Sunday Ojeme As countries across Africa remain trapped in debt and, thereby facing constant funding challenges, the Director of the African Department at the Inter- national Monetary Fund (IMF), Abebe Aemro Selassie, has called on the international community to proffer solutions to cushioning the plight. Selassie, in his article published by the Economist, said it would be extremely short-sighted of the international community not to help African countries reach their potential. According to him, “I strongly believe that, one way or another, this will be the African Century. Demographic trends will ensure this. The more we help the region make development progress now, the more resilient the global economy will be. The pandemic showed how connected we are: no one is safe unless all are. And that’s why Africa’s funding challenges should concern us all and inspire us to help.” He had recounted that a slowing global economy and tighter financing conditions had exacerbated the already challenging situation facing most developing countries, saying “the running track is now longer and access to financing much more difficult. Better-off economies can rely on their hefty foreign-exchange re- serves and deeper capital markets. But most African countries are being left on the starting blocks, shut off from finance in what the imf is calling “the big funding squeeze”—by far the most acute such situation in decades. He pointed out that since the onset of Covid-19 and Russia’s invasion of Ukraine, the cost of borrowing for African countries had shot up.
“Exchange rates across the region have depreciated markedly against the dollar. This has sharp- ly raised the cost of debt servic- ing and access to new finance, squeezing spending on health, education and infrastructure. “The proximate reasons for the current difficulties are two-fold. “First, most countries have been doing a decent job of directing de- velopment spending to the right ar- eas but have been less successful in collecting the returns on this investment through their tax systems. “Starting around the early 2000s, countries in the region had more fiscal space, reflecting higher economic growth, robust commodity prices and debt relief from the “official” sector (multi- laterals and governments). This facilitated much-needed invest- ments in health, education and infrastructure, spurring devel- opment progress that is evident across Africa: not just superficial change like taller skylines, but fundamental progress that shifts generational opportunity—in- creased life expectancy, improved living standards and education. But with tax collection not hav- ing improved commensurately, debt-servicing costs relative to revenues were rising even before the recent shocks. “Second, this higher develop- ment spending was financed on much pricier terms. As aid flows declined over the years, the only alternative financing was bor- rowing from international capital markets and new sovereign credi- tors such as China.
This not only raised the cost of debt but has also made the region more vulnerable to shifts in global sentiment. “Today, almost three-quarters of the debt of sub-Saharan African countries is commercial financing issued either domestically or as Eu- robonds. A further six percent is owed to China. In normal times the added cost of servicing this mostly non-concessional borrowing might be manageable. But these are not normal times.
“Here I would like to question the narrative that African coun- tries’ main challenge is too much debt, notably to China. Yes, public debt is clearly unsustainable in several cases. In most countries, however, debt is elevated but still manageable. And while China is an important creditor to several coun- tries, in most cases debt to China is modest,” he noted. He, however, observed that, rather, the main worry was the current funding squeeze, stressing that If it persists, this would turn the liquidity prob- lem many countries are facing into a solvency problem, even for those with otherwise manageable debt levels. Proffering remedies to the situation, he said: “First, there is an urgent need for more coun- tercyclical public financial sup- port to offset procyclical private capital flows. The imf is doing its part. Since the pandemic we have provided the region with more than $50 billion to support essential spending and reforms. But the impact of this would be greater still if help from other development partners wasn’t waning. OECD countries, for instance, now provide a frac- tion of the budget support they did a decade ago, with the hole created being filled by more ex- pensive borrowing. “Moreover, the fund used by the imf to provide concessional financing to most African countries urgently needs replenishing. “Second, richer countries need to step up their support. As one British mandarin put it to me recently, the “authorising environment” for this is difficult. But when countries closer to home have been hit by severe liquidity challenges in the past, the international community has provided extensive financing, even in the face of significant risks to economic recovery. “That was certainly the case during the euro-zone debt cri- sis of the early 2010s. Much the same calculated risk-taking is needed for developing countries that are suffering liquidity prob- lems caused by external factors and are vigorously addressing their domestic challenges, for instance with costly but neces- sary reforms. Without it, there is a risk that outcomes will be far worse—economically, social- ly and even geopolitically.