The world economy is currently facing a series of complex and interconnected crises that have had a significant impact on global economic stability. Although national economies are gradually recovering from the turmoil of recent years, challenges remain, which are contributing to uneven growth and exacerbating global inequalities. Among these challenges, the alarming increase in global public debt is a major concern for the international community.
While many African countries have experienced economic recovery in the post-COVID era, geopolitical tensions and over-reliance on external resources are undermining stability. Moreover, rising interest rates and a strong US dollar are increasing inflation and public debt, further straining trade balances.
African countries face a difficult trade-off between repaying their debts and pursuing key development goals. In Sub-Saharan Africa alone, governments will pay around $84 billion in debt service costs in 2021, while the Middle East and North Africa will incur around $45 billion in debt costs.
The World Bank projects that global debt service costs will rise by about 12% by 2024, with Africa facing $163 billion in debt service alone. Debt service payments are projected to peak in 2024 and then decline, but will remain above pre-pandemic levels for the time being.
Interestingly, Alexander Hamilton, one of the 18th century founding fathers of the United States, argued that ‘national debt, if not excessive, is a boon to the nation.’ Indeed, public debt, if effectively managed, can serve as an important tool for development and fund expenditures that pave the way for a brighter future.
But excessive debt is a huge burden and a drag on development efforts. Cascading crises in recent years have led to a surge in debt across the world, including in Africa. Alarmingly, some 3.3 billion people now live in countries where more money is spent on interest payments than on education and health services.
Key components of Africa’s debt
Africa’s debt-to-GDP ratio is expected to exceed 60 percent in the medium term, exacerbating existing financing problems caused by the rising cost of food and energy imports that the UN has labelled a “cost of living crisis of a generation”.
As a result, African countries are faced with difficult decisions between allocating resources to debt repayment or providing essential social services and public goods to their citizens.
Africa’s external debt consists primarily of financial obligations to foreign creditors, including governments, international financial institutions, and private entities such as commercial banks. The recent surge in this debt category is largely due to large-scale borrowing for critical development projects such as infrastructure, energy, and fiscal stabilization measures aimed at stimulating short-term growth.
However, reliance on external debt exposes countries to fluctuations in the global economy and currency risks, complicating fiscal management and economic planning. The decline of national currencies against the US dollar has exacerbated the debt burden.
Historically, most of Africa’s external debt was owed to official creditors, including high-income countries and multilateral institutions, but things have changed and a significant proportion is now held by private creditors.
More than 40 percent of Africa’s external debt is now owed to private companies, up from 30 percent in 2010. Additionally, more than 20 percent is owed to bilateral creditors. This change has made borrowing costs higher compared to official financing.
Given the challenges associated with accessing and managing external debt, domestic debt – that is, borrowing in local currency on domestic markets – is becoming increasingly important.
The Economic Commission for Africa (ECA) estimates that Africa’s external to domestic debt ratio is roughly 55.2% to 44.8%. Domestic debt generally has a shorter maturity than the bulk of external debt, which can require more frequent refinancing, resulting in higher costs on top of rollover risks.
A shift from external to domestic borrowing may simply transform one vulnerability into another. If domestic debt expands beyond sustainable levels, it could limit the private sector’s access to credit, adversely affecting economic growth.
High domestic debt can also signal fiscal weakness to international investors and undermine confidence in a country’s fiscal health. Moreover, through the fiscal-financial sector nexus, domestic debt can destabilize the financial sector, which is often the main source of domestic borrowing for many African governments.
On a more positive note, domestic borrowing, if managed effectively, can serve government needs and fund important public goods. This includes providing support to state-owned enterprises (SOEs) to fulfill their socio-economic missions, and governments can provide the capital they need for operations, infrastructure development, and financial stability.
But guaranteeing SOE borrowing means the government has to repay in the event of default, further straining already-strained finances. As Mozambique’s experience shows, non-performance of SOE debt, even hidden debt, can lead to a sovereign credit default.
Hidden debt – undisclosed liabilities owed by governments and state-owned enterprises – poses a major risk to African countries. Such debt is difficult to track and manage because it arises from opaque contracts and off-budget financing. The existence of hidden debt creates unexpected fiscal pressures and increases fiscal risks, especially for low-income countries that are already struggling with refinancing needs.
Debt Management in Africa
Given the increasing complexity of government borrowing and rising levels of public debt, African countries need to establish and implement comprehensive debt management structures and processes.
Yet many developing countries, including African countries, lack the capacity (skills and resources) needed to properly manage their public debt. This deficit can lead to poor debt monitoring and analysis, difficulties in negotiating with creditors and rating agencies, and distort risk perceptions about investing in Africa.
To address these challenges, African governments need to modernize their debt management approaches and learn from best practices within the continent and beyond.
Establishing a centralized debt management office with the necessary expertise, tools and technology to conduct simulations and communicate effectively with the markets is essential to return to sustainable debt levels and improve the sovereign’s credit rating.
While progress has been made on debt management across Africa, some governments still struggle with policy transparency, particularly around accurate reporting of debt amounts and terms. This lack of transparency hinders effective debt management and undermines evidence-based policymaking.
African countries face common external variables that affect debt sustainability, including commodity price fluctuations, currency instability and the global economic downturn, all of which complicate their ability to service their debt without accurate, real-time information.
Supporting ECA member states
ECA co-chairs the High-Level Working Group on Global Financial Architecture, helping African countries forge a unified position on key debt management issues and amplifying Africa’s voice in global discussions.
ECA is also working to build capacity in member countries by hosting a series of peer learning workshops designed for policymakers involved in debt management. These workshops facilitate the exchange of information on the current debt situation, key challenges to sustainability, and different debt management strategies.
Recent initiatives by ECA include:
– A hybrid capacity-building workshop on the theme “Debt Statistics for Effective Debt Restructuring”, to improve debt transparency among African member states while addressing key reporting issues.
– The workshop focused on domestic debt restructuring and debt resolution strategies to promote macroeconomic stability while fostering equitable growth through transparent implementation.
– A peer workshop aimed at strengthening the Ministry of Finance’s capacity to manage growing debt for state-owned enterprises, with a focus on best practices in debt management, operational strengthening, and privatization.
In conclusion, Africa’s public debt management challenges are multifaceted and require a comprehensive strategy that addresses both domestic and external debt issues. Modernizing debt management frameworks and increasing transparency can help African countries navigate the complexities of public debt and work towards sustainable development.
Support from ECA and the international community:
Helping African countries overcome these challenges and achieve economic success
Stability.
This article was prepared with the assistance of YARED ANTONIOUS TELLOREA from the Macroeconomics, Finance and Governance Department.
