The high level of Africa’s Debt Burden is posing significant challenges to the economic growth and development of the continent. Africa is facing debt payments of $69 billion this year alone, with an additional $185 billion due between 2022 and 2024, primarily in Eurobonds. This high level of debt is triple the rate paid a decade ago, with Nigeria alone spending 59% of government revenue servicing its debts. The Covid-19 pandemic, the Russian invasion of Ukraine driving up the price of food and energy, and rising interest rates to tame inflation are just some of the factors that have made it increasingly challenging for foreign borrowers to repay their loans.
Apart from that, African countries have also utilized several means of borrowing money such as commercial banks, export credit agencies, bilateral agreements with other governments, concessional loans from development banks or multilateral financial institutions, and state-controlled Chinese entities. Nevertheless, in the event of a default, Eurobond tranche payments or capital repayments are more prone to occur compared to other forms of financial obligations.
According to data from the International Monetary Fund (IMF), countries in Sub-Saharan Africa (SSA) have been severely affected by the Covid-19 pandemic, with a regional contraction of 3.3% in GDP anticipated for this year. The current economic landscape poses significant challenges to developing nations as they struggle to manage their debt burdens. Higher debt levels and currency risks are increasing the likelihood of sovereign defaults in Africa.
Africa’s Debt Burden – African countries who are at higher risk
Metal-exporting countries such as South Africa, Botswana, and Zambia have experienced a significant decline in export revenues. The oil-exporting countries, such as the Republic of the Congo and Angola, where oil accounts for more than 90% of export revenues, have been hit hardest by the shock, according to an October report titled “Covid-19 aggravates Sub-Saharan African Debt Problems” by Dutch export credit agency Atradius.
In addition to the decline in export revenues, many countries in Sub-Saharan Africa are also facing a drop in financial inflows, including remittances, foreign direct investments (FDI), official development aid (ODA), and portfolio investments. This is expected to exacerbate existing vulnerabilities, as FDI is likely to be lower due to investors postponing their spending or divesting amid the pandemic. The report also suggests that investments in the oil and mining sectors are likely to be lower this year due to decreased commodity prices.
Several African countries, including Ghana, Egypt, Malawi, Tunisia, Zambia, and many more, are facing a severe debt crisis, with some already defaulting on international loans.
Performance of Sub-Saharan Africa’s Government Bonds
It is evident that such a high debt burden will have a detrimental impact on growth and development. The commitment to finding a solution has been half-hearted, and international efforts to address it have failed to deliver. International financial institutions and donor countries must provide much-needed debt relief and support African countries in their efforts to manage their debt burdens. Debt restructuring, including debt forgiveness and debt rescheduling, could provide African countries with the breathing space they need to recover and put their economies back on a more sustainable footing.