African countries urged to look internally to manage debt

Last week, more than 3,000 delegates gathered in Nairobi for the African Development Bank’s 59th annual meeting. Though global financial architecture reforms took center stage, African countries were also urged to look within to manage their debt. As of last year, three countries in Africa had defaulted on their debt repayments and close to half of the assessed countries on the continent were at risk of falling into debt distress, where they struggle to make payments on their debts, in part, due to high interest rates. Africa’s debt is 1.9% of the total global debt as of 2023. However, most of this debt is held in foreign currencies exposing it to exchange rate fluctuations. Most African countries also have poor credit ratings, which means it is more expensive to borrow money from capital markets and they face higher interest rates. Speakers at the meetings said that efficient management of debt can help avoid a debt crisis. They asked countries to spend efficiently, enact macroeconomic reforms, mobilize domestic revenue, and develop legal and regulatory debt frameworks. “It is not just about loans but how do you mobilize resources for development.” --— Akinwumi Adesina, president, African Development Bank A 2021 study found that “inefficiencies of government spending have caused public debt to rise in most SSA [sub-Saharan African] countries as from 2015 hence African countries run deficit spending.” According to Kevin Urama, chief economist and vice president of economic governance and knowledge management of the AfDb, this inefficiency is a critical issue. “It is a big issue because mobilizing capital is on one side but managing that capital effectively is another side,” Urama said. He estimated that the continent loses $650 billion annually through unfair ratings, illicit financial flows, corruption, unwarranted tax breaks, and profit shifting by companies. Another aspect of inefficient spending is countries borrowing for projects that don’t generate enough money to repay the loan or bond and contribute to debt distress. “So, if you are borrowing at 10% and the project has a 1% rate of return, then there is a mismatch there. If you are borrowing at that kind of a high rate, you really want to make sure that what you are investing in has a rate of return that will enable you to repay that loan,” said Clemence Landers, a senior policy fellow at the Center for Global Development. AfDB President Akinwumi Adesina called on countries to consider domestic resource mobilization. “It is not just about loans but how do you mobilize resources for development,” he said. Urama echoed those sentiments, noting that countries using their own resources can attract private sector investment. An AfDB report from 2020 suggested that domestic resource mobilization reforms are needed to ensure maximum revenue collection. Hanan Morsy, the deputy executive secretary and chief economist of the United Nations Economic Commission for Africa, or UNECA, said that countries should build capacity for stronger debt sustainability, which makes debt affordable. Countries in debt need a safety net and waiting to refinance as payments are due is unsustainable, Adesina said. He added that Europe, Asia, and the Arab countries have a financial stability mechanism but Africa does not. Therefore whenever there is a shock, it leads to illiquidity, which can lead to insolvency creating multiplier effects that then affect other countries. In a bid to solve this, he recommended an instrument akin to the International Monetary Fund’s safety net. “The African Development Bank has made that case to the heads of states to have an African Financial Stability Mechanism that would provide a buffer for African countries when you have shocks and that would allow us not to have the problems we are having today,” he said. Legal instruments for the establishment of the African Monetary Fund were adopted in 2014 but it hasn't reached the requisite number of ratifications for it to be enforced. Once enforced, the fund will establish the African Financial Stability Mechanism. To support effective debt management, Olivier Pognon, the director of Africa Legal Support Facility, said that countries need to develop legal and regulatory frameworks. Countries, he said, should also negotiate sound documents and employ innovative legal provisions and instruments in addition to maintaining accurate and up-to-date debt data. Countries also need to implement their legal and regulatory debt frameworks. If implemented, it would lead to efficient debt management, said Mavis Owusu-Gyamfi, the executive vice president of Africa Center for Economic Transformation, or ACET. “Some countries have really great legal frameworks. Zimbabwe’s is brilliant. It is one of the best in the world but implementation is very different,” she said. She also spoke of the accountability of public officials. “Who is holding ministers of finance to account when they say we are going to borrow for X? Where is the parliamentary oversight, the robustness in our governance structures,” she asked. Kenyan President William Ruto called for an unbiased credit rating system in his opening remarks at the summit. According to a report by the Office of the United Nations High Commissioner for Human Rights, the “big three” credit rating agencies suffer from “conflict of interests, biased decision-making, oligopoly, wrong business model and lack of transparency.” In response, the African Union is in the process of establishing an African Credit Rating Agency with plans already at an advanced stage. The AU has developed the legal, financial, and structural aspects of the rating agency. At the meetings, establishing an African credit rating agency to address issues with the three credit rating agencies was stressed. Urama clarified that a lot of the bias in the ratings is not the fault of the rating agencies. “A methodology has been created that focuses on specific metrics to measure the risk of countries and some of those metrics, some African countries don’t have them. The agencies also do not have representation in every country. How best will you understand the risks in a country if you are not there?” he posed. However, some remain skeptical about the potential objectivity of an AU agency. “How do you set up something that is independent and that is going to be trusted by the market? It is a complicated question,” Landers said.