Rising Debts in Sub-Saharan Africa-A Threat to “Africa Rising”

“Africa Arise”

Africa, abounding in natural resources should not be on the deficit side of the equation in the natural scheme of things. Precious metals abound in the belly of the continent while its fields yield all manner of soft commodities. As a continent, Africa produces more than half the worlds diamond and about three quarters of its platinum. The hills of Zambia give its copper whilst the mines of South Africa are scattered with gold. Ivory Coast and Ghana lead the world in the production of cocoa beans.  Most Sub-Saharan African states struck oil in the last decade. Despite this huge portfolio of natural resources, the continent appears to be in a state of post-independence economic dormancy.

However, Sub-Saharan Africa has seen a period of tremendous economic growth over the last decade thereby earning the “Africa Arising” tag. Notably, Christine Lagarde, director of International Monetary Fund (IMF) in 2014 alluded to this notion in a meeting of African finance ministers held in Mozambique.  Growth in the region has “clearly taken off” she said. Political instability which has been the main bane of the continent’s lacklustre decades before the millennium has marginally improved. Democratic governance and peaceful transition of power from one government to another is taking shape across the continent.

The Republic of Ghana after ushering in constitutional rule in 1992 has been synonymous with this political wave. The Federal Republic of Nigeria, the economic powerhouse of the West African sub-region equally reinforces these democratic ideals. Its last polls saw off an incumbent government from a political party that had held the reins of power for about two decades. A new Africa is on the horizon. However, upheavals and skirmishes in some of its troubled hotspots like Kenya, Ivory Coast, Burkina Faso, Burundi, South Sudan and others continue to mar its economic resurgence. These unfortunate events continue to tell the story of the continent’s viscous ethnocentric politics, human right abuses, poverty and social instability which have continually plagued economic development.


Post Independence and HIPC

Post independent Sub-Saharan Africa, after years of economic mismanagement stemming from political power struggles found itself saddled with immense debt that required relief. The sought after debt relief came through the Heavily Indebted Poor Countries Initiative (HIPC) launched by the IMF and World Bank in 1996. The programme aimed at eliminating the burden of debt and rescheduling of Low Income Countries (LICs) not eligible under the Brady Plan. The initiative’s target was to reduce the debt stock of LICs to a sustainable level within a reasonable time frame.

Sub-Saharan African countries constituted 84.6 per cent of these LICs. The initiative supplemented with the Multilateral Debt Relief Initiative (MDRI) in 2005 led 35 of 39 countries through the various phases of the programme to completion. The initiative undoubtedly achieved its objectives of reducing the debt stock and creating greater fiscal space for social spending for the identified countries. Countries that completed the programme received 100 per cent debt relief from the IMF and other creditors thereby reducing their debt stocks. However, exit from the programme did not guarantee long-term debt sustainability.


Economic Resurgence and Growth

Economic growth in Sub-Saharan Africa accelerated in the first decade of the millennium. Real GDP growth averaged 6.6 per cent between 2004 and 2008. This record of economic growth trajectory flattened out though. Data published by the International Monetary Fund in its bi-annual regional economic outlook showed recent growth figures of 4.9 per cent in 2013, 5.0 per cent in 2014 and projections of 4.5 per cent in 2015. Despite lower commodity prices and sluggish growth in advanced economies coupled with China’s reduced consumption of the continent’s commodities, highlighted by its own decelerated growth, projected economic output of the region (the lowest in a decade of tremendous growth) is still above the global average of 2.5 per cent in 2015. Source: IMF


Issuance Boom

Arguably, economic growth in Sub-Sahara Africa allowed some African sovereigns access to international capital markets. Weaker monetary policies in Europe and America especially after the recent financial crisis led to investors in search of high yielding debt instruments outside their traditional boundaries. Strong GDP growth meant an otherwise risky Sub-Saharan Africa could produce and generate enough revenue to repay debt holders, breaking through investors’ risk aversion. Ghana, for the first time in history and the first among Sub-Saharan African countries, accessed the sovereign debt market in 2007. The likes of Zambia, Gabon, Rwanda, Senegal and Cote d’Ivoire accessed the market from 2012 to raise funds for so called capital expenditures. Kenya’s issuance of a US$2 billion Eurobond was four times over subscribed in 2014.

The potential for Africa to develop to its fullest capacity using the billions of borrowed dollars judiciously and for the right projects is certainly not up for debate.  However, as mentioned by Dr. Fanwell Bokosi (of The African Forum and Network on Debt Development), the covenants of these debt instruments limit policy space. This robs respective governments of the opportunity to make the most of such monies. Such constraints in the interest of creditors usually bar the use of funds in economic sectors.

They also prevent the realization of projects not specified in bond covenants which may however suffice to yield sufficient ROE to facilitate debt repayment. It is therefore critical for Sub-Saharan African governments to thoroughly analyze their capital needs, debt stock and expected portfolio returns before taking on additional financing. Without a well thought out analysis of a country’s finances, additional debt loading, as Ms. Largarde puts it, could be an additional vulnerability and risks “spoiling” the Africa rising initiative. “Governments should be attentive and should be cautious about not overloading their countries with too much debt,” she said to The Financial Times in an interview last year.


