Africa needs to mobilise innovative financing for development programmes and effectively manage its debt burden, which left untackled, threatens economic growth, experts have said.
A workshop on Debt Management, organised for policy makers from different African countries and research institutions to share challenges and best practices in debt management, heard that rising debt was constraining economic growth in Africa, worsened by the combined crises of the Covid-19 pandemic and the Ukraine war.
Adam Elhiraika, Director of the Macroeconomics and Governance Division, United National Economic Commission for Africa (UNECA) said on Monday that managing debt has remained a major challenge for many countries on the back of multiple global economic crises, despite it being a significant source of funding for the economic growth and development of African countries.
“The Covid-19 pandemic and the Russia-Ukraine war have negatively affected the fiscal performance of African countries, where the debt-to-GDP ratio has increased from 57% in 2019 and by 2021 it was to 66% in 2022,” Elhiraika said, attributing the increase in the debt burden to a growing spending on the health sector in responding to the pandemic as well as the social costs States have borne to mitigate the negative effects of the total or partial shutdown of economic activities.
He said the compounded global crises had exacerbated the debt distress for a number of African countries, with weakened domestic currency and increasing external debt.
Already the debt-to-GDP ratio for oil-importing countries in Africa reached 73% of GDP in 2022, due to skyrocketing energy costs brought about by the Ukraine crisis. The IMF’s latest list of low-income countries’ Debt Sustainability Analysis (DSA) shows that as of May 31, 2022, 16 African countries were at high risk of debt distress, and 7 were already in debt distress.
The International Monetary Fund has strongly recommended the G20 to launch the Debt Service Suspension Initiative (DSSI) which was established in 2021. It has helped countries in focusing their efforts on combating the epidemic and protecting the lives and livelihoods of the most vulnerable individuals.
Elhiraika said the difficult economic situation facing many African countries has made them account for 52% of the eligible DSSI countries. Out of the 73 eligible countries, 48 participated in this initiative, which succeeded in suspending the payment of $12.9bn of debt services between May 2020 and December 2021.
In an effort to help member states, UNECA in 2021 launched the Liquidity and Sustainability Facility (LSF) to lower liquidity premiums and enhance sovereign access to international bond markets for African countries through a regional repo market that conforms to international norms.
The facility has the potential to save African countries an estimated US$11bn over the next five years on borrowing costs. It has already attracted interest from a number of significant international Asset Managers and its potential value in the first year might reach up to $30 billion.
In August 2021, the International Monetary Fund launched the allocation of Special Drawing Rights worth US$650bn to boost global liquidity. Many developed countries had agreed on the reallocation of SDRs to support low-income countries.