## Breaking the Trend: Debt Stabilization in Sub-Saharan Africa (Section 1) ## Source details **Canonical URL:** [Breaking the Trend: Debt Stabilization in Sub-Saharan Africa (Section 1)](https://www.imf.org/-/media/files/publications/imf-notes/2025/english/insea2025001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/imf-notes/2025/english/insea2025001.pdf.md) - [Structured JSON version](/-/media/files/publications/imf-notes/2025/english/insea2025001.pdf.json) --- ### Key findings - Stabilizing debt across sub-Saharan Africa is still achievable in most cases, even though debt levels are elevated and vulnerabilities are high. - Countries in the region have often consolidated (stabilized or reduced) their debt ratios without debt restructuring; many countries did so recently, including after the end of the commodity super cycle. - Successful debt stabilization requires measures to strengthen public finances and a sound macroeconomic environment, strong institutions, and pro-growth structural reforms. - Baseline projections imply continued regional debt stabilization—and even some reduction—assuming recent efforts to consolidate budgets are maintained and in some cases intensified. - Interest payments and overall debt service as a share of revenues are high. The median interest-to-revenue ratio climbed to over 12 percent in 2024 and is expected to remain elevated. ### Frequency, magnitude, and persistence of debt reduction episodes - There have been more than 60 instances of public debt reduction in sub-Saharan Africa over the past 25 years; the probability that a country will experience such an episode in any given year is one in four. - The reduction in many cases proved economically significant and persistent: - A majority of episodes involved a decrease of more than 10 percentage points of GDP. - The median duration of an episode was three years. - The median decline in the debt ratio was 12 percentage points. - 40 percent of episodes lasted four or more years. - Examples of country experiences: - Botswana: continuous decrease in the debt ratio over 2012–17. - Cabo Verde: debt ratio decreased by more than 30 percentage points of GDP over 2021–23 (estimated to have decreased further in 2024). - Democratic Republic of the Congo: debt ratio fell by 15 percentage points during 2010–23. - Gambia: debt ratio fell by 10 percentage points since 2017. - Guinea: debt ratio fell by 6 percentage points during 2015–19. - Togo: debt ratio fell by 5 percentage points during 2016–19. ### Proximate drivers and decomposition results - Sustained debt reduction typically reflects both budgetary consolidation (increase in primary balances) and real growth. - Observations during debt reduction episodes: - The pace at which the primary balance increases rarely exceeds 2 percentage points of GDP per year—consistent with a “speed limit” to the pace of sustainable budgetary consolidation. - End of episodes is typically characterized by negative shocks to growth (a 3½ percentage points decrease on average). - Differences by country type: - In fragile and conflict-affected states, and in many low-income countries, growth is the predominant driver of successful debt reductions, reflecting limited revenue-raising capacity and larger primary deficits. - On average during debt reduction episodes, low-income countries in sub-Saharan Africa ran a primary deficit of 0.4 percent of GDP, compared to a primary surplus of 3 percent of GDP in middle-income countries of the region. - Stock-flow adjustments (SFA) and institutional quality: - SFAs capture below-the-line fiscal-financial operations (support to state-owned enterprises, recapitalization of public banks), off-budget activities, and clearance of arrears. - SFAs often undermine debt reduction. - SFAs tend to be smaller and debt consolidation episodes larger in countries with higher institutional quality. - Improving institutional quality from the 25th to the 75th regional percentile is associated with a reduction in stock-flow adjustments of 1.2 percentage points of GDP. ### Inflation, exchange rates, and debt dynamics - Inflation mechanically erodes the real value of debt, but the consequent exchange rate depreciations and higher interest payments offset much of this effect. - Across all debt reduction episodes, higher inflation is associated with a lower total reduction in debt. - Depreciations especially affect public debt dynamics given the region’s large share of foreign currency–denominated debt (more than one-half of total public debt on average). - Elevated, entrenched inflation is particularly likely to harm prospects for debt reduction because it raises interest rates and risk premiums—especially in countries reliant on non-concessional debt. - Attempts to inflate away debt are limited by the region’s reliance on foreign currency–denominated and short-term debt. - Maintaining an overvalued exchange rate can lower growth, increase future inflation, and hamper debt reduction (example: Nigeria’s elevated inflation in 2020–22 contributed to