With increasing uncertainty affecting all economies, tightening global financial conditions, and rising borrowing costs, concerns are growing about the fragility of the debt positions of sub-Saharan African countries. Ahmad abdel-Rahman explains.
It is only since the International Monetary Fund (IMF) stated in a report entitled: "How to Stabilise Africa's Debt" that the region is addressing this issue. Public debt ratios on average on stabilising.
Contrary to popular belief, countries in the region have often managed to stabilise or reduce their debt ratios without the need for debt restructuring. With more than 60 debt reductions, the likelihood of a country experiencing a similar situation in any given year is only one in four. These cases have occurred even in adverse external environments, including in the wake of the major commodity price cycle and the COVID-19 pandemic.
In many cases, the debt reductions were economically significant; most involved declines in GDP of more than 10 percentage points, and nearly half of these cases lasted four years or more.
For example, the Democratic Republic of Congo's debt ratio fell by 15 percentage points of GDP between 2010 and 2023.
The IMF notes that sustainable debt reduction typically reflects both budget consolidation and real economic growth. These two factors often go hand in hand. Budget consolidation (i.e., increased primary balances) is more likely when growth is rapid.
However, in fragile and conflict-affected states, as well as in low-income countries, growth is the primary factor behind many successful debt reductions. Debt reduction is more likely, significant, and sustainable if three conditions are met: a strong domestic institutional framework, a supportive domestic business environment, robust
global growth, and low global borrowing costs.
The IMF recommends continued budget consolidation to translate into debt consolidation. While exchange rate stability can support successful debt stabilisation, maintaining an overvalued exchange rate can be counterproductive, as it is likely to weaken growth and hamper overall macroeconomic stability.
For example, in Mauritius, a favourable domestic and external environment, strong growth, and a stable currency led to a decline in the debt ratio of approximately 20 percentage points between 2003 and 2008, according to the IMF report. Expanding taxation with rational spending
The IMF said the key message for policymakers is that fiscal adjustment is likely to result in stronger and more sustainable debt reduction when complemented by pro- growth structural reforms and measures to strengthen institutional frameworks.
These measures should include well-designed fiscal rules to ensure that off-budget financial operations do not undermine debt reduction. Furthermore, debt reduction efforts are likely to prove successful in the context of macroeconomic stability, including low and stable inflation.
The IMF revealed that the major shocks to the global economy over the past five years have been most severe for low-income countries and fragile and conflict- affected states. It stated that as crises have intensified, post-pandemic recovery in low- income countries has lagged behind that of emerging market economies, which began their recovery in 2021, albeit with significant differences.
Declining financing flows to developing countries According to the report, financing flows to developing countries, particularly low- income countries, have declined significantly since the start of the pandemic. This is despite the fact that these countries facing huge financing needs for essential spending such as education, health, and infrastructure.
The IMF stated that reversing this trend and ensuring that developing countries receive adequate, recurring, and affordable new financing flows are essential. Furthermore, debt vulnerabilities should be addressed proactively.
For wealthier developing countries, the focus should be on helping them attract more foreign investment and international private financing, with support from bilateral and multilateral partners.
For the poorest and most fragile countries, adequate financial support, through grants or highly concessional loans, are critical, along with technical assistance to build greater institutional capacity. Further improvements in restructuring processes are also needed to ensure timely and effective debt restructuring for countries that cannot sustain their debt.