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Africa to recover in 2021 from its worst economic recession in half a century

Africa’s average debt-to-Gross Development Product (GDP) ratio is expected to increase significantly to over 70 percent, a 10 percent increase within a year from 60 percent in 2019.

According to the African Development Bank Africa (AfDB) Economic outlook report 2020, African countries are expected to experience significant increases in their debt-to-GDP ratios for 2020 and 2021, especially resource-intensive economies.

 “The debt to GDP ratio in Africa is not sustainable. When you find that an economies debt to GDP ratio is 70 to 75 percent there is a problem. Most countries in Africa are developing economies. This means that their debt to GDP ratio according to IMF standards should be  50 percent.” Said AfDB President Dr. Akinwomi Adesina,

Due to the rising debt levels on the continent over the past decade, debt sustainability ratings for low-income countries in Africa have been negatively affected.

The outlook report points that out of the 38 countries with DSA ratings available, 14 were rated as in high risk of debt distress at the end of December 2020. Six were already in debt distress and sixteen countries have moderate risk of debt distress, while two are considered at low risk.

The report attributes the rising debt distress levels to COVID-19 pandemic. The pandemic caused a surge in public financing needs as governments spent more to mitigate the socioeconomic consequences of the pandemic.

African governments required additional gross financing of about 125 to 154 billion dollars in 2020 to respond to the crisis.

These countries had to outsource funding in order to buffer their economies and subsequently citizens thus increasing their debt burden.

According to AFDB, repayment of these funds will be difficult as most of the money was spent in consumption rather than investment.

The report also cites the recent increase in interest expenses as a share of revenue for many countries which undermines their ability to service maturing debt obligations.

In 2019, the interest rate was slightly short of 20 percent. According to the report, major vulnerability to the debt outlook in Africa is the diminishing liquidity available for many countries. Interest burdens are rising fast and government revenue is declining. For some countries, the interest  burden has doubled in the last five years.

While African countries continue to borrow, their debt composition continues to shift toward commercial and non Paris Club creditors, and from external to domestic sources.

Commercial creditors and non-Paris Club official creditors have increasingly supplied new financing to African governments. Between 2000 and 2019, 18 African sovereigns have made debuts into international capital markets and issued more than 125 Eurobond instruments valued at more than 155 billion dollars.

“Debt structures in Africa are alarming. Of all the debt accrued in the continent, 337 billion dollars is in the hands of private creditors. This makes debt renegotiating and restructuring difficult as creditors issue the money solely for profit purposes.” Said Dr. Adesina.

Higher borrowing from the non-Paris Club and commercial creditors has also meant shorter maturities and higher refinancing risks. 

The surge in the issuance of 10-year Eurobonds by many African countries since 2013 and the increase in non-Paris Club loans with maturities shorter than typical multilateral concessional long-term loans will cause bunching of maturing sovereign debt liabilities coming due in 2024 and 2025.

As such, affected countries need to begin debt resolution and restructuring negotiations before risks materialize. On the positive side, since 2010, maturities have lengthened for several local currency debt markets from 1.75 years to 2.5 years.

Ghana, Kenya, and Tanzania have issued local currency bonds at maturities greater than 15 years and Nigeria issued a debut 30-year Naira bond in April 2019.

Going forward, the report proposes strengthening the links between debt financing and growth returns which would play an important role in ensuring debt sustainability on the continent.

The report also calls for Improvements in the efficiency of debt-financed investments to ensure that debt is used to finance the most productive projects that generate sufficient growth and complementarities to payoff the debt in future.

Also, low global interest rates present an opportunity to use cheap capital for high return public investments that accelerate growth on the continent.

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