World Economy

African nations slipping into new debt crisis

Chris Giles and David Pilling
Managing Director of the International Monetary Fund Christine Lagarde answers the questions of press within the WBG/IMF Annual Meetings in Washington, USA on April 19, 2018.
Yasin Ozturk | Anadolu Agency | Getty Images

Sub-Saharan Africa is slipping into a new debt crisis, with 40 per cent of the region's countries now at high risk of debt distress — double the proportion of five years ago.

With the number of countries already unable to service their debts doubling in the past year to eight, officials at the IMF are urging all African countries to raise taxes to provide more scope for paying interest, which has increased to levels last experienced at the start of the century.

The officials caution that any debt relief required in future is set to be much more difficult than in the past because most recent lending has come from commercial sources less amenable to debt forgiveness than are national governments.

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Masood Ahmed, president of the Center for Global Development, a development think-tank, said the region's increased debt had been facilitated by commercial lenders searching for higher-yielding assets. Mr Ahmed led the World Bank's Heavily Indebted Poor Countries Initiative in the 1990s — a programme that significantly reduced debt burdens.

"While debt ratios are still below the levels that led to HIPC, the risks are higher because much more of the debt is on commercial terms with higher interest rates, shorter maturities and more unpredictable lender behaviour than the traditional multilaterals," he said.

Chad, South Sudan, the Republic of Congo and Mozambique moved into "debt distress" in 2017, the IMF said, which means they have defaulted or cannot service their debts. A much higher number have breached one of the fund's thresholds for debt or servicing burdens, putting them into the IMF category of highly vulnerable to default.

The fear is that many African countries will become stuck in a debt trap, undermining economic development, just 13 years after the Multilateral Debt Relief Initiative, which cancelled debt for countries that met economic-management and poverty-reduction criteria.

Abebe Selassie, director of the African department at the IMF, stressed that "while the rise in debt was a concern", the picture in sub-Saharan Africa was very diverse and many countries could stabilise debt burdens quickly if they mobilised revenues.

But in its Fiscal Monitor, a twice-yearly survey of governments' balance sheets, the fund noted that few countries with debt problems had benefited from much higher investment and strong growth rates. "The deterioration in fiscal balances over the past five years does not reflect a scaling up of investment," the report said.

Commodity exporters such as Nigeria, Chad, Congo and Zambia have suffered a plunge in revenues from the extraction of oil and metal ores. The recent rise in commodity prices has given some a little "breathing space", according to an IMF official, but many are in distress.

Other African countries "let spending drift upwards across most items", the IMF Fiscal Monitor said, a category it said included Ethiopia, Ghana and Gambia. Some countries had been hit because they had borrowed in foreign currencies and were finding debt hard to finance after a significant depreciation, including Côte d'Ivoire, Senegal and Zambia.

Substantial fraud and corruption, including the reporting of previously undisclosed debt, where the state is responsible for often opaque contingent liabilities of state-owned enterprises, has hit countries such as the Republic of Congo, Mozambique and Angola.

The result has been significantly rising debt burdens, with the IMF estimating the public debt burden in low-income countries has increased by 13 percentage points of GDP in the past five years.

Previous relief initiatives were triggered by debt burdens much higher on paper than present-day totals. But the figures are not strictly comparable because African governments had defaulted on those debts and were not paying interest.

Moreover, interest costs have risen sharply over the past decade, doubling to hit 20 per cent of tax revenues.

Vitor Gaspar, director of the IMF's fiscal affairs department said: "The escalating [interest] cost reflects in part the increasing reliance on market instruments. Almost half is now non-concessional debt, up from a quarter in 2007."

IMF officials at the spring meetings in Washington have urged African countries to increase the efficiency of public expenditure, hand over public investment to the private sector, and fully implement fiscal consolidation plans, including seeking new revenues from consumer taxes.

But some are pointing the finger at the IMF itself for being asleep at the wheel while debts increased significantly.

This month Indermit Gill and Kenan Karakulah of the Duke Center for International Development at Duke University said the fund should have been much more vocal earlier. "The increase in debt should have raised all sorts of flags and triggered triage, but it didn't. Neither the International Monetary Fund nor the World Bank sounded the alarm," they wrote.

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