Recently the African Development Bank unveiled a new platform, Debt Management Forum for Africa, to articulate and initiate high-level dialogue on debt productivity and sustainability at the national, regional, and continental levels. Chinedu Eze writes that the chilling details of Africa’s debt profile call for re-evaluation of fiscal policies of African countries
The Debt Management Forum for Africa (DeMFA) evolved by the African Development Bank (ADB) inaugurated recently in Abuja, Nigeria’s capital, may be the solution to protracted poor debt management in African, which has left nations on the continent fiscally lame and unproductive. During the inauguration of the platform, the Vice President and Chief Economist, Economic Governance and Knowledge Management, Prof Kevin Chika Urama,
brought to the fore the challenges African nations face in the inequities and lopsided global financial institutions that offer African nations credit facilities and take them away with stringent conditions, making it difficult for many countries to free themselves from debt overhang in the region.
He also threw light on what these countries use the credit facilities to do. Do they channel them to solve the problem that prompted their request for the loan or do they fritter the loan away by diverting them to less honourable causes?
Debt Overhang
Globally, countries routinely draw from local and multilateral institutions for various reasons, including to fund high-value infrastructure for economic growth and high return on investment that defrays their debt at maturity. Such sound borrowing plans are channeled at long-term investments of over 10 to 15 years with economic impacts, backed by active liquidity management plans to pay back the debt. Also, to develop a strong investment grade to attract future loans at very competitive and concessional terms, and deepening the domestic debt
market to create stability in the country’s debt portfolio.
That is the ideal plan for global credit system to aid development in different nations of the world. However, several African countries have been contracting loans allegedly channeled to the wrong investments in the mode of vanity projects, consumption purposes and building roads that lead to nowhere. Besides the faulty methods, they mainly attract high-interest short-term loans for long- term investments.
The implication is that the debt burden in Africa has surged to 170 per cent in the post-COVID-19 era, compared to 2010 figures, weighing on public financing, infrastructure and the Gross Domestic Product (GDP). Prof Urama in his presentation during the inauguration of DeMFA in Abuja, noted that Africa’s debt service costs have risen sharply, diverting resources from
infrastructure investment, thus constraining future GDP growth and economic transformation.
He disclosed that specifically for 49 African countries, average debt service cost
rose sharply from an average of 8.4 per cent of GDP in 2015–19 to 12.7 per cent in 2020–22.
“Please allow me to briefly summarize the key reasons why the inauguration and effective operationalization of the DeMFA is critical for responding to these persistent headwinds and building economic resilience and accelerating the continent’s development today. Africa’s public debt has surged by 170% since 2010 due to both structural issues in the global debt architecture, recent global and domestic shocks, and weaknesses in Africa’s macro-economic fundamentals,”Urama said.
According to the African Economic Outlook Report (AEO) 2024, African countries were estimated to have spent around $74 billion on debt service last year (up from $17 billion in 2010), of which $40 billion is owed to private creditors, representing 54 per cent of total debt service. Currently, 22 African countries are either in or at high risk of debt distress (compared to 13 in 2010). “Refinancing risks could further increase going forward, especially for countries with large bullet redemptions,” Urama warned.
The Chief Economists said further that the implication is that while developed countries could sustain high levels of debt with low debt service burdens, developing countries in Africa, particularly the most vulnerable ones, are devoting an increasingly large proportion of their fiscal resources to servicing public debt, and worsening poverty rate.
Tightening Global Financial Conditions
Urama observed that amid the deepening debt challenges for countries, external financial flows to Africa have suffered from tightening global financial conditions and other domestic and external factors.
“Foreign direct investment (FDI), official development assistance (ODA), portfolio investment and remittances—fell by 19.4 per cent in 2022, reversing a strong immediate post-pandemic recovery in external flows. This leads to what I call the paradox of debt and development financing in Africa,” Urama said.
However, he observed that the market failures in the global financing and debt architecture are not entirely to blame for Africa’s fiscal and debt challenges. There are well-known domestic drivers of the cost of capital which countries need to address.
According to the estimates, Urama mentioned, corruption costs Africa $148 billion every year and about $90 billion leaves the continent yearly in the form of illicit financial flows.
“In total, some estimates show that African countries lose above $1.6 billion daily
in capital outflows due to the combined effects of the high-risk premiums, international profit shifting, illicit financial flows, corruption, etc. Measured annually, this could reach about $587 billion – more than three times the total external financial inflows to Africa yearly. Plugging these leakages is therefore critical to addressing domestic resource mobilisation and debt sustainability challenges in Africa,” Urama said.
