There is a need for greater transparency in low-income countries if current unsustainable debt levels are to be reined in, says Tony Watima
This article was first published in the April 2020 Africa edition of Accounting and Business magazine.
Currently, there is a debate about whether Africa is accumulating debt to unsustainable levels. On the one hand, the World Bank and the International Monetary Fund (IMF) are raising the alarm about the steady pile-up of debt in Africa that’s likely leading to distress. On the other, the Africa Development Bank insists that debt crisis is coming because countries are not negotiating favourable terms, especially for Eurobonds and other commercial loans. None of the parties is wrong.
Let us start with the World Bank and IMF position. The IMF estimates that the average public debt to GDP ratio in sub Saharan Africa has doubled to 50% since 2008, and the threshold for debt distress is 60% for emerging economies, meaning they have little headroom to accumulate more debt. Additionally, there is the ‘debt overhang’ problem, where a country’s debt service burden is so heavy that it prohibits it from taking on additional debt to finance much-needed future development. For example, Mozambique has its debt service-to-revenue at 50%, meaning that half of the country’s tax collected is spent on repaying debt, rather than economic expansion. Kenya and Senegal have theirs at 40% and 35% respectively.
This means that countries are forgoing public investment in socioeconomic projects in order to repay debts. This debt pile-up problem arises from the fact that low-income countries are in dire need of public investment to improve their citizens’ quality of life and standard of living, but are constrained by the limited resources available. The IMF estimates that for low-income countries to achieve the United Nations Sustainable Development Goals, they need to scale up investments by an additional 15% to 18% of GDP. Given the limited funds available to them, most of these countries have now opted to borrow heavily in order to mobilise these needed resources.
This brings us to the crux of the African Development Bank’s argument that borrowing is not the problem; rather, these countries are borrowing on unfavourable terms. In 2019, for example, Eurobonds issued and listed by low-income countries averaged €16bn: four times higher than six years ago. The interest rates charged on these loans are as high as 8% to 10% at a time when Europe and the US are experiencing a period of zero to negative rates.
So, what can be done? Low-income countries need to exercise caution when procuring these loans so that they don’t find themselves in the debt overhang position. But this can only happen if governments run and manage transparent debt registers.
Debt financing simply runs on credit rating; therefore, lenders will be in a better position to recognise overborrowing risks and hold back their lending. Furthermore, a transparent debt register not only works for lenders: taxpayers can scrutinise and hold their governments accountable on matters of debt sustainability.
Tony Watima is an economist based in Kenya.
"Low-income countries need to exercise caution so that they don’t find themselves in the debt overhang position"