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December 22, 2019 /07:30AM / By FDC Ltd/ Header
Image Credit: The Conversation
Record commodity prices and
low global interest rates have encouraged African countries to borrow like they
did in the 1990s, but now some are struggling to pay up as their revenue slows
along with economic growth. Government debt as a percentage of Gross Domestic
Product (GDP) in sub-Saharan Africa has doubled in the past decade, heading
back toward the level it reached at the turn of the century. International
Monetary Fund Managing Director Kristalina Georgieva said in November this is a
cause for concern. Of the 54 countries on the continent, 20 are near or at
dis-tressed levels, according to the IMF, which means they face difficulties
honoring their obligations.
African
governments have raised about $26 billion in international markets this year,
from close to $30 billion in 2018, as they took advantage of investors' thirst
for returns in a world awash with negative yields. Volatile currencies across
the continent increase the risks of borrowing in hard currency and the rising
cost of servicing debt could crowd out other expenditure in a region that's
home to more than half of the world's poor people.
"The conditions are ripe for a much higher level of debt distress," Sonja Gibbs, head of sustaina-ble finance at the Institute of International Finance, said by phone. "Whatever triggers the next crisis, when it happens, you are likely to see a high degree of contagion risk because investors have been moving into higher yielding assets."
Further fanning
fears of a new crisis is the surge in direct credit from China. The China
Africa Research Initiative at Johns Hopkins University estimates that the Asian
country's government, banks and contractors handed $143 billion in loans to
African states and state-owned companies between 2000 and 2017. Still, Africa
is far from a debt crisis, its biggest multilateral lender says. "Some
individual countries are getting to higher levels in terms of debt-to-GDP
ratios, that's the concern," African Development Bank President, Akinwumi
Adesina, said in an interview. The debt-to-GDP ratio of Africa is still "well
within acceptable limits," he said.
Costly Debt
More reliance
on commercial bonds has raised debt servicing costs, diverting funds that could
be spent on new roads or schools. Nigeria, the continent's top oil producer,
spends about the same amount every year on repaying debt as it does on
infrastructure. Countries such as South Africa, the continent's most
industrialized economy, are raising debt levels and this year had its biggest
Eurobond issuance yet to help plug a widening budget deficit. External debt
payments now con-sume an average 13% of African governments' revenue compared
with 4.7% in 2010, according to data compiled by the U.K.-based Jubilee Debt
Campaign.
Overspending
and crashing commodity prices in the 1990s led to a debt crisis that prompted
multilateral lenders and rich nations to write off the obligations of dozens of
African countries in 2005. This time around, a debt pardon may not be that
easy.
The complex debt structure with opaque terms and mix of different creditors will make any potential restructuring agreement more difficult. "We're concerned that debt relief might now be-come more complicated," said Jan Friederich, a senior director at Fitch Ratings. "Nowadays there is a greater concern that governments, when they forgive any debts, might not actually help the African countries very much, but might primarily be bailing out the commercial creditors."
Related to Nigeria's Public Debt
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