Lagos, Nigeria

Africa’s fiscal state of play

Africa’s fiscal state of play

A strong fiscal position is necessary to achieve strong economic growth, build resilience to shocks, and liberate Africa from its current pickle. Many African countries are still dealing with post-pandemic financial stressors—high borrowing costs and re-financing risks—and middling politics. This is consistent with the broad emerging market trend of rising public debt burden, rising much faster than in advanced economies. Debt restructurings in the region are taking too long, and global financiers are under pressure to fix it.

On a quest for new finance

According to the World Bank’s Debt Sustainability Analysis (December 2023), nine African countries were already in debt distress, i.e. they are not able to meet their repayment requirements, while 14 other African countries were at high risk of debt distress. Some of these distressed countries are currently seeking debt relief, while others are considering swapping debt for climate finance or green investments.

Ghana’s efforts to resolve its sovereign debt default recently suffered hiccups. The International Monetary Fund (IMF) rejected its proposed restructuring deal with holders of US$13 billion of international bonds because it did not reduce the country’s debt to sustainable levels. Foreign investors hold 40% of these Eurobonds. 

Cape Verde, on the other hand, reached a debt-for-climate action deal with Portugal last year for the latter to write off an initial US$13 million owed by its former colony. The money saved will be invested in energy transition and the fight against climate change. If all goes well, the entire US$151 million (about 6% of GDP) that Cape Verde owes to Portugal will be committed to the same course.

The 800-pound gorilla

China is key to finding a solution to Africa’s debt distress. Over the past decade, China has been a major capital source for many of the region’s countries. This move has helped deepen its influence in Africa but has also complicated the landscape for debt restructuring. China needs to commit to shouldering a fair share of debt restructuring by agreeing to take some losses on loans that some countries cannot repay. So far, China has not shown enough indication that it is willing to play ball in negotiations, leaving countries like Zambia, Ghana, and Ethiopia in economic limbo.

In Zambia, tensions with China – the country’s single biggest lender – and other creditors, resulted in a stalemate for more than three years. Ghana owes less than a tenth of its foreign debt to China, so it has not recorded as much pushback from China. However, its array of creditor groups has made its debt restructuring complex.

Life and debt

Debt defaults have deep and long-lasting human, economic, and political consequences that make it a tough choice for African governments, even under extreme fiscal pressure. Stuck between a rock and a hard place, many of the region’s governments have tightened their belts on critical spending in the face of limited financing options. 

Even though more than half of Africa’s countries are either in default or at a high risk of debt distress, only a few have stopped servicing their debt obligations. To keep investors happy, governments have had to make a tough choice between spending their limited revenues on critical capital expenditures like education and health or servicing their debt obligations. 

In the years leading to its Eurobond default in 2020, Zambia’s debt-service obligation had more than doubled from 2015 while the government had cut public spending by 20%. Kenya also shared the same fate as its debt-service cost had tripled over the same period while its development spending was halved. 

The boot is on the other foot

Improving global financial conditions in the near term could see Africa gradually rise from the ashes. As the region’s debt crises continue to brew, Benin, Côte d’Ivoire, and Kenya have raised a total of US$4.85 billion from the international debt market in largely oversubscribed auctions earlier in the year. This signals strong investor appetite for the region’s debt instruments despite its myriad of macro-fiscal challenges.

Both Côte d’Ivoire and the debutant—Benin—were able to close their bids at single-digit rates of 8.5% and 8.4%, respectively. Benin’s inaugural dollar-denominated bond offering exceeded expectations with US$5 billion in demand, oversubscribing the offering by more than six times. Kenya, on the other hand, will be paying a premium (10.4%) for its new seven-year paper—a reflection of its current fiscal pickle. Kenya spends 60% of its tax revenue to service its debt.

Pace is the trick

Fiscal adjustments need to be implemented at a steady pace that balances economic exigencies. As the austerity vs growth debate lingers, African governments need to find the sweet spot that is good for growth and financing. There is no workaround for prudence, but there can be no sustainable fiscal adjustment without economic growth.

There can be no sustainable growth without enabling policies, and the current path to sustainable growth requires African governments to signal fiscal rectitude through a combination of both spending cuts and increased revenue – either through raising taxes, plugging the leaks, or both. Likewise, growth-enhancing policies need to be promulgated as they will ultimately make the difference between successful and failed fiscal consolidation.



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