Africa’s ballooning debt is hampering its economies and dimming its prospects of a brighter future. Countries fashioned out strategies to tackle the continent’s poor handling of its debt distress and negotiation in the face of a skewed global financing architecture at the recently launched Debt Management Forum for Africa in Nigeria, writes FELIX OLOYEDE

Many African countries are struggling to cope with their debt burden amid an increasingly volatile, uncertain, complex, ambiguous, and digital global economy. The traditional cliché “Those who go a-borrowing, go a-sorrowing” has become irrelevant as modern economists believe that it is not borrowing that is the problem, but for what purpose and under what sundry terms and conditions. Accumulating debt for recurrent expenditure and non-developmental purposes is where the sorrow lies.

Countries around the world often rely on local and multilateral institutions for various reasons. They seek funding for high-value infrastructure projects that promote economic growth and provide a high return on investment, which helps manage their debt when it matures. These borrowing strategies are typically aimed at long-term investments lasting over 10 to 15 years, with a focus on economic impact. Additionally, they implement active liquidity management plans to ensure timely repayment of the debt. By developing a strong investment grade, countries can attract future loans on competitive and concessional terms while also strengthening their domestic debt markets to enhance the stability of their debt portfolios.

However, several African countries have been contracting loans allegedly channelled to the wrong investments in the mode of vanity projects, consumption purposes, and building roads that lead to nowhere. Besides the faulty strategies, they mainly attract high-interest short-term loans for long-term investments.

Consequently, Africa’s debt burden has surged to 170 per cent in the post-COVID-19 era, compared to 2010 figures, adversely affecting public financing, infrastructure, and the gross domestic product.

African Ministers of Finance recently converged on Abuja for the launch of the Debt Management Forum for Africa and the inaugural policy dialogue titled “Making Debt Work for Africa: Policies, Practices, and Options.”. They acknowledged that many African countries were currently experiencing significant debt distress, more so than in other regions, and that urgent strategic interventions are needed.

The event, organised by the African Development Bank Group, culminated in a consensus that while there is a need to reform the inequitable global financing system, African countries can also take substantial action. This includes addressing financial leakages, leveraging domestic markets, and maximising the use of natural resources to secure essential funding for socioeconomic development.

Debt crisis

Many African governments are using a substantial portion of their revenue to service debt instead of improving the standard of living of their people.

Africa’s public debt has surged by 170 per cent since 2010, hitting $1.15tn in 2023. Most debts were incurred during a long period of low-interest rates in the global market at the start of this century. However, in the post-Covid-19 era, there has been a significant increase in the cost of debt servicing and interest on new loans. This rise is attributed to structural issues in the global debt framework, recent global and domestic shocks, and vulnerabilities in Africa’s macroeconomic fundamentals.

Nigeria’s total debt servicing costs reached N3.57tn in the third quarter of 2024, an increase of N60bn, or 1.71 per cent, from N3.51tn in the second quarter, according to the Debt Management Office. This year, the country has allocated N15.81tn, which accounts for 45 per cent of its revenue, for debt servicing.

Vice President and Chief Economist, Economic Governance and Knowledge Management, AfDB, Prof. Kevin Urama, noted that Africa’s debt service costs had risen sharply, diverting resources from infrastructure investment, thus constraining future GDP growth and economic transformation.

The average debt service cost of 49 African countries jumped from an average of 8.4 per cent of GDP in 2015–19 to 12.7 per cent in 2020–2022.

According to the African Economic Outlook Report (2024), African countries were estimated to have spent around $74bn on debt service last year (up from $17bn in 2010), of which $40bn is owed to private creditors, representing 54 per cent of total debt service.

Currently, 22 African countries are either in or at high risk of debt distress (compared to 13 in 2010). “Refinancing risks could further increase going forward, especially for countries with large bullet redemptions,” Urama warned.

The chief economists of the AfDB noted that developed countries could sustain high levels of debt with low debt service burdens. In contrast, developing countries in Africa, particularly the most vulnerable ones, are increasingly allocating a larger portion of their fiscal resources to servicing public debt, which contributes to a worsening poverty rate.

As these debt challenges deepen, external financial flows to Africa have been negatively impacted by tightening global financial conditions, as well as various domestic and external factors.

“Foreign direct investment, official development assistance, portfolio investment, and remittances fell by 19.4 per cent in 2022, reversing a strong immediate post-pandemic recovery in external flows. This leads to what I call the paradox of debt and development financing in Africa,” Urama said.

However, the market failures in the global financing and debt architecture are not entirely to blame for Africa’s fiscal and debt challenges. There are well-known domestic drivers of the cost of capital that countries need to address.

Urama disclosed that corruption costs Africa $148bn annually, and about $90bn leaves the continent yearly in the form of illicit financial flows.