Danger of a Rerun

Debt relief for the African countries that reached completion of the HIPC/MDRI initiative by mid 2012 amounted to US$100 billion. Debt to GDP ratio only fell below 30% after these initiatives on the back of strong GDP growth and improved prices on world commodity markets. Debt Sustainability Analysis by the IMF in 2014 however showed the debt stocks of some beneficiary countries to be on the rise.

On this same report, six countries are still in debt crisis of which two (Burundi and DRC) are in Sub-Saharan Africa. A further sixteen encompassing Burkina Faso, Cote d’ Ivoire, Ghana, Guinea, Guinea-Bissau, Malawi, Mali, Togo, Niger, The Gambia, Sierra Leone, Mozambique, Mauritania, and Central African Republic were classified as moderately in debt distress. A separate report by the World Bank notes that a third of the gains made on debt stock ratios since HIPC/MDRI for eight African countries (Niger, Malawi, Ghana, Senegal, Uganda, Mozambique, Benin and Sao Tome and Principe) had been wiped out over a four-year period since their completion of the programme.  It warned that if the rate of piling on debt continues, the debt to GDP ratios will soon revert to pre-relief ratios within a decade irrespective of economic growth.

Source: International Monetary Fund, World Economic Outlook Database, April 2015

The IMF has repeatedly cautioned African countries about the perceived risks of the issuance boom especially those denominated in foreign currencies. In the worst case scenario, a defaulting sovereign may print money (inflate) to pay its creditors but not without attendant economic consequences. The persistent Greek problem reflect this assertion in part. Had the sovereign country’s foreign indebtedness been in Drachma, it may have been inflated away somehow but not without economic consequences.

The combined borrowing (through bond issues, both sovereign and private) of Sub-Saharan Africa from the capital market in 2000 was just about US$1 billion. According to the IMF, US$5 billion was raised in 2009.This increased to US$6 billion in 2012 and a record US$11 billion the following year. The debt has grown to US$ 20 billion as of 2014. Interestingly and to say not unexpected, investors are demanding higher premium for holding the debts of these countries amid concerns of increasing risks (rising fiscal deficits). Average fiscal surpluses of 1.7 per cent of GDP recorded between 2004 and 2008 have waned to ever increasing deficits since 2010. The IMF forecasts that fiscal deficits in the region will hit 3.7 per cent of GDP in 2015 and dip to 2.9 per cent in 2016. Source: IMF

Market sentiment to this fundamental analysis is well illustrated by Zambia’s coupon rate of 8.625 per cent for a 10-year USD$ 1 billion issued in 2014 compared to the 5.63 per cent yield on its first bond issue in 2012. With such perceived risks and premiums, interest expenses soar and could be unsustainable in the longer term when coupled with poorer economic output.

As a matter of fact, some countries’ debts are fast approaching the threshold of 70 per cent of GDP or beyond; a rule of thumb being that 40 per cent is sustainable for an emerging economy. One such country is Ghana – Debt to GDP ratio as at June 2015 stood at 70.9 per cent. The fiscal soundness of the country, or lack thereof, once touted as a flag bearer of the “Africa rising” narrative cannot be overlooked.


The republic of Ghana is a middle-income country by status (based on 60 per cent upward revision of GDP) which had prior to 2014 entered into three-year support programmes with the IMF in 1999, 2003 and 2009. The country once again asked to be bailed out by the IMF last year after what analyst perceived as deepening economic crisis.  The country received the allotted quota of cash flows as per the agreement between the two parties pending performance review for the disbursement of further tranches.

It can be argued that anticipated revenues from oil discovery and the prospects of economic growth led the Ghanaian government to increase its spending incrementally. Contracted loans are not self financing i.e. they are not invested in projects that will generate revenue to repay the debt. The country’s huge public wage bill, which accounts for about 70 per cent of the government’s operating expenditure, is of great concern to donor countries and creditors alike.  The ongoing power crisis is crippling businesses thereby decreasing economic output.

Depreciation of the Ghana cedi, branded the worst performing currency in sub-Saharan Africa does not help in the scheme of things. The currency depreciated by 24 per cent in 2013, 40 per cent in 2014 and about 26.2 per cent as at June 30 this year. In July the Cedi bounced back, recording impressive gains against the major trading currencies (year to date depreciation of 3.4 per cent). An opportunity exists for Ghana in this volatile situation to make some gains on devaluation. Historically, Germany (West Germany) after the Second World War was able to repay its debt following the 1953 London Debt Agreement.

The provisions of the accord allowed the country to make repayment with trade surpluses. In effect creditors’ strengthened their currencies relative to a weaker Deutschmark allowing the Germans to rake in consistent cash flows for repayment. Devaluing of the Cedi would therefore have been an opportunity to generate more income through an export boom. However, Ghana unlike post conflict Germany has not been able to develop and broaden its export base to take advantage of the value drop.

