Introduction

Public debt is a critical element influencing economic growth in Africa, a continent striving for sustainable development. Understanding the intricacies of this relationship is paramount in navigating the complexities of financial management. In this exploration, we delve into key dynamics, from the optimal debt-to-GDP ratio to the evolving landscape of creditors. As African nations grapple with economic challenges, insights into prudent debt management become imperative for a resilient and flourishing future.

Six reasons why African countries continue to grapple with high levels of debt

Addressing Africa's debt crisis requires urgent action, equitable vaccine distribution, and sustainable debt management strategies. The impact of debt on vulnerable populations underscores the need for global cooperation and support. At the same time, new data shows the extent of Africa's debt challenges and the urgency needed to fix them before it's too late. Here are six reasons why Africa's debt crisis could be here to stay.

  1. Pandemic-Driven Debt Surge: During the pandemic, countries worldwide spent substantial amounts to combat COVID-19's health and economic impacts. While this spending was necessary, it exacerbated existing debt challenges. Even before the pandemic, many African countries were already near their spending limits. Despite this strain, African debt increased by $45 billion (an 8% rise) in 2020Twenty-one African countries are either bankrupt or at high risk of bankruptcy1.
  2. Debt Repayments Persist: Despite initiatives to reduce debt repayments during the pandemic, most creditors still received payments. The Debt Service Suspension Initiative (DSSI) postponed $10.3 billion in repayments to G20 countries, and the IMF canceled about $850 million for the poorest nations. However, private-sector creditors received $34.3 billion (60% of the total) in repayments in 2020. High-income governments and international organizations like the IMF and World Bank also received significant amounts in repayments1.
  3. World Bank's Role: The World Bank mobilized $157 billion to fight the pandemic, but when repayments are considered, debt inflows from the World Bank to Africa were lower in 2020 than in 2019. Overall, African countries received $17 billion from official lenders, up from $14 billion in 20191.
  4. Private Lenders Prioritize Repayments: Private lenders received $8 billion more in debt repayments than they lent to African countries in 2020. This suggests that they prioritized collecting payments over offering financial support during the pandemic's initial year1.
  5. High Debt Payments: Africa faces debt payments of $69 billion in 2021, with an additional $185 billion due between 2022 and 2024. Foreign debt payments constituted 15.5% of Africa's exports in 2020, up from 11.7% in 2019 and three times the 5.3% in 2011. These repayments directly impact the ability to allocate resources for pandemic response1.
  6. Ongoing Challenges: Factors such as the economic consequences of COVID-19 and geopolitical events (like Russia's invasion of Ukraine) have further strained African nations' ability to service their sovereign debts. Currently, 22 low-income African countries are either in debt distress or at high risk of it.

Public debt plays a crucial role in shaping economic growth in Africa.

Public debt holds a key role in shaping the economic growth of Africa. It acts as a critical factor influencing the continent's financial trajectory. This influence is encapsulated in the concept of a "debt threshold," a delicate balance where public debt can either support or hinder economic growth. As we delve into this dynamic landscape, we discover the changing composition of debt, with African countries engaging a broader spectrum of creditors.

  1. Debt Threshold: Research indicates that there exists a debt threshold beyond which public debt becomes detrimental to economic growth. Specifically, when the debt-to-GDP ratio falls within the range of 20% to 80%, it tends to have a neutral or even positive effect on growth. However, increasing public debt beyond 50% to 80% of GDP adversely impacts economic growth in Africa12.
  2. Changing Debt Composition: African countries now owe more money to a broader range of creditors. In 2020, sub-Saharan Africa's total external debt stock reached $702.4 billion, compared to $380.9 billion in 2012. The debt owed to official creditors (including multilateral lenders, governments, and agencies) increased significantly. Beyond traditional creditors, countries now engage with China, India, Turkey, and multilateral institutions like the African Export-Import Bank and the New Development Bank. Additionally, the issuance of bonds on international markets has tripled in the last decade3.
  3. Resource-Intensive Countries: For middle-income and resource-intensive African countries, the debt threshold lies within the range of 58% to 63% of GDP. Beyond this point, high public debt negatively affects growth2.
  4. Robustness Checks: Researchers have explored various models to account for endogeneity and heterogeneity. While the exact threshold varies, the consensus remains: high debt is detrimental to growth2.

Conclusion

In conclusion, the intricate dance between public debt and economic growth in Africa demands strategic consideration. As nations navigate the complexities of debt management, transparency, and comprehensive policies, a resilient foundation can be laid for sustainable development. These insights provide a roadmap, emphasizing the need for effective measures that extend beyond financial metrics. By acknowledging and implementing these strategies, African nations can carve a path towards economic prosperity and resilience. The journey towards sustainable growth in Africa is not without challenges, but armed with knowledge and prudent measures, it is a journey that promises a brighter future for the continent.