“In total, some estimates show that African countries lose above $1.6bn daily in capital outflows due to the combined effects of the high-risk premiums, international profit shifting, illicit financial flows, corruption, etc. Measured annually, this could reach about $587bn—more than three times the total external financial inflows to Africa yearly. Plugging these leakages is therefore critical to addressing domestic resource mobilization and debt sustainability challenges in Africa,” he reasoned.

The Director of Macroeconomic Policy, Forecasting, and Research Department at the AfDB, Dr Anthony Simpasa, noted that the debt management initiative had become more critical for responding to persistent headwinds, building economic resilience, and accelerating the continent’s development today.

He stated that the debt-to-GDP ratio was already 60 per cent, with a public investment efficiency gap of 39 per cent. “That means that the funds (borrowings) are not well utilised. We are talking of $174bn in debt servicing in 2024, far more than the continent spends on education, 13 per cent of gross revenue, unlike 9.9 per cent between 2015 and 2019. That money could have gone into infrastructure and investment in social needs’ costs. African countries borrow to pay or refinance existing debt instead of financing development.”

Efforts made

African countries and their finance ministers are concerned about the continent’s debt impasse. They complained that the more they tried to ease the burden, the higher the hurdle imposed by their foreign creditors.

The Director-General of the Debt Management Office, Patience Oniha, noted the role of the credit rating agencies and some unfair risk assessments of the African countries, which were less risky than other regions.

At the panel on credit rating in Africa, Oniha noted that the discretionary modus operandi of the assessors often leaves their hosts hard done by.

She recalled that Nigeria was in 2022 downgraded by one of the three credit rating agencies. “There was no review on their side. It was just based on our decision or announcement of a bond exchange, which is just a risk management strategy and does not mean a default. And that was it. The discretionary element in their parameter is high, especially fuelled by their distrust in our ability,” she said.

Oniha added that feedback from the agencies’ findings was usually rapid, “with less than 24 hours to respond, which is just not fair, and often never changing their positions.”.

Prof. Daniel Cash of Aston University in the UK observed that unfair ratings are not unique to African countries but had been with Europeans until they started getting their ratings done on the continent and by their own regulations.

“You have to be pan-African in your approach. It is largely for Africans to support themselves in tackling this problem and not keep seeking help from outside,” Cash said.

DeMFA agreement

According to Urama, African countries should stop seeing credit rating agencies and foreign experts as gods.

He said, “What happens when a credit rating agency does not like a government? Is it just a question of bias? What of the intra-African biases among fellow African countries? We need to reduce biases among ourselves.

“We have instruments that can help us on this continent, but do we use them? We keep running to creditors’ experts for advice, but they will always do so on their own terms.

“Similarly, negotiations from African countries can be very frustrating. One country went to Copenhagen with a large entourage, and in the middle of the negotiation, the officials were busy shopping. Later, they came to ask, ‘Prof., have they finished?’ The truth is that negotiating debt on behalf of a country is a very serious assignment, and officials should take it responsibly.”

The Assistant Director of Debt Contraction, Ministry of Finance, Zambia, Patrick Mfungo, stressed the need for an in-country legal framework on borrowing and transparency in the process.

He noted that some creditors were not multilateral but often demanded to be treated as such during negotiations.

“It is therefore important to review and update legal frameworks to guide this process. In Zambia, we have included the National Assembly in what we do. We have enacted new laws that make it statutory to sanitise borrowing plans and reject those that are not of maximum interest. It is part of the legal requirement to publish the debt report and make it public,” he said.

The Director of the African Development Institute of the AfDB, Dr Eric Ogunleye, added that from the shared experience on debt burden and management at the two-day forum, African countries are unanimous on the need for an urgent Debt Management Forum for Africa that is focused on routine policy dialogue to find homegrown solutions in dealing with the common problem.

He explained that the AfDB was already offering support to the African countries in the management of debts, including the creation of an African Credit Rating Agency, capacity development, technical assistance, and training for the countries. He noted that there was a discussion on the use of the African Legal Support Facility, which the AfDB has already created to help the countries renegotiate their loans fairly.

“That is the facility they could fall back on to provide them with a legal framework and support to help them through a fair process. We all only need to leverage what we have within instead of running to our creditors for help,” he said.

There was a strong focus on the prudent management of resources, highlighting the necessity for African countries to become more self-reliant in cultivating their consumables, leveraging their natural endowments to fulfil their requirements, and enhancing the value of their natural wealth to maximise benefits that can support and address contemporary needs.

The saying goes, “Tax is the debt that the public pays today, while debt is the tax the public pays tomorrow.”

Bridging this gap is the role of sound fiscal discipline, which not only optimises the abundant local resources to meet current demands but also spares the country from the burdens of debt and the accompanying hardships.