As Ghana’s newly elected President Nana Akufo-Addo, draped in a splendid multi-coloured “kente” silk robe, took to the podium last December during his inauguration, the newly elected leader told the world that the West African country was “open for business again.”
He had campaigned on a platform pledging to revive a stalling economy, promising to build a factory in each of Ghana’s more than 200 districts and provide free high school education for all children. Yet soon after Accra’s Independence Square had cleared, the president’s campaign promises took a hit when the West African nation discovered a $1.6bn budget hole left by the previous government.
The government was suddenly faced with a budget deficit of at least 10% of GDP, while the country’s debt-to-GDP ratio stood at 72.4%. The discovery has forced the country to restart talks with the International Monetary Fund (IMF) over reviewing a $918m aid programme taken out in 2015 to finance its spending plans.
Ghana’s situation is not unique. Warnings about out of control external public debt have been sounded for other sub-Saharan African nations, including Angola, Kenya and Zambia.
Across the continent, external debt stocks increased by 47.2% to $416.3bn in the period 2010–15, with the median government gross debt-to-GDP ratio standing at 48% in 2016, more than 10 percentage points higher than 2014, according to Albert Zeufack, the World Bank’s chief economist for Africa.
“It is a fact that debt levels are on the rise in sub-Saharan Africa, he says. “Some countries in the region are caught in an environment of low growth prospects, widened fiscal deficits, weaker currencies, and lower export revenues, and could face problems in repaying their debt.”
“However, it is important to emphasise that debt is not always bad… the question is whether debt levels are sustainable in the medium term. Public debt levels are sustainable to the extent that the funds borrowed generate returns that allow timely repayment.”
Since the global financial crash of 2008, African countries have benefited from investors seeking greater yields in developing countries, amid low interest rates and loose fiscal policies in industrialised countries, especially in the US, Japan and Europe.
The spike in borrowing has increased African public debt stock by over 8% per annum over the last nine years, compared to 1% per annum from 2000 to 2008. Despite this growth, it is noteworthy that Africa’s debt stock levels remain below those in Europe and some Asian countries.
The rise of commercial borrowing
Over the past decade, the composition of Africa’s debt has markedly shifted from concessional to nonconcessional debt. Concessional loans traditionally have more generous terms than market loans.
The share of concessional lending to Africa declined from 42.4% to 36.8% in the period 2001–13, according to the World Bank. Non-concessional debt from a variety of commercial lenders and international bond markets rose from $2.4bn in 2010 to $25.5bn in 2015.
The largest bond issuances in 2015 came from Ghana, which issued bonds worth $3.5bn; Kenya, at $2.8bn; Angola, at $2.5bn; Zambia, at $2bn; and Ethiopia, which issued bonds worth $1bn. The average return for these bond issuances is about 6.6%, with an average maturity of 10 years.
This shift reflects more flexible IMF and World Bank guidelines on external debt limits, low interest rates in the West and greater access to the financial markets.
Having slowed last year, bond issuances are once again on the up – African governments have borrowed $5.9bn in international bonds this year according to Dealogic data – more than the total for 2016. Countries having already issued or planning to issue bonds include Nigeria, Tunisia, Egypt and Côte d’Ivoire.
The commodities slump and falling growth rates make the prospect of relatively cheap borrowing too tempting for economies trying to contain their fiscal deficits or develop infrastructure projects, says Abebe Aemro Selassie, director of the African Department at the IMF.
“There may well be some lenders dangling seemingly cheap financing to countries,” he says. “Often foreign currency financing (in US dollars, euros, etc.) can seem more attractive because of the low interest rates that they are offered at. But government’s generally collect tax revenues in local currency and if [the local currency] weakens, then repaying the foreign currency loan will be more expensive. The best way to reduce fiscal deficits is through stronger domestic revenue mobilisation.”
There is also the question of how money is being spent.
“You cannot generalise to say whether the money is being used wisely or not. However, across some countries, there is a problem,” says Mukhisa Kituyi, secretary-general of the United Nations conference on trade and development (UNCTAD).
“When you have governments using part of the money from the bond market as part of a recurrent expenditure or on frivolous things, then I am concerned because there is not a lasting legacy of that money,” he adds.
Some analysts and multilateral financial institutions have warned that Africa could be on the verge of a debt crisis reminiscent of the 1980s and 1990s, when external debt ballooned from $140bn in 1982 to over $270bn in 1990, ultimately proving unsustainable.
90s crisis revisited?
At first glance there are strong parallels. During the commodity boom of the 1970s international creditors lent liberally to African countries. Interest rates in the industrialised countries were at particularly low levels, making them attractive markets for developing countries to borrow money.
When the oil and commodity price bubble burst in the late 1970s to early 1980s, it caused a global recession which depressed export earnings around the world. Despite this some African countries continued to borrow money rather than cut expenditure.
The crisis unfolded when international interest rates rose from low or negative levels in the 1970s to over 8% in the early 1980s, contributing to the lost decades of the 1980s and 90s.