In his contribution, the Director of Macroeconomic Policy, Forecasting and Research Department at the AfDB, Dr Anthony Simpasa, stated that the debt management initiative has become more critical for responding to persistent headwinds, building economic resilience and accelerating the continent’s development today.
Simpasa noted that the debt-to-GDP ratio is already 60 per cent, with a public investment efficiency gap of 39 per cent. “That means that the funds (borrowings) are not well utilised.
“We are talking of $174 billion in debt servicing in 2024, far more than the continent spends on education, 13 per cent of gross revenue, unlike 9.9 per cent between 2015 and 2019. That money could have gone into infrastructure and investment in social needs’ cost. African countries borrow to pay or refinance existing debt instead of financing development,” he said.
Enduing labyrinth African countries and their finance ministers express hopelessness in the
bewildering mounting debts that are never completely liquidated. They complained that the more they tried to ease the burden, the higher the hurdle imposed by their foreign creditors increases.
Director-General of the Debt Management Office in Nigeria, Patience Oniha, complained about the role of the credit rating agencies and some unfair risk assessments of the African countries, which are actually less risky than other regions.
At the panel on credit rating in Africa, Oniha noted that the discretionary modus operandi of the assessors often leaves their hosts hard done by. She recalled that Nigeria was in 2022 downgraded by one of the three credit rating agencies.
“There was no review on their side. It was just based on our decision or announcement of bond exchange, which is just a risk management strategy and does not mean a default. And that was it. The discretionary element in their parameter is high, especially fueled by their distrust in our ability,” she said.
Oniha also observed that feedback from the agencies’ findings is usually rapid “with less than 24 hours to respond, which is just not fair, and often never changing their positions”.
Prof. Daniel Cash of Aston University in the UK, observed that unfair ratings are not unique to African countries but had been with Europeans until they started getting their ratings done on the continent and by their own regulations.
“You have to be pan-African in your approach. It is largely for Africans to support themselves in tackling this problem and not keep seeking help from outside,” Cash said.
Negotiating on their Own Terms
Urama, however, said that enough of African country officials seeing credit rating agencies and foreign experts as gods and literally grovel before them.
“What happens when a credit rating agency does not like a government? Is it just a question of bias? What of the intra-African biases among fellow African countries? We need to reduce biases among ourselves. We have instruments that can help us on this continent, but do we use them? We keep running to creditors’ experts for advice, but they will always do so on their own terms. Similarly, negotiations from African countries can be very frustrating. One country went to Copenhagen with a large entourage, and in the middle of the negotiation, the officials were busy shopping. Later, they came to ask, ‘Prof., have they finished?’ The truth is that negotiating debt on behalf of a country is a very serious assignment, and officials should take them responsibly.”
Assistant Director, Debt Contraction, Ministry of Finance, Zambia, Patrick Mfungo, emphasised on the imperative of in-country legal framework on borrowing and transparency in the process.
Mfungo noted that some creditors are not multilateral but often demand to be treated as such during negotiations.
“It is therefore important to review and update legal frameworks to guide this process. In Zambia, we have included the National Assembly in what we do. We have enacted new laws that make it statutory to sanitise borrowing plans and reject those that are not of maximum interest. It is part of the legal requirement to publish the debt report and make it public,” he said.
Director of the African Development Institute of the AfDB, Dr Eric Ogunleye, added that from the shared experience on debt burden and management at the two-day forum, African countries are unanimous on the need for an urgent Debt Management Forum for Africa (DeMFA) that is focused on routine policy dialogue to find homegrown solutions in dealing with the common problem.
ADB Support
Ogunleye noted that the AfDB is already offering support to the African countries in the management of debts, including the creation of an African Credit Rating Agency, capacity development, technical assistance, and training for the countries.
He noted that there was a discussion on the use of the African Legal Support Facility, which the AfDB has already created to help the countries in renegotiating their loans fairly.
“That is the facility they could fall back on to provide them with legal framework and support to help them through a fair process. We all only need to leverage on what we have within instead of running to our creditors for help,” he said.
Overall, there was an emphasis on prudent management of resources, especially the need for African countries to be more self-reliant in growing what it consumes, exploring its endowments to meet its needs, and adding value to natural wealth to optimise gains that can finance and meet today’s needs.
“I look forward to a fruitful, bold and original dialogue on how we can make debt work for growth in Africa, drawing on your rich experiences in African countries over the years. Looking at the list of delegates from several African countries who have been at the forefront of policymaking and implementation in this important sector of development financing for Africa, I am confident that the DeMFA will provide the platform for Africans to face the brutal facts and come up with sustainable solutions embedded in Africa’s realities, learning from experience in Africa and elsewhere,” Orama said.
