Rising Africa’s External Debt and Looming Debt Crisis
African nations have continued to record an increase in their external debt despite their already huge debt burden. So far this year, no less than 6 countries have visited the international debt market as weak tax revenues and the need for sustained economic support measures have increased the need for new credit lines. Africa’s external debt is expected to reach a record high of over $1 billion in 2022, which could push the external debt-to-GDP ratio above 40%, an 18-year high.
Pandemic-Induced Debt Relief Initiatives
Most African countries suffered severe fiscal setbacks after the outbreak of the covid-19 pandemic, especially huge revenue shortfalls despite increased fiscal spending. Before the outbreak, many of these countries were already heavily indebted and running large fiscal and current account deficits. This situation has, however, been further exacerbated by the economic disruptions induced by the pandemic, necessitating requests for financial assistance from multilateral organizations such as the IMF and the World Bank. In 2020, the G20 group of nations helped defer up to $5.4 billion of Africa’s external debt in 2021-24 under its Debt Service Suspension Initiative (DSSI) . However, external borrowing by African countries has maintained an upward trajectory underscoring the risk of a looming debt crisis on the continent..
Africa’s Looming Debt Crisis
African economies are at risk of a debt crisis as their ability to service their already bloated external debts remains largely limited. In H2’21, the International Monetary Fund (IMF) identified six countries already in external over-indebtedness (Congo-Brazzaville, Mozambique, Sao Tomé and Príncipe, Somalia, Sudan and Zimbabwe). In the absence of new debt relief measures or an extension of the DSSI, there is a high risk that 15 more countries (including Cameroon, Ethiopia, Ghana and Kenya) will join the list of countries in difficulty, according to the IMF. This is due to the high risk of sovereign default when debt moratoriums expire. Zambia became the first African country to record a sovereign default in November 2020 and Angola is on the brink, with external sovereign debt exceeding 100% of GDP.
Implications and prospects
Africa’s rising external debt is hurting investor confidence due to the concomitant increase in the already huge debt service burden in many countries. With many countries still severely restricted in their ability to meet debt repayments, there is a risk of exchange rate instability and credit rating deterioration. Many African countries have already seen their credit rating downgraded in 2020 due to increased risk of default. Further external borrowing, in the absence of additional debt relief measures, will expose these countries to the risk of further credit rating downgrades. However, troubled countries will likely begin to seek debt restructuring, which will improve their fiscal outlook. In addition, countries may be forced to introduce fiscal consolidation measures, which could put the brakes on the current nascent economic recovery.
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