eventual large depreciation, more inflation, higher borrowing costs, and rising public debt ratios). ### Role of domestic and external environments - Debt reduction is relatively more likely, more economically significant, or more persistent if: - The country has a solid domestic institutional framework and a supportive domestic business environment. - Global growth is buoyant and global financial conditions are favorable (including low borrowing costs). - A favorable investment climate and solid institutions support sustained budgetary consolidation, rapid growth, a stable macroeconomic environment, and limited SFAs. - Debt reduction is more likely when an IMF-supported arrangement is present, indicating the importance of international support. - Quantitatively, enhancements to the domestic environment (for example, improving business climate and institutional quality from the lower regional quartile to the upper) could offset even a large deterioration in the external environment (for example, a 1 percentage point reduction in global growth and a 200 basis points increase in regional bond spreads). - 48 percent of debt reduction episodes started when global demand was below average, indicating debt reduction can occur in less favorable global conditions. ### Policy implications and recommendations - Fiscal adjustment is more likely to produce stronger, durable reductions in debt when complemented by: - Pro-growth structural reforms. - Measures to strengthen institutional frameworks. - Specific policy priorities: - Implement well-designed fiscal rules to ensure below-the-line and off-budget fiscal operations do not undermine debt reduction. - Build fiscal buffers and reduce debt during good times to allow for more gradual adjustment if shocks occur. - Improve fiscal transparency and debt disclosure, and strengthen accountability mechanisms with international support. - Improve debt liability management to reduce the cost of debt servicing. - Accompany adjustment efforts with well-designed public consultation and communication strategies focused on consistent delivery to build broad-based acceptance and ownership of fiscal strategies. - Macroeconomic stability priorities: - Maintain low and stable inflation. - Avoid financial repression and overvalued exchange rates that hamper growth and debt reduction. - Prioritize establishing a sound macroeconomic environment to support debt consolidation. - Recognize constraints: - The share of firms that are credit-constrained in sub-Saharan Africa is almost one-half—the highest among regions—limiting private-sector–led growth and requiring policy attention. ### Notes on figures, definitions, and interpretive guidance (Section 2) - Visual presentation: - The blue shading reflects the probability density of different parameter values, and the lines represent the range of most likely values, with credible intervals at the 50th and 75th percentile. - Key definitions: - “Persistent fiscal consolidation” denotes a budgetary consolidation in both the current year, and at least one of the previous three years. - “IMF program” denotes the presence of an IMF financing arrangement. - “EMBIG spreads” denote the difference between the yield on emerging market bonds, as measured by the J.P. Morgan Emerging Markets Bond Index Global, and on US Treasury bonds. - “Global demand” is proxied by the GDP growth rate of the G7 economies and China. - Abbreviations and units: bps = basis points; EMBIG = J.P. Morgan Emerging Markets Bond; pp = percentage point. - Findings and interpretive guidance: - The chapter uses probability density shading and credible-interval lines (50th and 75th percentile) to convey parameter uncertainty. - Definitions clarify empirical regressors and controls used in analysis, specifically indicators for fiscal consolidation history, IMF program participation, external financing conditions (EMBIG spreads), and global demand proxied by G7+China GDP growth. - Policy recommendations and regional guidance: - Countries aiming at sustainable debt reductions should seize the opportunity to improve the efficiency of taxation and spending. - Focus areas: strengthening balances in a growth-friendly manner by broadening the tax base, removing inefficient tax exemptions, and improving expenditure quality (October 2024 Fiscal Monitor). - Support from the international community, including through concessional financing, is critical to helping the region succeed in reducing debt levels while mitigating adverse social effects. - Most countries—especially fragile states and low-income countries—face difficult trade-offs between short-term macroeconomic stabilization, longer-term development needs, and ensuring the social acceptability of reforms. - External support can make these difficult trade-offs less daunting—for example, allowing for more gradual fiscal adjustments, which are more likely to prove economically and socially sustainable. *Breaking the Trend: Debt Stabilization in Sub-Saharan Africa • APRIL 2025 • INTERNATIONAL MONETARY FUND* ### Section 