Debt dangers in Africa: how defaults hurt people, and why forgiveness isn’t the answer
Public debt repayments in some African countries are at their highest levels since 1998. The Conversation Africa’s founding editor Caroline Southey talks to dean and economics professor Philippe Burger about the danger of debt problems some African countries face.What’s behind the spike in debt servicing repayments? For most countries experiencing new highs in debt servicing costs, it is not so much a spike, but rather a gradual increase over several years.
Public debt repayments in some African countries are at their highest levels since 1998. The Conversation Africa’s founding editor Caroline Southey talks to dean and economics professor Philippe Burger about the danger of debt problems some African countries face.
What’s behind the spike in debt servicing repayments?
- For most countries experiencing new highs in debt servicing costs, it is not so much a spike, but rather a gradual increase over several years.
- For emerging market and developing economies the debt ratio increased from 33.5% in 2008 to 64.6% in 2022.
- With higher debt comes higher debt servicing costs.
- In Zambia the debt ratio was a mere 21.9% in 2007, but increased to 140.2% in 2020, when the government defaulted.
Ghana and Zambia have defaulted: what impact will this have?
- Governments must then cut back significantly on their expenditure, often in the face of shrinking tax revenues.
- If such a country must knock on the door of the IMF for assistance, as both Ghana and Zambia had to do, the institution usually prescribes several tough policy and economic adjustments.
- The period leading up to a default is also often characterised by companies and households facing much higher inflation.
Which other African countries are on the watchlist: what stress signs should we be alive to?
- Although economists sometimes use rules of thumb, such as a debt ratio that exceeds say 60% or 90%, the answer depends on several variables.
- For instance, at 121.7%, the debt ratio of the US is much higher than that of Ghana.
- Yet Ghana defaulted because the interest cost of its debt as percentage of GDP was much higher than that of the US (2.1% for the US).
- Its debt ratio increased from 21.9% in 2007 to 140.2% in 2020, thus 6.4 times its 2007 level (see Table 1).
- This also meant, as mentioned above, that its interest payments increased from 1.4% of GDP to 6% of GDP.
- Two further countries that need to tighten up their fiscal policies are Rwanda and South Africa, which both saw their debt ratios almost triple between 2007 and 2022.
Is debt forgiveness a possible solution?
- Two decades ago, domestic debt markets in low- and middle-income countries were underdeveloped, and their governments depended on access to international financial markets to finance their debt.
- Debt forgiveness thus largely entailed foreign investors (often in advanced economies) taking a voluntary loss on their investments.
- Forgiveness before default will therefore entail domestic investors taking voluntary losses on their investments to reduce the future tax liability that domestic debt implies for domestic taxpayers.
- In addition, forgiveness may reduce the debt ratio, but it does not necessarily eradicate the initial mismatch between government revenue and expenditure that gave rise to the increasing debt ratio.
Take-aways
- The data show that the increased interest burden that some African countries face results from years of steadily rising debt ratios.
- And while Ghana and Zambia might have been the most serious cases, there are several other countries that can be placed on a “watch list”.