Africa’s debt crisis has come to roost
As I, against my dearest wishes, expected, Africa’s multiplying external debt challenges are quickly becoming a crisis.
Kenyan and Chinese government ministers meet in Beijing in 2017. (Etienne Oliveau/Getty Images)
Significant increases in global interest rates this year, along with a strong US dollar, high inflation and other exogenous shocks like the pandemic, and the war in Ukraine, have made it difficult for many African countries to make their foreign debt repayments on time. Many have taken on new external debt to finance their existing foreign debt stock, or to continue to finance required public spending.
Debt distress in Africa is especially acute in sub-Saharan Africa, but is now a continent wide problem. Approximately 18 African countries now have foreign debt that is unsustainable and there is a danger of a wave of impending defaults.
Debt default is exactly what we are beginning to see in West Africa. For example, Ghana has stopped making payments on its external debts to bondholders, commercial lenders and foreign governments, and is now unable to make good on its foreign debt obligations. This comes even after Ghana reached a preliminary agreement on a $3 billion bailout package from the IMF which will likely help manage this crisis, but not resolve it.
Of particular concern for Ghana, and to a wide range of African countries as well, is bilateral debt to select foreign governments. Ghana has debt obligations of $3.2bn to foreign governments, including China and South Korea. China in particular resolves this bilateral debt by exchanging its value with things like mining rights. This bartering for debt relief usually leads to terms that don’t favor African economies.
As for Ghana, its total external public and publicly guaranteed debts stand at approximately $32.4bn. Ghana also owes about $3.4bn to the IMF and $4.7bn to the World Bank emphasizing that bailout money from multilateral development banks is not free and yet another burden a country has to carry.
In 2023 expect to see more Paris Club and HIPIC type debt workouts, but this won’t be easy for several African nations including MICs. China’s rapid rise as a major bilateral lender in Africa has given it an increasingly large role in debt workouts. For several African countries trying to restructure their foreign debt, dialogue with Beijing is now inevitable.
While 2022 has been a difficult year for many African economies, 2023 will be all about foreign debt restructuring with a variety of lenders. But, just as challenging, 2023 will also be about finding a way forward on the required economic reforms that will be peddled by the IMF and World Bank in exchange for their financial support. These reforms, and the austerity that will come with it won’t be easy.
When it comes to Africa, an economist who’s a pessimist will now see every difficulty in this evolving foreign debt crisis. But, an economist who’s an optimist will see the opportunity in the economic reforms this debt crisis will usher in. For the economists reading this article, you know who you are.
