Sub-Saharan Africa increasingly exposed to debt - World Bank

07 Oct 2018

Vulnerability to weaker currencies and rising interest rates associated with the changing composition of debt may put the region’s public debt sustainability further at risk.

As a result, according to the Washington based World Bank, the latest release of Africa Pulse report suggests that, public debt remained high and continues to rise in some countries in Sub Saharan Africa.

Other domestic risks highlighted include fiscal slippage, conflicts, and weather shocks. Consequently, policies and reforms are needed that can strengthen resilience to risks and raise medium-term potential growth.

This issue of Africa’s Pulse highlights sub-Saharan Africa’s lower labor productivity and potentials for improvement “Reforms should include policies which encourage investments in non-resource sectors, generate jobs and improve the efficiency of firms and workers,” said Cesar Calderon, Lead Economist and Lead author of the report.

According to the same institution, in its April report, it sentimentally indicated that, debt sustainability risk in the region had increased significantly over the past five years with 18 countries at high risk of debt distress as at March 2018, compared with eight in 2013.

Of 46 countries in the region (excluding South Sudan and Somalia due to lack of data), the debt ratios of 44 countries changed during 2014–16. Of the 35 countries with rising debt ratios, 18 saw at least a 10-percentage point increase in this ratio between 2014 and 2016. Zimbabwe, Mauritania, Sierra Leone, the Republic of Congo, São Tomé and Príncipe, and Mozambique have seen their debt to GDP ratio increase by more than 20 percentage points.

On the latest October release, with fiscal deficits narrowing, government debt levels appear to have stabilized, but vulnerabilities remain. Compared to 2012–13, the median public debt level remains high, especially among oil exporters and non-resource-rich countries. “During 2012–17, government debt is estimated to have increased by more than 20 percentage points in the region. Debt rose in about two-fifths of the countries in 2017 and was above 60 percent of GDP in one-third of the countries. Exchange rate depreciations (Zambia), negative growth (Chad, the Republic of Congo, and Equatorial Guinea), and the reporting of previously undisclosed debt (the Republic of Congo and Mozambique) contributed to the deterioration in debt-to-GDP ratios,” states the report.

During 2018, government debt rose rapidly in Angola and Zambia, partly due to continued currency depreciations. Chad finalized the restructuring of its oil-collateralized debt, which would reduce the country’s debt service payments. In addition to the rise in debt ratios, change in the composition of debt has made many countries vulnerable to changes in financing conditions. As countries have gained access to international capital markets and non-resident participation in domestic debt markets has expanded, non-concessional debt has increased. Non-concessional financing accounted for more than 50 percent of total public debt in six countries (Côte d’Ivoire, Ghana, the Republic of Congo, Sudan, Zambia, and Zimbabwe) and more than 30 percent of total public debt in several other countries (including Chad, Senegal, Mozambique, and Ethiopia)

Coming to Botswana, which has rapidly became one of the world’s development success stories; recorded a government debt equivalent to 22.30 percent of the country's Gross Domestic Product in 2017. Government Debt to GDP in Botswana averaged 15.42 percent from 1998 until 2017, reaching an all time high of 27.50 percent in 2012 and a record low of 5.98 percent in 2006.

As at June 2018, Botswana’s Parliament heard that, Botswana owes over P13billion to the international financial institutions for the county’s 40 contracted projects. Out of the 40 projects, 36 of them have already been completed and only four are still ongoing.

This came after one Legislator for Selibe Phikwe West; Dithapelo Keorapetse had posed a question to the Finance Minister Kenneth Matambo to update the house on the names of International Financial Institutions, including regional financial institutions owed and the amounts outstandings.

The good and the bad…

Research has shown that, when used correctly, public debt improves the standard of living in a country. That's because it allows the government to build new roads and bridges, improve education and job training, and provide pensions. This spurs citizens to spend more now instead of saving for retirement. This spending by private citizens further boosts economic growth.

Governments tend to take on too much debt because the benefits make them popular with voters. Therefore, investors usually measure the level of risk by comparing debt to a country's total economic output, known as gross domestic product. The debt-to-GDP ratio gives an indication of how likely the country can pay off its debt. Investors usually don't become concerned until the debt-to-GDP ratio reaches a critical level. 

When it appears the debt is approaching a critical level, investors usually start demanding a higher interest rate. They want more return for the higher risk. As interest rates rise, it becomes more expensive for a country to refinance its existing debt. In time, more income has to go toward debt repayment, and less toward government services.

In the long run, public debt that's too large can act like driving with the emergency brake on. Investors drive up interest rates in return for greater risk of default. That makes the components of economic expansion, such as housing, business growth, and auto loans, more expensive. To avoid this burden, governments must be careful to find that sweet spot of public debt. It must be large enough to drive economic growth but small enough to keep interest rates low.