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Doing Business in Africa: A Risks, Trends, and Opportunities Roundtable

Session III: Emerging Investment Opportunities and Risks Associated with Debt Sustainability

Editor’s note: Improved economic and political governance, together with a favorable global external environment, has set the foundation for Africa’s recent and much-heralded economic growth story. Although these features point to opportunities, they do not alone provide a sufficient basis for the type of sustainable and comprehensive development the region badly needs. In too many cases, governments and businesses in Africa encounter daunting economic, political, and social risks that reduce their ability to make long-term investment decisions and implement development policies. The Brookings Africa Growth Initiative (AGI) addresses this need through a private roundtable series that convenes high-level professionals from both the public and private sector for regular working group sessions to identify, manage, and mitigate the biggest risks to economic development in Africa. In addition to risks, the sessions seek to identify key trends in the continent, and formulate practical and implementable policy recommendations to leverage the opportunities on the continent.

Summary

As Africa continues its recovery from the 2014 commodity price slump, concerns are emerging that unsustainable debt poses the next great risk to the continent.

Public debt levels in Sub-Saharan Africa (SSA) are on the rise, and the pace of government borrowing is accelerating. Since the mid-2000s, when debt relief programs reduced much of the debt African countries had accumulated over previous decades, countries have once again intensified borrowing—increasingly turning to international markets and denominating debt in foreign currencies—to finance their fiscal deficits and urgent development priorities. In fact, the median debt-to-GDP ratio in Africa has increased dramatically in recent years, jumping from 34 percent in 2013 to over 53 percent in 2017. Debt levels now exceed 50 percent in 25 of the region’s 45 countries, compared to just 11 in 2013.

Although this ratio is still low by international standards, African countries’ debt has characteristics that suggest that the debt tolerance threshold is lower. For example, a large share of the debt is external and denominated in foreign currency; interest rates are higher; economic growth is more volatile, etc. Furthermore, many countries are commodity exporters and vulnerable to future commodity price shocks. Even so, there continues to strong appetite for African sovereign debt. Recently, several countries have issued eurobonds, which attracted a high level of interest from investors. As of March of this year, African countries had already sold about $13 billion in debt compared with $18 billion for 2017 eurobonds.

During this high-level roundtable, participants examined the state of debt management and sustainability throughout Africa, as well as how African governments are mitigating the risks of increased indebtedness. Participants also highlighted ways in which debt can serve as a productive asset rather than a liability. They also explored ways that private sector, donor, and international financing institutions can best support African countries facing debt challenges.

The following takeaway messages emerged from the discussion:

  • One of the most fundamental challenges facing African policymakers today is how to reconcile debt sustainability and development. Official development assistance has been dwindling in volume and concessionality in recent years, yet vast upfront investments are needed to address countries’ urgent development priorities. African governments must choose carefully how to finance their agendas, especially in environments marked by decelerating growth and debt sustainability issues. Several participants noted that raising tax-to-GDP levels through domestic resource mobilization is one important strategy for closing financing gaps and improving debt sustainability.
  • Africa’s debt landscape has changed significantly since the debt relief programs of the 2000s. In recent years, the main drivers of rising debt levels have been mounting primary deficits, exchange rate collapses, slowing growth, and a shift to market borrowing (and the consequent rise in average interest rates). The composition of debt has changed, with much of it being external debt denominated in foreign currency, increasing the potential for exchange rate risks. Furthermore, new non-Paris Club creditors, such as China, are playing a bigger role. Without sufficient coordination among the creditors, debt resolution could become much more challenging.
  • Debt is a tool that, when properly managed, can assist countries in achieving development outcomes and promoting economic growth. Several participants emphasized that when invested productively and focused towards achieving development outcomes, debt can stimulate further growth and may not be as dangerous as certain observers suggest. Some participants added that the debt accumulated by their respective governments is part of a long-term plan (2-3 years), which works toward increasing investment in productive activities, therefore boosting job creation. Alternatively, there are instances where debt was used for consumption. Whether debt was used for consumption or investment purposes, participants, notably African policymakers, remain optimistic on the future of Africa’s debt and its ability to create a multiplier effect, which starts with increased investment.
  • The proper management of public debt is key to ensuring debt sustainability and enhancing the productive capacity of debt. The misuse or inefficient use of public funds can further undermine growth and entrench countries in poverty, highlighting the importance of sound public financial management and accountability with respect to the use of public funds.
  • Changes in the donor-Africa relationship are needed to reinvigorate African concessional finance. Some participants argued that the current system of official development assistance is not delivering on debt sustainability or creating a foundation for long-run growth. Thus, stronger collaboration across multilateral development banks and donors is essential for a more effective policy dialogue and better use of development finance.
  • Current frameworks and data for analyzing debt sustainability could be improved. A few participants referred to a bias towards favorable narratives in current debt sustainability frameworks. A few participants touched on the fact that analysts rely too heavily on templates like the IMF-World Bank Debt Sustainability Analysis (DSA) Framework for Low-Income Countries and desk studies when assessing debt sustainability. One disadvantage of these frameworks is they can be complicated and give the false sense of accuracy. Instead, in-depth, collaborative country investigations could be more effective. The IMF-WB framework does emphasize the role of judgement as a supplement to the econometric framework, which helps alleviates some of the concerns raised. There are also sizeable data gaps in how countries report on their debt. While in some cases, authorities might not have clear sense of how much debt state-owned enterprises have contracted, a policymaker shared his country’s experience. There is coordination among entities before debt is issued and the government approving and overseeing the process. Participants agreed that comprehensive debt statistics are critical to fully assess debt sustainability and hold countries accountable.
  • Investment opportunities remain attractive on the continent, despite concerns of about the increase in debt. Investment opportunities—in education, energy, agriculture, consumer goods, banking and financial services, infrastructure, and urban markets—are immense in Africa. Opportunities in the consumer goods industries are underpinned by increasing household consumption, with varying degrees of retail maturity across markets. In financial services, there are sizeable opportunities in traditional banking or leapfrogging services, including mobile money. Infrastructure gaps, including in power, remain large, and there are opportunities in both renewable and conventional energy sources. The scope for modernization of agriculture to unlock the sector’s potential is great. While governments have taken on much of their debt to finance their countries’ development agendas, riskier and more profitable investment opportunities could be assumed by the private sector in order to keep public debt levels manageable. The greater private sector investment could alleviate some of the pressure on public financing and ease fears about debt sustainability.

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