The Debt Challenge to African Growth

IMF Blog, May 23, 2018

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At the end of 2017, average public debt in the region was 57% of its GDP, an increase of 20 percentage points in just five years.
The current spike in public debt is concerning even though it remains well below the peaks of the early 2000s.
Six of the region’s 35 low-income countries (LICs) are in “debt distress,” meaning they are unable to service external commitments.
A further nine LICs are classified as being at “high risk of debt distress.”
Eight of the region’s fifteen debt-troubled LICs are commodity exporters.

Government borrowing to finance public investments has been essential to improving human development outcomes.
Between 1990 and 2015:
- average life expectancy increased,
- infant mortality rates were halved,
- secondary school enrollment soared,
- infrastructure gaps narrowed.
Rising public debt implies higher interest costs that divert resources from education, health care, and infrastructure.

Commodity price shock: the 2014-2016 slump in commodity prices hit commodity exporters, particularly oil exporters, hard.
Insufficient revenue mobilization: many countries that borrowed to finance development and infrastructure failed to generate sufficient additional tax revenues to repay that debt.
Migration of liabilities and exchange-rate depreciation: portions of the debt build-up stem from shocks in the migration of liabilities (such as losses by state-owned enterprises) to the public-sector balance sheet and exchange-rate depreciations.
Governance weaknesses: in a handful of countries, poor governance contributed to unsustainable debt practices.

Stick to medium-term fiscal-consolidation and reform plans to stabilize or decrease debt levels.
For resource-intensive countries (especially the region’s eight oil exporters):
- Enact fiscal consolidation plans without delay.
- Pursue economic diversification, leveraging the recent recovery in commodity prices.
For much of the rest of the region:
- Pursue steady increases in tax revenues.
- There is potential to raise revenue by 3-5 percentage points of GDP over the next few years by broadening the tax base, streamlining exemptions, and strengthening the administration of value-added tax.
Strengthen debt transparency and management:
- Account for off-balance-sheet risks,
- Improve debt-management capacity,
- Enhance data coverage of debt and debt exposure.
Improve prospects for private investment to enable a transition from public to private investment:
- Strengthen regulatory and insolvency frameworks,
- Increase intra-African trade,
- Deepen access to credit.

Sub-Saharan Africa’s public-debt burden has not yet hindered investment demand; foreign financial flows to Africa are higher as a measure of GDP than those to emerging markets and come from a broader range of sources.
Frontier economies have issued record levels of sovereign bonds, and bilateral creditors, like China, continue to invest heavily.
Capital flows are fickle; failure to tackle public-debt vulnerabilities could prevent the region from taking full advantage of the current global economic upswing and constrain prospects for sustainable and inclusive growth.

Abebe Aemro Selassie, Director of the African Department at the International Monetary Fund.