The Sub-Saharan Outlook
Despite promising headline growth figures, the economies of Sub-Saharan Africa are haunted by the spectre of high public debt burdens.
Sub-Saharan Africa seems to be set for a promising 2018 as the World Bank has forecasted 3.2% growth over the year for the region which is up from 2017’s rate of 2.4%. Rather, the exclusion of the Nigerian, South African, and Angolan economies - the biggest economies of the region, actually makes the average forecasted growth rate an impressive 5% - with some countries including Ghana and Ethiopia projected to exceed 7%. Considering the Nigeria and Angolan economies, the rebound of oil prices to near $70 (Brent Crude) is likely to provide a significant growth boost. Encouragingly, 6 out of the 10 fastest growing economies in the world are in Africa according to World Bank figures.
Before we move on to the current debt scenario in Africa, let’s first go back a few decades. Owing to significant borrowings between 1970 and 1990, by 1990 the African continent’s debt stood in excess of $270 billion. Given that this had become highly unsustainable and unmanageable, the World Bank in 1996 introduced the Highly Indebted Poor Countries Initiative which was aimed at “relieving the world’s poorest countries of unmanageable debt burdens”. Under the programme, the conditions that were required to be fulfilled to receive ‘debt forgiveness’ were relaxed; 36 countries benefitted from this programme–30 of which were African nations–and a total amount close to $100 billion was written off while the remainder of the amount was restructured by the implementation of Structural Adjustment Programmes.
Back to the present
Public debt levels in certain African nations have once more reached critical levels. In 2017, the average debt-to-GDP ratio of African countries was 56% compared to 40% in 2013 which can be explained by African nations’ issuing of $23 billion worth of Eurobonds. (Note: A Eurobond is debt security issued by a national government and is denominated in foreign currency – such as if an African government wanted to borrow in American dollars.) But, more than half of the nations that issued the Eurobonds are close to defaulting on interest payments and/or are looking to refinance the bonds; essentially meaning that cracks have already started appearing and will become only more prominent as the 10-year maturity period of the Eurobonds issued in 2010 and 2016 approaches. The following case studies illustrate this issue well:
Mozambique: In 2017, the IMF pulled budgetary support from the country when a mass scandal involving the IMF being misinformed about the size of debt and misuse of proceeds was uncovered; $1.4 billion of debt was hidden from the IMF for Mozambique’s ministries and public-sector firms. Moreover, much of the proceeds that were actually meant for the purchase of fishing fleets were being used for military purposes. In addition, the debt-to-GDP ratio of the country has reached a critical 80%, and it has already defaulted on its Eurobond coupon payments.
Ghana: Ghana has, on multiple occasions, refinanced its Eurobonds by issuing more bonds at a higher coupon rate. In 2007, it had issued $750 million worth of 10-year bonds. This was partially refinanced to the tune of $250 million by another $750 million issue in 2013. The remaining amount of $500 million was then refinanced in 2015 by the issue of another $1 billion worth of Eurobonds with a 15-year maturity period and a coupon rate of 10.75%.
Zambia: Zambia had issued Eurobonds amounting to $3 billion between 2012 and 2015. Yet, it is currently making efforts to receive an IMF bailout package of $1.6 billion which has so far failed as Zambia has been unable to adequately account for the use of the Eurobond proceeds amounting to $2.2 billion. Additionally, Zambia is also looking for ways to refinance its Eurobonds in a manner similar to that of Ghana.
Essentially, across the continent, whenever Eurobonds near maturity, they are refinanced by a fresh issue at a higher coupon rate to extend the debt repayment period and hence the debt of the nations continues to grow even in periods of high economic growth. Unfortunately, we are in danger of seeing almost an exact repeat of the events of 1970-90 African Debt Crisis and its aftermath. The situation is highly fragile considering: susceptibility of African economies to commodity-price shocks, rampant corruption and poorly managed monetary and fiscal policy.
Thus, considering the situation of debt mismanagement, debt management is of the utmost importance if the African nations are to reap the benefits of the projected growth for this year. Their finances are further threatened by tighter monetary policy in advanced economies which may weaken national exchange rates and hence make existing as well as future debt more expensive. Africa would be wise to institute economic reforms as quickly as possible – centred around building tax revenue. This has immense potential considering the average tax-to-GDP ratio in Africa is just 15% compared to 24% in OECD countries. Yet it is important to bear in mind that these reforms must accompany others to tackle the multitude of economic, social and environmental issues the continent faces.