A Major Debt Crisis Could Be in the Making in Africa – But Not For All
by Matthew Edwards
The last years have seen generally strong economic growth in sub-Saharan Africa, an ‘Africa Rising’ narrative has emerged from parts of the media, and considerable progress has been made against the various UN development targets (see, for example, here and here). The November 2018 publishing of World Bank figures that showed that borrowing by some governments had increased rapidly and led to 40 percent of countries in Africa being at risk of falling into debt distress, therefore came as something of a rude awakening.
International Monetary Fund figures illustrate the levels of debt that have been taken on in recent years. The IMF reports that Burundi has gone from having central government debt of just over 25 percent of gross domestic product (GDP) in 2009 to almost 65 percent predicted for 2019. Zambia has gone from just over 20 percent to over 77 percent in the same timeframe, while Mozambique has increased from under 42 percent to over 118 percent. The World Bank’s International Debt Statistics for 2019 provide further insight into this, showing worryingly high levels of short-term debt in a number of countries, including Zimbabwe and Eswantini (the former Swaziland). The graphs below show some of the countries where debt has most substantially increased. (It should be noted that the causes behind this do vary with Sierra Leone, for example, being heavily affected by the West Africa ebola outbreak between 2014-16).
The figures promoted several further warnings, with the Jubilee Debt Campaign warning in January 2019 that action was needed to avoid a “full blown debt crisis.” A mid-2018 report from the campaign group, building on World Bank and IMF data, identified Burundi, Cabo Verde, Cameroon, the Central African Republic, Chad, Djibouti, Ethiopia, Gambia, Ghana, Mauritania, Mozambique, Sao Tome and Principe, South Sudan, Sudan, Zambia and Zimbabwe as being at high risk of debt distress or actually in debt distress.
In a way, so far so normal. The warnings of emerging market countries loading up on debt since the substantial cuts to global interest rates after the global financial crisis in 2008 have been sounded loudly before.
One of the aspects that is interesting, however, is how the increases in debt levels – in many cases a useful proxy for increased government spending – show little correlation with progress in the Worldwide Governance Indicators, which are available from the World Bank. The WGI are a research dataset summarizing the views on the quality of governance provided by a large number of enterprise, citizen and expert survey respondents in industrial and developing countries. These data are gathered from a number of survey institutes, think tanks, non-governmental organizations, international organizations, and private sector firms.
In some cases, there does appear to be a correlation between major increases in central government debt and reduced governmental effectiveness. Ghana, which required an IMF bailout in 2015, provides a clear example of this relationship. There were consistent increases in central government debt over the period accompanied with reductions in governmental effectiveness. Subsequently, with improvements in governmental effectiveness, debt stabilized. Of the countries highlighted in the graphs above, Burundi, Mozambique and South Africa all showed decreases in governmental effectiveness between 2008 and 2017, while also showing increases in central government debt.
However, the correlation is not automatic. Zambia and Zimbabwe showed fluctuating performance in governmental effectiveness – leading to little change over the period overall – along with increasing central government debt. And conversely some of the better performers in terms of the WGI were generally able to post positive WGI governmental effectiveness improvements while also increasing their debt loads. For example, Rwanda showed substantial and sustained improvements in governance with an accompanying modest increase of debt from 20 percent to 40 percent of GDP between 2012 and 2017, with Namibia showing broadly the same (16 percent in 2010 to 41 percent in 2017) along with governmental effectiveness improvements. Togo, which had a larger increase in debt levels, also showed improvements in governmental effectiveness, albeit from a low base.
While only presenting a snapshot of the situation, the central government debt levels and WGI estimates allow some conclusions to be drawn. It is interesting that countries with positive WGI governmental effectiveness estimates that have consistently improved have generally increased their debt by more moderate amounts, likely reflecting better policy making and fiscal apparatuses. However, it is clear that increasing public expenditure does not automatically lead to improvements in governmental effectiveness. Several countries have swiftly increased debt loads while governmental effectiveness has reduced. This leads to major questions about how effectively the debt has been utilized, the overall sustainability of the debt load (especially with global interest rates likely to continue to progressively increase), and the impost that will be placed on their taxpayers in the future.
Matthew Edwards is an independent consultant and analyst based in Vienna. He gained his bachelor’s from the University of York and master’s degree from King’s College, London.
The views expressed on austriancenter.com are not necessarily those of the Austrian Economics Center.
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