Central bankers in Africa are joining a chorus of voices, which includes the International Monetary Fund (IMF), who are worried about surging public debt levels on the continent.
Nigerian central bank governor Godwin Emefiele warned in January that rapidly rising debt and a lack of fiscal buffers could threaten economic growth. That same week Kenyan central bank governor Patrick Njoroge said in an interview that his country was running out of room to increase its credit load.
For nearly two years, the IMF and credit ratings companies have admonished African governments about the dangers of accumulating too much debt as their revenues dwindle.
Rising obligations are depleting the fiscal space the continent’s governments have to buttress economic growth, raising pressure on central bankers to do more to prevent a deeper slowdown in a region that is home to two-thirds of the world’s poor. Stubborn inflation and currency pressures also limit monetary wiggle room in some economies.
“They are sending a warning to policymakers that if your debt levels become unsustainable, then it is going to have consequences on growth and the financial environment and that raises monetary risks,” said Colin Coleman, the former CEO of Goldman Sachs in Sub-Saharan Africa who now lectures at Yale University’s Jackson Institute for Global Affairs.
To pay for infrastructure and public servants’ wages, African governments have tapped debt markets like never before to take advantage of investors’ appetite for high-yielding paper. Public debt as a percentage of GDP in Sub-Saharan Africa has doubled to more than 50% since 2008, IMF data show. While that’s below the average for emerging markets, the continent’s debt ratio rose faster than that of any other country grouping over the period.
Kenya doubled its debt ceiling in 2019 and the IMF said the government should be more cautious with borrowing. In SA, authorities see debt jumping nearly 20 percentage points to 80% of GDP by 2028 unless urgent steps are taken. While debt at 30% of GDP in Nigeria is low compared with peers, the government spends more than half its revenue on repayments, according to IMF estimates.
About 40% of governments on the continent face difficulties honouring their obligations, according to the IMF. The African Development Bank, however, is less worried, saying last week it did not see a systemic crisis.
Still, high indebtedness complicates the job of central banks.
Rising government debt crowds out lending to the private sector and weakens the transmission of monetary policy to boost demand, the IMF’s Africa department director, Abebe Aemro Selassie, said last year. Lowering interest rates in countries with rising debt levels could add pressure to local currencies by prompting foreign investors to leave in search of higher-yielding securities elsewhere.
“Higher debt has clipped the wings of monetary policy,” said Andrew Roche, managing partner at Paris-based financial consultancy Finexem. “In Nigeria, if the governor wants to lower interest rates, that could weaken the currency and increase the debt burden, which creates another set of problems when you are trying to find a solution.”
Faced with limited monetary space, Nigeria’s central bank has stepped in to help cover the government’s widening fiscal gap with cash advances worth 2.5% of GDP, which are more expensive than debt funded on the domestic market. Moody’s Investors Service warned against “opaque and costly options” to finance the government’s rising debt burden when it changed the outlook on the country’s credit rating to negative in December
“High debt levels will lead to the expansion of these non-conventional policies,” said Adedeji Adeniran, a senior fellow at the Abuja-based Centre for the Study of The Economies of Africa. Central banks “will be expected to print money and become more activist in policy orientation”, he said.