Africa's External Debt Mountain and Looming Debt Crisis


Sunday, November 07, 2021   /08:06 AM / by FDC Ltd / Header Image Credit: Global Finance Magazine 


African nations have continued to record an increase in their external debt despite their already huge debt burdens. So far this year, not less than 6 countries have visited the international debt market as subdued tax revenue and the need for sustained economic support measures raised the need for new lines of credit. Africa's external debt is projected to reach a record high of over $1trn in 2022, which could push the external debt to GDP ratio above 40%, an 18-year high.


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Pandemic-induced Debt Relief Initiatives

Most African nations suffered severe fiscal setbacks following the outbreak of the covid-19 pandemic, particularly huge revenue shortfalls despite rising fiscal expenditures. Prior to the outbreak, many of these countries were already heavily indebted and running large fiscal and currentaccount deficits. This was however further exacerbated by pandemic-induced economic disruptions necessitating requests for financial assistance from multilateral organizations such as the IMF and the World Bank. In 2020, the G20 group of nations helped to defer up to $5.4bn of Africa's external debt into 2021-24 under its Debt Service Suspension Initiative (DSSI).However, external borrowings by African countries have maintain an upward trajectory highlighting the risk of a looming debt crisis in the continent.


Africa's Looming Debt Crisis

African economies are at risk of a debt crisis as their ability to service their already bloated external debts remains largely constrained. In H2'21, the International Monetary Fund (IMF) listed six countries that were already in external debt distress (Congo-Brazzaville, Mozambique, Sao Tome and Príncipe, Somalia, Sudan and Zimbabwe). In the absence of new debt relief measures or an extension of the DSSI, there is a high risk that 15 more countries (including Cameroon, Ethiopia, Ghana and Kenya) will join the list of debt distressed nations, according to the IMF. This is due to the high risk of sovereign defaults upon the expiration of the debt moratoriums. Zambia emerged the first African nation to record a sovereign default in November 2020 and Angola is teetering on the brink, with sovereign external debt above 100% of GDP.


Implications and Outlook

Africa's rising external debt is negative for investor confidence due to the attendant rise in the already huge debt service burdens in many countries. With many countries still severely constrained in their ability to meet up with debt repayments, there is the risk of exchange rate instability and credit rating downgrades. Many African countries already had their credit ratings downgraded in 2020 due to increased debt default risks. New external debt borrowings, in the absence of additional debt relief measures, will put these countries at risk of further credit rating downgrades. However, distressed countries are likely to start seeking debt restructuring, which will improve their fiscal outlook. Also, countries may be compelled to introduce fiscal consolidation measures, which could dampen the current nascent economic recovery


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Proshare Nigeria Pvt. Ltd.

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