean African governments’ dependence off foreign credit. Insofar as overseas credit are used, African countries will need to ensure that this is done is a way that maximizes cost effectiveness.

In addition to the above, the expansion of fintech and digital transformation in financial services present an unpreceded opportunity for African economies to stretch their local credit markets and enhance their overall presence in the global financial sector. Before the Covid pandemic, the uptake of fintech and digital finance was growing faster in Africa than anywhere else in the world, driven mainly by the spread of mobile phones and the internet which allowed financial service providers to leapfrog the need for brick and mortar infrastructure to scale their services. A growing number of financial institutions across Africa are now offering everything banking-related, from small scale daily credit to enterprise finance, through entirely digitised platforms. Besides growing the potential for capturing Africa’s informal sector, fintech and digital banking are benefiting African governments in their efforts to expand the possible tax pool which will be indispensable to reducing budget shortfalls in the long run. These advances will further assist in addressing the chronic problem of lack of information on local financial markets which has long obviated foreign investors’ interest and made it difficult for governments to make accurate decisions on capital allocations.

These factors indicate that there is hope that, with carefully planned strategies, the continent can successfully flatten its debt curve and pave a way to a better financial prospect. Although the current debt crisis has unveiled the precarious economic situation in many African countries, it has also demonstrated the value of developing a strong local financial market that is able to provide sound and affordable funding structures that promote long-term sustainable growth. Since calls for debt relief currently carry no promise of forgiveness or cancelation, the situation will propel African governments to make positive moves in fiscal responsibility that will unlock robust macroeconomic fundamentals. The on-going political and economic reforms across a vast swathe of local countries thus offer the hope that African economies will be able to rise above their current budgetary constraints and chart local sustainable and diversified financial paths to fund their developmental goals.

Key Points:

  • The events leading to what is to become Africa’s present day debt crisis began not long after the general African debt forgiveness of 2001, and were marked, among other things, by the uptake of a Eurobond debt market, the influx of cheap and opaque Chinese credit, and recurrent commodity demand shocks.
  • Although ensuring a debt-free Africa seems unattainable in the foreseeable future, efforts need to be geared toward this objective in the coming years. The continent will need to start by addressing the immediate concern of overspending and change its relationship to debt from unsustainable and cyclical miscalculations to well-managed tools for diversified economic growth.
  • Solutions to the current debt crisis may not bring a definite end to Africa’s indebtedness but will serve to reorient decisions towards cheaper and more sustainable lines of credit.
  • Policies geared towards the financialization of local economies and the utilisation of the burgeoning African bond market should be prioritised to wean off Africa’s dependence on foreign credit.
  • The uptake of digital technologies will be key in helping grow local financial markets while removing information asymmetries which have precluded foreign investors’ interest and complicated governments’ efforts to make accurate decisions on capital allocations.

The views expressed are the opinion of the author and do not necessarily reflect the position of In On Africa.