The Rising Tide of Public Debt in Sub-Saharan Africa: Causes and Implications

The pace of sovereign debt accumulation in recent years is becoming a cause for concern across SSA countries, many of whom benefitted from significant debt relief under the Heavily Indebted Poor Country (HIPC) and Multilateral Debt Relief (MDRI) initiatives. Recent IMF/World Bank debt sustainability analyses revealed a sustained weakening of the medium-term debt sustainability outlook in several developing countries. Of the 37 SSA countries[1] eligible for the Poverty Reduction and Growth Trust (PRGT), the risk of external debt distress is low in five (5) countries, moderate in sixteen (16) countries and high in ten (10) countries, while six (6) are already in debt distress. The deterioration in debt indicators is due to a combination of factors, key among them being the recent slow-down in economic growth, declining commodity prices, exchange rate depreciation, and materialization of contingent liabilities due to weak monitoring of public sector entities.

These developments informed plenary discussions during the African Economic Research Consortium’s (AERC) 49^th Biannual Research Workshop held from 2 to 6 December 2018 at the Safari Park Hotel and Casino in Nairobi. Kenya’s Cabinet Secretary, Mr. Henry Rotich presided over the opening ceremony, and the key note address was delivered by the the World Bank’s Vice President for the Africa Region, Dr. Hafez Ghamen. Zimbabwe’s Minister of Finance and Economic Development, Professor Mthuli Ncube; former Governor of the Bank of Tanzania, Professor Benno Ndulu; and World Bank’s Chief Economist for the Africa Region, Dr. Albert Zeufack, were among the panellists. At the invitation of AERC, the MEFMI Executive Director, Mr. Michael Atingi-Ego, and Programme Manager in Debt Management, Mr. Tiviniton Makuve, attended the conference which also attracted over 200 economists, researchers, policy makers and private sector participants from around the globe.

The plenary discussions focused on the theme, “The Looming Debt Crisis in Africa”, and panelists debated the cause and potential impact of the recent debt developments on fiscal consolidation, monetary policy and the macroeconomic policy environment. While it was noted that public debt indicators in most countries are still below levels that triggered the debt relief initiatives, panelists raised concern that the rapid debt accumulation since 2012 could bring back the specter of debt crisis, macroeconomic instability, and weakening of the region’s development prospects.

More worrying is the shift in the composition of public debt from traditional concessional sources towards more non-concessional sources such as international sovereign Eurobonds and non-Paris Club creditors, which expose countries to vulnerabilities they are least equipped to manage. High interest rates on commercial debt has increased debt service costs and market risks, and amplifies refinancing risk, as these instruments typically have shorter maturity and grace periods. Increased reliance on non-traditional creditors may pose new challenges when the need for debt resolution arise, as these creditors are not part of existing frameworks for debt resolution, such as the Paris Club. The emergence of new creditors also implies a change in the nature and modalities of engagement, as governments often deal with a diverse range of stakeholders with different lending policies, objectives and motives.

On the brighter side, the plenary acknowledged that borrowing to finance large scale public investment projects has underpinned the rise in public debt in some countries. While high public infrastructure investment tends to have significant up-front fiscal cost implications, benefits or returns accrue over a very long period, as the productive capacity of the economy increases. The extent to which public investment raises potential output is a key factor in determining the evolution of the debt-to-GDP ratio over the medium and long term, and hence debt sustainability.

The plenary highlighted the need for enhanced measures to manage the emerging debt vulnerabilities. Key measures proposed include the need to enhance debt management capacity; promote economic diversification to strengthen resilience to shocks; build buffers to absorb future shocks; enhancing the efficiency of public investment spending to improve growth dividends from investment projects financed through debt; broadening and strengthening compilation and monitoring of public debt to reduce unpleasant surprises from realisation of contingent liabilities; and maintaining strong oversight and greater transparency on the scale, terms and conditions of lending to avoid further debt surprises. 

A range of insights emerged from plenary discussions with regards to capacity building priorities in Sub-Saharan Africa. These are summarized as follows:

• developing a consistent dynamic model-based framework to capture the economic growth and debt sustainability implications of debt-induced public investments;
• scaling up provision of technical assistance to strengthen countries’ capacity to use the IMF/World Bank revised Debt Sustainability Framework (DSF) for assessing and monitoring debt sustainability;
• helping countries devise strategies for economic and export diversification, to strengthen resilience to shocks;
• developing robust local currency debt markets to reduce risks associated with foreign currency borrowing;
• building capacity to identify and manage fiscal risks arising from contingent liabilities as countries are embarking on large-scale public infrastructure investments through state-owned enterprises and public private partnerships;
• public investment management, to enhance efficiency of public investment spending and improve growth payoff;
• strategies for managing Eurobond bullet maturities;
• investor relations programs, as well as creating investor relations offices/units in the relevant government Ministries;
• liability management operations and risk management;
• broadening and strengthening compilation, monitoring and dissemination of public debt statistics;
• strengthening financial negotiation competencies;
• exploring alternative mechanisms for debt resolution/restructuring;
• financial sector development, particularly focusing on pension sector reforms;
• domestic revenue mobilization (tax policy and administration, informal economy)
• financial and contract negotiation skills; and
• infrastructure project valuation

[1] This number excludes Somalia and Eritrea as no DSAs were conducted in recent years.