## The Debt Challenge to African Growth

_IMF Blog, May 23, 2018_

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**Canonical URL:** [The Debt Challenge to African Growth](https://www.imf.org/en/blogs/articles/2018/05/23/vc052318-the-debt-challenge-to-african-growth)

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## Bibliographic details
- Authors: Abebe Aemro Selassie
- Published: May 23, 2018

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### Current debt situation and recent trends
- 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.

### Development context and trade-offs
- 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.

### Main drivers of the debt build-up
- 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.

### Policy priorities and recommendations
- 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.

### Financing environment and risks
- 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.*

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## References

- [could be jeopardized](https://www.imf.org/en/News/Articles/2018/05/08/pr18161-imf-sets-out-policy-steps-to-reduce-vulnerabilities-and-raise-sub-saharan-africa)
- [Regional Economic Outlook](https://www.imf.org/en/Publications/REO/SSA/Issues/2018/04/30/sreo0518)
- [economic diversification](https://www.imf.org/en/Publications/REO/SSA/Issues/2017/10/19/sreo1017)
- [frontier economies](https://blogs.imf.org/2015/04/29/managing-capital-flows-in-frontier-economies/)

_Source: https://www.imf.org/en/blogs/articles/2018/05/23/vc052318-the-debt-challenge-to-african-growth_