Africa’s rising debt; Real or imaginary threat?

Dr Kaberuka and Prof Frolens Luonga, the Governor of Tanzania Central Bank, on a panel during the 42nd Ordinary meeting of the Association of African central banks in Kigali yesterday. E. Kwizera.

The rising debt level in Africa is increasingly becoming a topical issue.

However, there’s divided opinion on whether the rising debt levels are a real threat or an alarm fuelled by myths and misinformation.

The average public debt on the continent rose to 45 per cent of GDP at the end of 2017 from 29.1 per cent in 2013.

Globally, developed countries’ debt level average stands at around 266 per cent while emerging markets’ average is around 168 per cent.

Nineteen countries on the African continent are above 60 per cent threshold set by the African Monetary Co-operation Programme.

Labels such as ‘sinking in debt’ and ‘debt ridden’ have, as a result, become common in reference to Africa.

Some experts argue that thresholds and targets around debts only serve to raise alarm and are often not relevant with specific social economic context of countries.

Rather than look at thresholds, the argument is that stakeholders ought to look at debt repayment capacity.

Dr Donald Kaberuka, the Chairman of SouthBridge and former President of African Development Bank, argued that the concerns in regards to the continent, and fears, are misplaced.

Rising debt, he said, is not unique to Africa.

With countries across the world having ambitious development projections some requiring heavy investment, debt is among the most viable avenues for financing the ambitions.

For instance, the Sustainable Development Goals is among global development goals requiring heavy investment.

SDGs’ incremental financing needs are estimated at between $614 billion and $638 billion per year while incremental spending needs for low-income countries and lower middle-income countries are estimated at $1.2 trillion per year.

Kaberuka said that aspects such as the share of revenue to GDP that go to paying debt which currently stands at about 12 per cent are of concern.

The 12 per cent share of revenue to GDP assigned to repayment of debt is similar to the figure in 1998 which either reflects low repayment capacity or low revenue generation ability.

“There should be efforts to ensure that countries have improved revenue generation capacities in order to be in a better position to pay back debts,” he said.

The former AfDB boss noted that countries continue to lose revenue through tax incentives.

Kaberuka also argued against the perception that debt was a bad thing, noting that its management and administration should probably be the key concern.

African countries that have gone beyond the 60 per cent threshold are all largely dependent on oil and gas, reflecting challenges in international commodities super cycle.

However, Vera Songwe, the Executive Secretary of the UN Economic Commission for Africa warned that if not contained rising debt could push back vulnerable in society into poverty.

“High debt levels and consequent unstable macro economies could unravel development gains.

Debt levels in more than half the African countries (30 countries) have risen precariously beyond the IMF recommended 40 per cent ceiling debt to GDP ratio for developing and emerging economies,” she said.

She noted that the number of countries with debt ratios of more than 75 per cent of GDP has more than doubled from 3 countries in 2010 to 11 countries in 2018.

She said that if not addressed, the rising debt levels are likely to lead to lower investment capacity by governments, high future taxes as well as future inability of the government to spend on development expenditure.

Africa and China debt

China has often been cited to be responsible for ‘burdening’ Africa with debt.

However, statistics show that the Asian nation is not the greatest lender to African countries. Paris Club is.

The Paris Club, is an informal group of official creditors who try to find sustainable and coordinated solutions to payment problems that debtor countries experience. The 22 countries, all western, do not include China.

Among the African countries in high debt distress, china has only lent them 15 per cent of the amounts they owe.

Share best practices not alarm

Patrick Njoroge, the Kenyan central bank governor, said that as opposed to the alarming statement on debt levels, more attention ought to be given to sharing best case scenarios and examples on debt management.

He said that models such as Rwanda’s could serve a great deal to share insights on ideal models.

The recent 14th World Bank Rwanda Economic Update noted that Rwanda is one of only four countries in Sub-Saharan Africa with low risk of debt distress.

The Bank rates countries’ risk of distress, which is categorised as high, moderate, in-distress, or low.

Among attributes that have facilitated the development, the bank said include careful borrowing, proper loan management and high economic growth.

According to the Ministry of Finance and Economic Planning preliminary results of the debt sustainability analysis, Rwanda’s present value debt to GDP reaching is around 32.9 per cent as of March this year and is below the critical EAC threshold of 50 per cent.

The share of concessional loans in the total debt stock stood at 63 per cent as of end 2018.

Both the World Bank and the IMF noted that Rwanda still has room to borrow more to finance development projects given that recent investments have shown a high return on investment.