Africa ignores danger of its debt crisis
For the past two years analysts have been raising alarm bells about the debt sustainability of some African countries. They caution about the pace of debt accumulation and emerging risks from private-sector borrowing. Despite warnings, debt accumulation continues unabated and, in some countries, has accelerated.
So it was not a surprise to hear the governor of the South African Reserve Bank and chairman of the International Monetary and Financial Committee, Lesetja Kganyago, recently lament the debt crisis in low-income, developing countries at his maiden press conference in his new position.
However, the IMF missed a few opportunities to avert the emerging problems.
To summarise the press conference and the IMF’s board policy note released prior to the annual World Bank/IMF spring meetings: the fund has called for a global dialogue on sovereign debt developments in lowincome developing countries as risks of the debt crises in some of them have increased.
According to the IMF, Africa is most vulnerable to a debt crisis — 10 of the 13 countries that have moved into the “high risk” or “in debt distress” categories are in sub-Saharan Africa. Fourteen out of 23 countries classified as being in debt distress are in Africa.
The heavily indebted poor countries initiative launched in 1996 provided comprehensive debt reduction of more than $76bn to more than 36 countries. This initiative laid the foundation for Africa’s economic recovery in the 2000s. Ghana’s debt-to-GDP ratio improved from 120% in 2000 to 12% in 2006. Mozambique’s debt-to-GDP ratio improved from above 200% to 25%.
These improvements facilitated better economic performance for the benefit of the population. So it can be expected that the latest increases in government debt will have significant effects on macroeconomic stability, security and development.
Another challenge raised in the IMF policy note is the lack of transparency about sovereign balance sheets. There are indications that some countries have understated their levels of debt or simply failed to disclose new commitments.
In Kenya it was announced that more than $2bn eurobond proceeds had not been accounted for — years after the government claimed the cash was allocated to its ministries.
In 2016 the IMF cancelled its Mozambique budget support programme when it emerged that the country had misinformed the fund about the size of its debts. More than $1.8bn in state-backed loans to state-owned enterprises remain unaccounted for.
Similarly, Zambia issued three eurobonds between 2012 and 2015 totalling $3bn and has been seeking a $1.6bn IMF bailout package since late 2016. However, this has not been approved primarily on two accounts: the country shows obvious signs of high debt risk, with its debt hovering around 60% of GDP, and its lack of transparency to fully account for the use of at least $2.2bn of the $3bn it issued in eurobonds.
Given this context and the consequences for Africa, the relatively low level of debate on the continent is surprising. More so for major economies like SA, whose economic growth prospects are tied to regional development.
If African voices remain absent from debates despite the IMF calling for global discussion on this problem, some parts of the continent and some countries will be made vulnerable to macroeconomic and social instability as the crisis deepens.
Perhaps some countries remain silent because they are reluctant to draw attention to their internal challenges.
Key African economies must play a leading role in addressing some of the key questions and issues arising from sovereign debt problems. They should examine how to balance the need for sovereign financing and debt sustainability; and how to manage the increasing role of private creditors and perverse incentives in global private creditors and sovereign lending.
There should be debate on how to manage the debt crises in African countries to reduce cross-border spillovers and threats to regional economic development. There should be an examination of what the impacts and risks are to Africa’s private sector as many African banks have become key players in sovereign issuances.
In the event of a debt distress, some countries will struggle to negotiate with myriad debt holders — the situation in Mozambique — so it is likely that a continental initiative might be required.
If Africa fails to lead debate and find its own solutions, this might prove to be costly to the continent’s economic growth and development imperatives.
Certainly, a debt crisis in more than a quarter of African countries is likely to impede progress on regional integration initiatives, including the Tripartite Continental Free Trade Agreement.
As history has proven, macroeconomic and socioeconomic stability are preconditions for regional integration efforts.
In absence of either, the free trade agreement will remain a mirage.