It’s a balancing act trying to have enough financial resources to increase revenue generation capabilities and take on opportunities, but also not biting off more than you can chew in debt financing. The African continent too over the years has tried to balance its need for funding to invest in critical infrastructure while also maintaining good debt sustainability levels and minimizing defaults – or has it? For a continent that already grappling with a myriad of challenges, unprecedented global and economic shocks such as the COVID-19 pandemic and the Russia-Ukraine war certainly did well to further exacerbate its public debt levels only that now, most of its creditors are external lenders.
According to Afreximbank’s debt sustainability framework, more than half of the countries in Africa are considered vulnerable, regarded as high risk, or are already in distress. African countries have witnessed significant increase in their external debt, reaching a whopping $1.152 trillion by the end of 2023 according to the African Development Bank (AFDB) Group. Afreximbank also notes that Africa’s loans in default are at a 3-decade high. Impaired loans in the year 2022 increased to as much as $149.4 billion, from $112.2 billion in 2021 and 100.2 billion in the year 2020.
As of 2024, key liquidity ratios such as the debt service-to-revenue as well as the debt service-to-exports ratio, have officially “breached recommended thresholds.” The recommended median for debt service-to-revenue ratio stands at 20%; In other words, African countries are recommended to allocate 20% of their revenues to debt servicing. In 2023, the ratio for the continent stood at 19.6% while it is expected to increase by 1% to 20.6% in the year 2024. The same goes for the debt service to exports ratio which is used to assess how much of a country’s export revenue is to be used for debt servicing. While threshold defined by the report’s Debt Sustainability Framework is 18%, the ratio is expected to hit as much as 38.4% in 2024.
An interesting finding is that the continent’s external debt is concentrated amongst few countries. “About 67% of Africa’s total external debt stock is borne by 10 African countries: Egypt (14.5%), South Africa (14.3%), Nigeria (8.4%), Morocco (5.9%), Mozambique (5.5%), Angola (5.3%), Kenya (3.7%), Tunisia (3.4%), Sudan (3.1%) and Ghana (3.0%) respectively.” From China’s debt traps to IMF loans, poor debt sustainability especially with external debts lead to loss of sovereignty. These countries often end up in a cycle of debts and possible neo-colonialism amongst other challenges that come with ill-managed debts.
In countries like Nigeria, the utilisation of the debts taken create another type of sustainability issue. The IMF predicts that the country’s government debt-to-GDP ratio is expected to rise to 46.6 percent in 2024 from 46.3 percent in 2023. While the rise in the debt-to-GDP ratio could be attributed to factors like financing for infrastructure projects and curbing economic impacts of external headwinds, its utilisation begs to differ.
“The Chief Executive Officer of Financial Derivatives Limited, Mr. Bismarch Rewane, explained how Nigeria is moving “from a debt sustainability path to a debt trap path.” While Nigeria’s government debt-to-GDP ratio remains within a manageable range compared to many other countries, he emphasized that its debt becomes a trap when its utilisation is directed toward consumption, corruption, and mismanagement. Contextually, in 2022, Nigeria spent N5.7 trillion on debt servicing. This amounted to twice its capital expenditure, nine times more than total health spending in 2022, seven times more than total education expenditure (recurrent plus capital), and six times higher than defense spending in the same year. Still, the country continues to borrow.
Other challenges that compound the challenge of debt sustainability in Africa include, first, the existence of short repayment time frames for long term infrastructure projects. It also has to do with the reordering of the continent’s creditor base as bilateral debt now represents 27% versus 52% in the year 2000, while commercial debt accounts for 43% of total debt up from 20% in the year 2000. The composition of Africa’s debts has shifted from sources like Paris Club to more commercial creditors. Private debt as a share of GDP rose from 18.8% in 2008 to as much as 41.6% in 2023. As a percentage of Africa’s total debt, private debt accounts for more than half of the continent’s external debt at 54.3% while bilateral and multilateral creditors accounted for 18.7% and 27.1% respectively.
There is also the age-old reputation challenge that has led to negative risk assessments, thus, affecting associated borrowing costs. AfDB notes that with global interest rates at their highest level for 40 years, the African continent is expected to pay out $163 billion just to service debts in 2024, up significantly from $61 billion in 2010. Several Eurobonds are also being restructured following defaults.
Countries burdened by significant debt often face instability, and this issue has become particularly acute in Africa. The escalating debt levels are not merely a financial concern but a growing source of political and economic instability. They also threaten the achievement of the Sustainable Development Goals (SDG) on the continent especially in health, education and the creation of necessary infrastructure.
As African nations continue to accrue substantial debt through increased borrowing, they find themselves caught in a relentless cycle of financial strain. The mounting debt burden is increasingly clashing with the political realities within these countries. Governments are grappling with the challenge of managing repayment obligations while simultaneously trying to address pressing socio-economic needs and maintain political stability. Given the foregoing, there is ardent need for timely interventions, lest the continent falls into more crisis.
Lawretta Egba is a chartered accountant, financial analyst and writer, leveraging data to tell meaningful stories.
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