1 ### Breaking the Trend: Debt Stabilization in Sub-Saharan Africa (Section 1) ### Key findings - Historical experience suggests stabilizing debt across sub-Saharan Africa is still achievable in most cases, even though debt levels are elevated and vulnerabilities are high. - Countries in the region have often consolidated (stabilized or reduced) their debt ratios without debt restructuring; many countries did so recently, including after the end of the commodity super cycle. - Successful debt stabilization requires measures to strengthen public finances and a sound macroeconomic environment, strong institutions, and pro-growth structural reforms. - Baseline projections imply continued regional debt stabilization—and even some reduction—assuming recent efforts to consolidate budgets are maintained and in some cases intensified. - Interest payments and overall debt service as a share of revenues are high. The median interest-to-revenue ratio climbed to over 12 percent in 2024 and is expected to remain elevated. ### Frequency, magnitude, and persistence of debt reduction episodes - There have been more than 60 instances of public debt reduction in sub-Saharan Africa over the past 25 years; the probability that a country will experience such an episode in any given year is one in four. - The reduction in many cases proved economically significant and persistent: - A majority of episodes involved a decrease of more than 10 percentage points of GDP. - The median duration of an episode was three years. - The median decline in the debt ratio was 12 percentage points. - 40 percent of episodes lasted four or more years. - Examples: - Botswana: continuous decrease in the debt ratio over 2012–17. - Cabo Verde: debt ratio decreased by more than 30 percentage points of GDP over 2021–23 (estimated to have decreased further in 2024). - Democratic Republic of the Congo: debt ratio fell by 15 percentage points during 2010–23. - Gambia: debt ratio fell by 10 percentage points since 2017. - Guinea: debt ratio fell by 6 percentage points during 2015–19. - Togo: debt ratio fell by 5 percentage points during 2016–19. ### Proximate drivers and decomposition results - Sustained debt reduction typically reflects both budgetary consolidation (increase in primary balances) and real growth. - During debt reduction episodes: - The pace at which the primary balance increases rarely exceeds 2 percentage points of GDP per year—consistent with a “speed limit” to the pace of sustainable budgetary consolidation. - End of episodes is typically characterized by negative shocks to growth (a 3½ percentage points decrease on average). - In fragile and conflict-affected states, and in many low-income countries, growth is the predominant driver of successful debt reductions, reflecting limited revenue-raising capacity and larger primary deficits: - On average during debt reduction episodes, low-income countries in sub-Saharan Africa ran a primary deficit of 0.4 percent of GDP, compared to a primary surplus of 3 percent of GDP in middle-income countries of the region. - Stock-flow adjustments (SFA) often undermine debt reduction. SFAs capture below-the-line fiscal-financial operations (support to state-owned enterprises, recapitalization of public banks), off-budget activities, and clearance of arrears. - SFAs tend to be smaller and debt consolidation episodes larger in countries with higher institutional quality. - Improving institutional quality from the 25th to the 75th regional percentile is associated with a reduction in stock-flow adjustments of 1.2 percentage points of GDP. ### Inflation, exchange rates, and debt dynamics - Inflation mechanically erodes the real value of debt, but the consequent exchange rate depreciations and higher interest payments offset much of this effect. - Across all debt reduction episodes, higher inflation is associated with a lower total reduction in debt. - Depreciations especially affect public debt dynamics given the region’s large share of foreign currency–denominated debt (more than one-half of total public debt on average). - Elevated, entrenched inflation is particularly likely to harm prospects for debt reduction because it raises interest rates and risk premiums—especially in countries reliant on non-concessional debt. - Attempts to inflate away debt are limited by the region’s reliance on foreign currency–denominated and short-term debt. - Maintaining an overvalued exchange rate can lower growth, increase future inflation, and hamper debt reduction (example: Nigeria’s elevated inflation in 2020–22 contributed to eventual large depreciation, more inflation, higher borrowing costs, and rising public debt ratios). ### Role of domestic and external environments - Debt reduction is relatively more likely, more economically significant, or more persistent if: - The country has a solid domestic institutional framework and a supportive domestic business environment. - Global growth is buoyant and global financial conditions are favorable (including low borrowing costs). - A