Can African countries overcome the cycle of debt?

African leaders have called for a recalibration of the “dysfunctional” global financial infrastructure to help developing nations deal with the current global economic challenges and address the effects of climate change. While high-income countries were able to pump trillions of dollars into their economies during the COVID-19 pandemic, African governments “kept their nations afloat by taking on more debt, which turned out to be a very expensive life raft,” Kenyan President William Ruto, African Union Commission Chair Moussa Faki Mahamat Faki, and the president of the African Development Bank Group, Dr. Akinwumi Adesina, wrote in a New York Times essay in early October ahead of the World Bank/International Monetary Fund meetings. “Africa is now paying more in debt service than the estimated $50 billion a year the Global Center on Adaptation says it needs to invest in climate resilience. These investments are not nice-to-haves — they are vital for building roads, bridges and dams that can withstand torrential rains and floods,” they wrote. As of 2020, 27 African countries had a debt-to-GDP ratio of more than 60%. The debt challenges and broader global economic conditions are limiting private investment and the continent’s ability to respond to crises such as climate change. Economic and development experts are calling for collaborative efforts to restructure debt. Debt distress Malawi is one of the sub-Saharan African countries that are in debt distress, as of December 2022 the country’s total public debt was at 7.90 trillion Malawian kwacha (about $6.9 billion) representing 69.93% of its gross domestic product. Malawi defaulted on its debt payment in 2022 according to the IMF. That is in part because the government spends more on interest payments on public debt than it does on any individual sector of the economy. It is estimated that Malawi will spend nearly a quarter of its 2023 to 2024 budget expenditure to service debt, said Lauryn Nyasulu, president of the Economic Association of Malawi. “Borrowing has been largely to finance recurrent expenditures rather than investment, this is exacerbated by weak public finance management systems," Nyasulu said. She said the main causes of Malawi’s economic slowdown were multiple and overlapping crises and shocks including effects of weather-related shocks such as Cyclone Freddy, which caused massive destruction to infrastructure and crops, and claimed many lives; the war in Ukraine, which resulted in higher inflation; and a foreign exchange crisis that has led to a shortage of essential goods such as fuel. “There is a need to address the large budget deficit which leaves little resources for development projects,” Nyasulu said. Sluggish growth A World Bank regional economic outlook released in October 2023 shows that even with receding inflation, the rising instability, weak growth in the region’s largest economies, climate shocks, and lingering uncertainty in the global economy are causing deceleration of growth — from 3.6% in 2022 to 2.5% in 2023. Similarly, the April edition of the economic outlook notes that amid the underperformance of the continent’s largest economies, high inflation, and a sharp deceleration of investment growth, as well as an overdependence on imported goods will continue to push African countries into debt. Weak economic growth combined with debt vulnerabilities and dismal investment growth risks a lost decade in poverty reduction in the region, said Andrew Dabalen, World Bank Chief Economist for Africa. “Policy makers need to redouble efforts to curb inflation, boost domestic resource mobilization, and enact pro-growth reforms — while continuing to help the poorest households cope with the rising costs of living,” Dabalen said in a press statement. The World Bank found that stubbornly high inflation and low investment growth continue to constrain African economies further indicating that while headline inflation appears to have peaked in 2022, inflation is set to remain high at 7.5% for 2023. “Fiscal policy should aim at containing the deficit in line with available non-inflationary financing and creating fiscal space for critical spending. This can be achieved by mobilizing additional revenues, based on tax policy reforms, and by scaling back non-priority outlays, while strengthening public finance management,” said Dhaneshwar Ghura, an IMF mission team lead to Zimbabwe. Finding solutions While debt is proving challenging to address, and efforts are very slow, African countries can still work to boost growth. Southern African countries need to have policies that make it easier for the private sector and small-scale investors to borrow from financial institutions and banks at fair lending rates, Daniel Tonga, a Zambian economic expert, told Devex. Countries need to invest more in the agriculture and mining sectors to increase exports and bring about economic growth and development, he added. In addition, sub-Saharan African countries also need to reduce trade restrictions to make it easier for small businesses to trade across borders and build regional markets, Tonga said. As governments tackle policy solutions to growth, they may also need to look to curb corruption. According to Tonga, most sub-Saharan African countries are in debt distress because of corruption in the public and private sectors where resources that were supposed to be channeled to rightful and profitable ventures end in individuals’ or politicians’ pockets. In some cases, such as Zambia, a country remains in debt distress despite looking for solutions and working with its creditors, including China, to reach a debt restructuring deal. The process to address Zambia’s debt has dragged on longer than expected because there are many creditors involved, he said. “Moving countries from debt distress needs collaborative efforts where countries need to collaboratively fight for debt forgiveness from creditors,” said Tonga. African leaders are calling for a 10-year grace period on interest payments on foreign debt to give them a chance “to invest in climate resilience and other pressing needs, such as health and education,” Ruto, Faki, and Adesina wrote. They also called for “a more imaginative use for debt relief — for example, debt-for-nature swaps — where a portion of a nation’s foreign debt is forgiven in exchange for local investments in environmental conservation measures.” “Countries in the West often plead with us to invest in the kind of ambitious resilience projects we need to survive in a warming world. But in Africa, we can’t fix the climate issue unless we fix the debt issue,” they wrote. Update, Nov. 2, 2023: This article has been updated to clarify that Lauryn Nyasulu is the president of the Economic Association of Malawi.