Debt is creeping back up in Sub-Saharan Africa

DURING the 1980s, African economies groaned beneath unpayable sovereign debts. By the mid-1990s much of the continent was frozen out of the global financial system. The solution, reached in 2005, was for rich lenders to forgive the loans that “heavily indebted poor countries”, 30 of which were in Africa, had received from the World Bank, IMF and African Development Bank. With fresh credit and better economic policies, many of these countries turned their fortunes around. By 2012 the median debt level in sub-Saharan Africa (as defined by the IMF) fell to just 30% of GDP.

Today,however, the median debt-to-GDP ratio in the region is back over 50%. Although that figure may seem low by international standards, African countries collect relatively little tax and tend to pay high interest rates. As a result, they cannot afford to borrow nearly as much as their counterparts elsewhere do. The main cause is the long decline in commodity prices that has unfolded since the global financial crisis of 2008. As the proceeds from their chief exports have dwindled and economic growth has slowed, African governments have had to borrow more to fill the void in their budgets. The IMF reckons that five sub-Saharan African countries are already in “debt distress”, with nine more at high risk of joining them.

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Disaster can still be averted. Sudden spending cuts would leave half-finished infrastructure projects to rust, and could potentially exacerbate the debt crunch by tipping economies into recession. Instead, research from the IMF suggests that the least costly way to deal with fiscal imbalances in Africa is to raise the region’s meagre tax-to-GDP ratio, which has crept up by just a couple of percentage points this century.

Read more in Africa in the red from the print edition

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