favorable investment climate and solid institutions support sustained budgetary consolidation, rapid growth, a stable macroeconomic environment, and limited SFAs. - Debt reduction is more likely when an IMF-supported arrangement is present, indicating the importance of international support. - Quantitatively, enhancements to the domestic environment (for example, improving business climate and institutional quality from the lower regional quartile to the upper) could offset even a large deterioration in the external environment (for example, a 1 percentage point reduction in global growth and a 200 basis points increase in regional bond spreads). - 48 percent of debt reduction episodes started when global demand was below average, indicating debt reduction can occur in less favorable global conditions. ### Policy implications and recommendations - Fiscal adjustment is more likely to produce stronger, durable reductions in debt when complemented by: - Pro-growth structural reforms. - Measures to strengthen institutional frameworks. - Specific policy priorities: - Implement well-designed fiscal rules to ensure below-the-line and off-budget fiscal operations do not undermine debt reduction. - Build fiscal buffers and reduce debt during good times to allow for more gradual adjustment if shocks occur. - Improve fiscal transparency and debt disclosure, and strengthen accountability mechanisms with international support. - Improve debt liability management to reduce the cost of debt servicing. - Accompany adjustment efforts with well-designed public consultation and communication strategies focused on consistent delivery to build broad-based acceptance and ownership of fiscal strategies. - Macroeconomic stability is essential: - Maintain low and stable inflation. - Avoid financial repression and overvalued exchange rates that hamper growth and debt reduction. - Prioritize establishing a sound macroeconomic environment to support debt consolidation. - Recognize constraints: - The share of firms that are credit-constrained in sub-Saharan Africa is almost one-half—the highest among regions—limiting private-sector–led growth and requiring policy attention. *Prepared by Athene Laws, Thibault Lemaire, Rachid Pafadnam, Nikola Spatafora, and Khushboo Khandelwal. International Monetary Fund, April 2025.* ### Section 2 ### insea2025001 - Section 2 ### Notes on Figures and Key Definitions - The blue shading reflects the probability density of different parameter values, and the lines represent the range of most likely values, with credible intervals at the 50th and 75th percentile. - “Persistent fiscal consolidation” denotes a budgetary consolidation in both the current year, and at least one of the previous three years. - “IMF program” denotes the presence of an IMF financing arrangement. - “EMBIG spreads” denote the difference between the yield on emerging market bonds, as measured by the J.P. Morgan Emerging Markets Bond Index Global, and on US Treasury bonds. - “Global demand” is proxied by the GDP growth rate of the G7 economies and China. - Abbreviations and units: bps = basis points; EMBIG = J.P. Morgan Emerging Markets Bond; pp = percentage point. ### Findings and Interpretive Guidance - Visual probabilistic presentation: The chapter uses probability density shading and credible-interval lines (50th and 75th percentile) to convey parameter uncertainty. - Definitions clarify empirical regressors and controls used in analysis, specifically indicators for fiscal consolidation history, IMF program participation, external financing conditions (EMBIG spreads), and global demand proxied by G7+China GDP growth. ### Policy Recommendations and Regional Guidance - Countries aiming at sustainable debt reductions should seize the opportunity to improve the efficiency of taxation and spending. - Focus areas: strengthening balances in a growth-friendly manner by broadening the tax base, removing inefficient tax exemptions, and improving expenditure quality (October 2024 Fiscal Monitor). - Support from the international community, including through concessional financing, is critical to helping the region succeed in reducing debt levels while mitigating adverse social effects. - Most countries—especially fragile states and low-income countries—face difficult trade-offs between short-term macroeconomic stabilization, longer-term development needs, and ensuring the social acceptability of reforms. - The challenge is to ensure that rapid fiscal consolidation does not jeopardize progress on securing growth and meeting critical development needs, and does not unsettle the social and political equilibrium. - External support can make these difficult trade-offs less daunting—for example, allowing for more gradual fiscal adjustments, which are more likely to prove economically and socially sustainable. *Breaking the Trend: Debt Stabilization in Sub-Saharan Africa • APRIL 2025 • INTERNATIONAL MONETARY FUND* --- _Source: https://www.imf.org/-/media/files/publications/imf-notes/2025/english/insea2025001.pdf_