Several African countries, including SA, in danger of debt distress
European Investment Bank report warns that high level of public debt in Africa leaves several states vulnerable
Several African countries are in danger of defaulting due to governments’ rising debt-servicing costs and high levels of arrears, a new report compiled by the European Investment Bank (EIB) says.
The EIB report highlights that the high level of public debt leaves a number of states vulnerable to external shocks and reduces or blocks access to external financing.
The report comes as SA’s government is struggling to stabilise its debt. SA’s debt as a percentage of GDP is expected to reach a staggering 62% in 2019/2020, rising to 65.6% in 2020/2021, to 69.1% in 2021/2022 and 71.6% in 2022/2023. With debt service costs now gobbling 15.2% of tax revenue, the government has been forced to slash spending in other critical areas such as education and social services.
The continent’s total external debt burden has reached nearly $500bn, with Eurobonds comprising more than one-fifth of that figure. Public debt levels are high and rising in most African economies, with the median ratio of government debt to GDP climbing to more than 56% in 2018, up from 38% 10 years earlier, according to a recent report by the African Development Bank (AfDB).
The IMF defines debt distress as when a country is struggling to service its debt, the evidence of which can be seen in rising arrears and debt restructuring.
In February, the AfDB dismissed suggestions by World Bank president David Malpass that together with other development banks it has a tendency to lend too quickly and in the process add to the continent’s debt crisis.
The AfDB said it provides a strong governance programme for its regional member states that focuses on public financial management, better and transparent natural resources management, sustainable and transparent debt management, and domestic resource mobilisation.
The EIB report, titled “Banking in Africa: Financing Transformation amid Uncertainty”, analyses recent developments in the African banking sectors. Based on both macroeconomic and survey data, the report addresses structural issues and investment opportunities in Africa and frames policy options for all stakeholders.
Zooming in on Southern Africa, the report says economic developments in the region in recent years have generally been characterised by low growth, increasing fiscal deficits and sharply rising public debt levels. It says the expected recovery remains vulnerable. Growth remained subdued in 2019, but is expected to pick up gradually in the coming years, though domestic and external risks to this outlook remain substantial.
“Fiscal consolidation is reducing the pace of debt accumulation. However, the high level of public debt leaves several states vulnerable to external shocks and reduces or even blocks access to external financing,” the reported states.
Furthermore, fiscal consolidation and the uptick in growth are reducing budget deficits across the region. The average budget deficit amounted to about 3.8% of GDP in 2019, down from about 5% in 2016.
Deficits have remained at over 8% of GDP in Eswatini (formerly Swaziland), 6.5% in Mozambique and SA, and about 5% in Malawi, Namibia and Zambia. On the other hand, Angola and Seychelles ran a surplus. Overall, the decline in public deficit is likely to continue very gradually, reaching 2.7% of GDP in 2023, according to the EIB report.
However, declining public deficits have not yet led to falling public debt levels, though the pace of debt accumulation has slowed down. Average debt stood at 56% of GDP at the end of 2019, up from 40% five years before, the EIB report points out. Mozambique and Zimbabwe have been in debt distress for some time. The IMF classifies the risk of debt distress in Zambia as very high and the risk in Comoros, Lesotho, Madagascar and Malawi as moderate.