Ghana’s current debt exceeds that of pre-HIPC levels. This was revealed in a report by the IMF after a review of the country’s performance under the current bailout programme. Ghana’s debt stock was about 90 billion Ghana cedis as at June this year and is expected to increase in the coming months. Comparatively, Ghana’s debt, prior to joining the HIPC initiative in April 2001 was 24 million Ghana cedis in present times (6million dollars).

The Washington-based lender is projecting a debt to GDP ratio of 75 per cent by the close of the year for the country. Despite the gloomy picture painted by economists and the dreaded 70 per cent threshold, the finance minister and a host of others will be on a roadshow in the coming months to raise some 1.5 billion dollars from foreign investors. The proceeds are expected to be used in financing budgeted projects and payoff some earlier issues. Caution cannot be thrown to the wind by the Ghanaian government especially in times like these.

Debt Sustainability

While specific definition of debt sustainability exists in the literature, the key underpinnings of HIPC/MDRI can be used to earmark when debt may be unsustainable: inability of a country to service its current and future debts fully without recourse to rescheduling and or debt relief. Increasing debt ratios, in general, do not simply imply unsustainable debt burdens, but rapid rate of debt ratio increment signal increasing debt burdens and long-term sustainability.

Since debt relief, the following African countries have borrowed at a quicker pace than any of their peers: Ghana, Uganda, Senegal, Niger, Malawi, Benin, Mozambique and São Tomé and Príncipe. Ethiopia, Burkina Faso and Tanzania’s debt stock indicators are rising quite swiftly again. Despite the economic resurgence of the sub region, some researchers (Beddies et al) argue the sustainability of new external debts due to the recent and rapid pilling on of non-concessional debt.

Most African countries, if not all, consume more than they produce and even if they produce anything at all it is usually the raw or semi finished product that is exported via poorer export structures. Value addition economic activity is truncated prematurely denying the treasury some needed revenues to sustain economic growth. Less efficient tax systems equally contribute to poor revenue generation of the government machinery.

Regrettably fewer citizenry and corporate entities are taxed whilst multinationals enjoy tax breaks in perpetuity. Financial markets are still far from maturity in these countries. Total financial inclusion is a dream to be realized. Dependence on aid packages from donor countries/partners to supplement budget deficit is still pervasive in the sub-region. Little can be said about weaker policies. Barack Obama in his first visit to the continent as president of the United States of America stated unambiguously what Africa needed – strong institutions.

These policy structures beautifully adorn the landscapes of Abidjan, Harare, Niamey, Dakar but are devoid of substance. Revenue generation capacity of these countries are lowered by all these factors thereby exposing these countries to solvency and liquidity risks. Access to concessional loans seem to have dried up and thus pave the way for cash strapped African governments to resort to public private partnerships and other less concessional borrowings to finance their growth. However, these riskier sources of funding increase threat to debt sustainability.  Sovereign bonds make up about 15 per cent of Senegal’s debt stock. In Mozambique, semi-concessional loans from the Chinese government make up a third of their debt stock. Both concessional and non-concessional loans feature in Ghana’s debt stock. Source: International Monetary Fund, World Economic Outlook Database, April 2015


Sub-Saharan African governments have issued international sovereign bonds on the back of perceived economic growth for deficit financing and public spending but maturing public debt need to be redeemed. However, these issues as a financing option and debt stock piling bring untoward macroeconomic risks that have to be carefully managed to avoid unfavourable events in the future. Interest rate risk is ever persistent in these issues since global interest rate will not be near zero in perpetuity.

Given this scenario, rolling over a long term debt instrument may come at considerable cost to the borrower when rates inch upward. Yield on Zambia’s second Eurobond issue exemplifies this risk carried on government books. More so, these issuances are usually foreign currency denominated thereby carrying exchange rate risk. Challenges in significant policies that are functions of macroeconomic management could also be detrimental to the finances of countries. Côte d’Ivoire defaulted on a $29 million interest payment in 2011 following election disputes.

Sub-Saharan Africa had a good start to the millennium with robust economic growth which catapulted most of the countries to the international capital markets to access less concessional funding (riskier) to further drive their developmental agenda, however, the relative ease of raising such funds from these markets should not mask the apparent risks inherent in them. It is time to prioritize what needs doing from what can be done. Austerity is not advocated however, prudence must guide the conscience and decision making process of African leaders if the gains made since debt relief is to be sustained and bettered in the longer term for the benefit of posterity.

With the benefit of hindsight and powerful analytical tools borne out of technological advancement, choice variables for national models can readily be optimised for simulations to identify that which works best for states.  More borrowing for capital expenditure does not necessarily translate into progressive development. Optimal use of each and every available resource is key and it is about time Sub-Saharan Africa take a cue and act accordingly. Africa is indeed making progress as claimed, however, all that could be undone without much needed risk management.