The crisis was finally resolved through initiatives like the Heavily Indebted Poor Countries (HIPC) initiative, launched in 1996 by the IMF and World Bank. Coupled with extensive lobbying by African policymakers this resulted in widespread debt forgiveness across Africa in the mid 2000s, effectively wiping the slate.
The current surge
While debt levels have been rising for several years, there has been a step change in the last 12 months, driven by the commodity slump-induced slowdown. In November Egypt took out a $12bn loan from the IMF, the biggest ever regional loan approved by the lender, to pull its economy back from the brink, amid rising inflation and public anger over a lack of reforms.
Nigeria is borrowing heavily, having already issued a $1bn Eurobond this year, with more planned. President Muhammadu Buhari has just announced the country will be taking on almost $7bn in debt from China and the World Bank to finance railway infrastructure and reconstruction efforts in its insurgencyhit north, respectively.
Other countries piling on the debt include Kenya, Zambia, Uganda, Tanzania and Angola. So strong is the apparent demand that the World Bank has recently announced a record $57bn in credit for sub-Saharan Africa over the next three years.
Some analysts are nervous
“The lessons of the danger of commodity dependence and external debt have not been heeded,” says Tim Jones, senior policy and campaigns officer at Jubilee Debt Campaign.
“The response to the crisis since 2015 has been the same as in the 1980s and 1990s, with the IMF and World Bank [lending] money to enable the high interest to private lenders to be paid, rather than a debt reduction being required of those reckless private lenders.”
“Lenders are only too willing to lend without ensuring that the money is being well spent on diversifying away from commodity dependence into more sustainable forms of economic activity, which create more jobs.”
Others have downplayed immediate concerns about a return to a 90s style debt crisis. On the whole African economies are more durable than they were
Something that has undoubtedly changed since the 90s is the balance of global economic and financial power.
in the past, argues John Ashbourne, Africa economist at Capital Economics.
“It is true to say that the direction in the past few years has seen debt rates increasing, but in very few countries do we see debt levels that were back to where they were before the debt relief of the early part of the century, with Ghana and Senegal being two notable ones,” says Ashbourne.
“African economies are in a much better place than they were in the 1990s, I don’t think that comparison is reasonable today.”
China as a donor
Something that has undoubtedly changed since the 90s is the balance of global economic and financial power, especially the ascent of the Chinese economy. Already an ever-present force in financing the continent’s infrastructure, China is rapidly making the transition to becoming a major donor in the region.
Speaking at the Forum on China-Africa summit in December 2015, Chinese President Xi Jinping pledged $60bn in financial support to help African economies weather a volatile global economy, with $35bn being handed out in the form of loans.
Delegates including South African President Jacob Zuma and Zimbabwean President Robert Mugabe welcomed the announcement, calling it a “win-win” partnership. The apparent generosity was tinged with caution about how the loans were allocated, with most of the funding going to nations where China had resource interests such as oil-rich Angola and Sudan.
This reflected a more circumspect approach by China argues Jyhjong Hwang, a senior research assistant at Johns Hopkins University’s China-Africa Research Initiative (CARI).
“From 2000 to 2007 there was a lot of generous Chinese spending in Africa and it was also the first few years of their foray into giving large loans to African governments,” she says. “They’re more careful these days, and more discerning about who they are lending to and whether they will be able to recuperate their lendings.”
According to CARI, between 2000 and 2014 China provided loans to African countries worth $89.9bn, with the China Development Bank accounting for 13.7%, China Export-Import Bank providing 59.6%, and other state-owned enterprises and Chinese contractors providing 13.6%.
The top five recipients of Chinese loans during the corresponding period were: Angola ($21.2bn), Ethiopia ($12.3bn); Sudan ($5.6bn); Kenya ($5.2bn); and the Democratic Republic of Congo ($4.9bn).
Despite China’s more cautious approach, its banks remain exposed to countries at risk of default, according to Hwang.
“Chinese lending in Africa is usually done in opaque countries such as Angola, Ethiopia and Sudan, so we have both parties not being transparent about the deals that they have agreed on,” Hwang says. “Therefore it is difficult to ascertain with certainty just how significant the debt load is and therefore, how serious the problem is.”
“[However], Eximbank and the Development bank are both policy banks that are state-backed so the Chinese government is not too concerned about the two institutions failing,” she adds.
With China pushing its landmark “One Belt, One Road” initiative, a $1 trillion trading network spanning Europe, Asia, the Middle East and Africa, and the China-led Asian Infrastructure Investment Bank gaining global prominence – recently announcing plans for deeper collaboration with the World Bank, for example – borrowing from the East Asian giant can be expected to continue.
Towards a new debt trap?
It is too soon to determine whether Africa is walking into a new debt trap. The global context has changed significantly since the 1990s making a like-for-like comparison questionable. Reforms have taken place in many governments across the continent, arguably making them more resilient to some of the pitfalls of the past. It must also be remembered that borrowing is a necessary part of the development process, not an inherent danger.
The big questions for economies in the region in the coming years will be whether policymakers have learned the lessons of the last few decades, and whether they can respond appropriately and in time to stave off any potential long-term risk.