AFRICA: Sounding alarm on Africa’s debt
BROOKINGS – Thanks to debt relief under two programs, the Heavily Indebted Poor Countries Initiative and Multilateral Debt Relief Initiative, debt in sub-Saharan Africa was cut by two-thirds by 2008. The relief has given the region a new lease on life.
But since 2008, public debt in sub-Saharan countries has been rising at a increasingly rapid pace. By 2016, the subcontinent’s gross public debt to GDP ratio had doubled (Figure 1). 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.
By 2017, some economies—Chad, Mozambique, South Sudan, Sudan, and Zimbabwe—had run into serious trouble, and the multilateral organizations finally woke up and paid the problem some attention. Last year, the debt to GDP ratio breached the 50 percent mark, and the multilaterals gently warned economies such as Ethiopia, Cameroon, Ghana, Kenya, Mauritania, and Zambia that they needed to rein in public spending. But we believe that until one of Africa’s big five economies—Nigeria, South Africa, Angola, Ethiopia, and Kenya—becomes debt distressed, the alarm bells won’t be truly be rung.
Source: Authors’ calculation, based on data from the IMF’s World Economic Outlook.
3 MEASURES OF PUBLIC DEBT
Sadly, that time will soon be here. In a forthcoming paper, we take a close look at public (domestic and external) debt in Africa. Here, we provide a nontechnical preview.
After surveying the literature, consulting debt specialists, and crunching some numbers, we’ve come up with three simple measures that anyone can track, using elementary arithmetic and publicly available data:
Debt measure 2: The second is a dynamic measure of how quickly the ratio of public debt to GDP is changing. Obviously, this can change because of what’s happening to either the numerator or the denominator. But it is fair to assume that if this ratio is going up quickly, it should be a matter of concern.
One more thing: We rank the countries using three combinations of these measures. The first is a ranking using only measure 1; the second is an equally weighted average of measures 1 and 2; and the third is an equally weighted average of measures 1, 2, and 3. Figure 3 at the bottom reports the results, using the latest publicly available information.
When we looked just at the average public debt levels (the numbers are for 2017 and 2016, depending on the latest available), the picture does not look too bleak. Several countries are clearly in trouble, but they are all small economies: Cape Verde, Gambia, Congo, Mozambique, and Mauritania have debt to GDP ratios near or above 100 percent, but keep in mind that their collective GDP is less than $30 billion. Even with next five countries in the ranking (the top 10) , the total is still less than $100 billion. But the total for the top 15 starts to look worrisome.
Adding a measure of the sustainability of debt (r-g) makes matters worse for the countries with adverse debt dynamics. In general, countries with bigger differences between real interest rates (r) and economic growth (g) have higher debt ratios. When this measure is added to the mix, Equatorial Guinea, Chad, South Sudan, Congo, and Gambia do especially badly. And the big three economies—Nigeria, South Africa, and Angola—are now all ranked in the middle third of the subcontinent’s countries; we would classify them as economies facing a moderate risk of debt distress.
Figure 2: For most countries in Africa the cost of borrowing exceeds the rate of growth
Source: Authors’ calculation based on data from the IMF’s World Economic Outlook and the World Bank World Development Indicators. Note: 2017 data for 10 countries, 2016 data for 34 countries, and 2015 data for two countries. Eritrea and Somalia are excluded since no data are available.
Africa is running out of time. Governments in the region have to make a big effort to generate growth and raise revenues. Increasing tax revenues is something that almost all of the subcontinent’s governments can do by themselves. For a continent of small economies, increasing growth rates will be harder without help from abroad. But there are some countries that can do this on their own. With more than half of the region’s economic output, Nigeria and South Africa control not just their own destinies but also those of their neighbors. If they don’t do well and soon, the prospects for Africa do not look good.
Thanks to debt relief under two programs, the Heavily Indebted Poor Countries Initiative and Multilateral Debt Relief Initiative, debt in sub-Saharan Africa was cut by two-thirds by 2008. The relief has given the region a new lease on life. But since 2008, public debt in sub-Saharan countries has been rising at a increasingly rapid pace.