Mthuli warns of looming debt crisis

SAMANTHA MADE

Zimbabwe’s Minister of Finance, Economic Development, and Investment Promotion, Professor Mthuli Ncube, has urged African nations to prioritise debt restructuring with international creditors, warning that rising debt levels and the escalating cost of capital pose a significant threat to economic stability across the continent.

Professor Ncube underscored the growing burden of unsustainable debt, exacerbated by external shocks such as climate change, inflationary pressures, and tightening global financial conditions.

He emphasized the urgent need to reform existing debt restructuring frameworks to provide struggling economies with the necessary fiscal space for recovery and growth.

“We need to understand the changing global landscape, where debt levels are rising, the cost of capital globally is also increasing, and climate shocks continue to impact countries, costing between 2% and 5% of GDP,” Professor Ncube stated.

His remarks come at a time when several African countries, including Zimbabwe, Ghana, Zambia, Egypt, Nigeria, Kenya, Ethiopia, and Angola, are facing severe debt distress. Without decisive action, the situation could spiral into a full-blown economic crisis, potentially triggering social and political instability.

Debt restructuring is a financial strategy that allows countries to renegotiate their debt obligations with international creditors, making it more manageable and sustainable. It can involve extending repayment periods, reducing interest rates, or even securing partial debt forgiveness. For African economies grappling with mounting obligations, debt restructuring offers a critical pathway to restoring fiscal stability and economic growth.

Professor Ncube highlighted the importance of reforming the G20 Common Framework, a global initiative designed to assist developing countries in restructuring their debt. However, critics argue that the framework has been slow and ineffective in delivering relief, leaving many countries in prolonged financial distress.

“We need to reform the framework so that countries can receive the necessary support in restructuring their debt,” Professor Ncube stressed.

“Additionally, African nations must support each other in these efforts to ensure long-term financial sustainability.”

Many African countries are currently grappling with debt crises due to a combination of excessive borrowing, poor economic management, external shocks, and unfavorable global financial conditions.

Here is a closer look at eight countries facing severe debt challenges.

The first is Zimbabwe. The southern African country’s total public debt in the past few months surged by US$3bn to US$21bn following a recapitalisation effort, with the Mutapa Investment Fund receiving US$1.9bn and the Reserve Bank of Zimbabwe securing US$900m. With limited access to international credit markets due to arrears, Zimbabwe’s debt-to-GDP ratio continues to be a concern.

Another is Ghana. Ghana defaulted on most of its external debt in 2022 and sought an IMF bailout. Despite restructuring efforts, its debt-to-GDP ratio remains high at around 85%, placing immense pressure on public finances.

Zimbabwe’s northern neighbour, Zambia is also in debt distress. Zambia was the first African country to default during the COVID-19 pandemic. It has struggled with debt renegotiation delays, complicating its economic recovery.

Egypt is another country facing a growing debt burden exceeding 90% of GDP, Egypt’s economic crisis has been aggravated by high inflation and a weakening currency.

Africa’s largest economy, Nigeria is also in trouble, with a public debt exceeding US$110m. Nigeria’s revenue-to-debt servicing ratio is unsustainable, leaving little fiscal room for infrastructure and social spending.

Kenya is also struggling with a debt load surpassing 70% of GDP, exacerbated by heavy reliance on costly commercial loans. The country faces mounting pressure to meet its Eurobond obligations in the coming years.

Yet another country in debt distress is Ethiopia. Political instability and a prolonged civil conflict have worsened Ethiopia’s debt situation, forcing the government to seek relief under the G20 Common Framework.

In addition, Angola is also choked with an unsustainable debt level. Despite being an oil-rich nation, Angola remains heavily indebted, with much of its debt owed to China. Currency devaluation has further strained its repayment capacity.

The debt crisis in Africa is not just an economic issue—it is a ticking time bomb that could have devastating consequences if left unaddressed.

Here’s why?

As debt obligations outpace revenue generation, many African nations risk defaulting on their loans, which would significantly erode investor confidence and make future borrowing even more expensive. Zambia’s 2020 default and Ghana’s more recent debt distress highlight the dangers of unsustainable borrowing.

High debt servicing costs leave little room for essential public spending on healthcare, education, and infrastructure. Governments facing debt distress often resort to harsh austerity measures, leading to cuts in social services and heightened public discontent.

Heavy debt burdens often lead to currency depreciation, making imports more expensive and driving up inflation. In countries like Zimbabwe and Ghana, this has severely impacted the cost of living, worsening economic hardship for citizens.

When governments are unable to meet basic public needs due to debt obligations, frustration grows among the population. This can lead to protests, strikes, and, in extreme cases, political instability. Sudan, for instance, has faced ongoing unrest partly linked to economic mismanagement and debt challenges.

Excessive debt without sustainable restructuring can lock countries out of international financial markets, making it difficult to secure funding for future development projects. Zimbabwe’s prolonged arrears to international creditors have effectively cut it off from major financial institutions such as the World Bank and IMF.

To avoid an impending economic catastrophe, African countries must take decisive steps toward debt sustainability. This requires governments enhancing tax collection systems, reducing illicit financial flows, and broadening their revenue base to reduce reliance on external borrowing. Many African nations also suffer from opaque debt agreements, particularly with private creditors and Chinese lenders. Transparency in debt reporting is crucial for accountability and effective restructuring negotiations.

Also, overreliance on commodity exports leaves countries vulnerable to external shocks. Diversifying into sectors such as manufacturing, technology, and agribusiness can boost economic resilience.

African countries should also advocate for improved mechanisms under the G20 Common Framework and seek alternative solutions, such as debt-for-development swaps.

Professor Ncube’s call for debt restructuring reform comes at a crucial time when many African economies are on the brink of financial distress.

Without urgent intervention, the continent faces a wave of defaults, economic stagnation, and social turmoil. Governments must act swiftly to implement sustainable debt management strategies, ensuring that Africa’s economic future is not derailed by the burden of unsustainable borrowing.

The debt crisis is not just a problem for individual countries—it is a systemic issue that demands collective action. Whether through policy reforms, creditor negotiations, or economic diversification, African leaders must prioritise long-term stability over short-term fixes. Failure to do so could result in a financial catastrophe with far-reaching consequences for the continent’s development prospects.