Most African policymakers have struggled to keep their debt sustainable and their fiscal heads above water in 2022. Few cannot repay their loans and have sought debt restructuring and fiscal support from the International Monetary Fund, and many are at the verge of debt distress.
Key takeaways:
-
This year, many African countries have either defaulted on their loans or are on the verge of defaulting, leading to several countries' call for debt restructuring or forgiveness.
-
While the debt distress situation in most countries can be linked to the pandemic and other situations beyond these countries’ control, the situation is also largely due to the fiscal decisions of many of these countries.
- For most countries, like Nigeria and Ghana, their decision to spend and borrow beyond their means is largely tied to their debt overhang today. While others, like Ethiopia, although borrowed too, have been plagued by devastating conditions that have
Going by the World Bank and International Monetary Fund (IMF) 's joint debt sustainability index, 19 out of the 35 low-income African countries are either in debt distress or have a high risk of debt distress. Lower middle-income countries in the region, such as Ghana and Nigeria, also have moderate debt distress risks. Essentially, African countries are struggling to sustain their debt.
One of such countries, Zambia, defaulted on its Eurobond loan in 2020. The Ghanaian government has had to reassure its commercial creditors that they won't get a haircut to assuage the fears around the government’s ability to continue repaying its debt.
Therefore, one conversation in many development circles, particularly during the just concluded IMF and World Bank Spring meetings, is the request for debt forgiveness—especially for African countries in debt distress. Debt relief for heavily indebted poor countries (HIPC) might be justifiable given the external and significant shocks these countries have faced since the early 2000s.
They include a series of commodity price crashes (African countries are predominantly commodity exporters), particularly exacerbated during the Covid-19 pandemic. Ironically, countries like Nigeria have also struggled to benefit from the latest commodity price rallies.
Were these countries unlucky, or did these acts expose existing fiscal defects?
Smooth start, rough end
The early 2000s are a great place to start looking at many African countries' fiscal positions (mainly debt). This period represented a fresh start for many African countries that had suffered heavy debt overhang (having too much debt that they needed more debt to service existing ones) the decade before. Let me give you some context.
In the1970s and 80s, several African countries took on much debt to cope with the stagflation experienced at the time. Between 1980 and 1990, the external debt to GDP ratio of African countries doubled, from 27% to 62%, with over 60% of the debt owed to multilateral organisations like the World Bank and IMF and the Paris club—a group of developed countries lending to low-income countries.
Around the 1990s, the World Bank launched the Highly Indebted Poor Countries initiative (HIPC) and the Multilateral Debt Relief Initiative (MDRI) to provide debt relief—in the form of completely wiping off the debt or extending the payback period for some time to these countries. Over 30 countries in Africa benefited from this to stabilise their fiscal positions. The average debt-to-GDP ratio of African countries in the 1990s was about 110% but declined to less than 40% after about 36 African countries benefited from the HIPC.
This gave many African countries a somewhat clean slate. Their debts? Gone.
In the early 2000s, more than 70% of African countries were so stable that they had fiscal balances—their expenditure was practically equal to their revenue. With this fiscal space, many countries started to embark on high-growth expenditures like infrastructure spending and market liberalisation initiatives.
GDP growth in Sub-Saharan Africa was over 6% between 2003 and 2008, with Nigeria, Rwanda and Ethiopia having an average growth rate of 9% between 2004 - 2010. This growth was significant because higher GDP growth meant a higher chance for these countries to earn tax revenue from their people. Inflation was also low in most countries. In 2007, median inflation in Africa was about half of what it was in the 1990s. These metrics presented Africa as a stable place for investment, and foreign investment was at an all-time high, multiplying by 5x between 2000 and 2008—from $7 billion to $38 billion.
As the chart above shows, it was a great time to be African.
Several African countries enjoyed debt relief in the late 1990s and early 2000s, giving them fiscal room for growth. So, what they did with that fiscal space for the next two decades (2000-2020) tells us whether their current debt situation is self-inflicted.
Too much money, the problem is how to spend it
There were three categories of countries: the savers, spenders and borrowers.
Like Nigeria and Botswana, the savers focused on setting aside rainy-day funds. Botswana—the model country for fiscal prudence—created its Pula fund in 1996; a sovereign wealth fund meant to save the excess revenue from its diamond sales.
Likewise, after Nigeria’s debt forgiveness in 2005, Ngozi Okonjo-Iweala, the Minister of Finance, created the Excess Crude Account (ECA) to save up excess revenue from budgeted crude oil sales. So, if crude oil price got higher than what was in the budget, the extra margin went into the ECA. As a result, Nigeria’s foreign exchange reserves in September 2008 were the highest, at over $50 billion—enough to meet the country’s import obligations for 16 months. For context, the foreign reserves have not been up to $40 billion in the last ten years.
While this fiscal prudence was admirable and put the countries in strong fiscal positions, Nigeria failed to take on significant fiscal reforms that could reduce the impact of oil price shocks. Tax revenue was low, and the government maintained an unsustainable fuel subsidy, which was detrimental to the country’s fiscal position, as we will see later.
The spenders like Rwanda and Ethiopia focused on growing their economies and splurged towards it by funding large infrastructure projects to rebuild their economies. This is understandable, especially for Rwanda, recovering from its 1990s genocide impact. So, it had to rebuild its infrastructure, increase its agricultural productivity and take on more growth-focused and pro-poor expenses to reduce poverty. These projects were heavily funded by aid and lending from multilateral organisations.
The timing for the spending was good because the countries had pretty decent fiscal space to accommodate it, and investors were willing to lend to Africa at the time. However, they borrowed most of the money spent, which exposed them to debt distress risk. Also, Ethiopia failed to stop some populist policies like its fuel stabilisation fund, a fuel subsidy aimed at reducing the impact of fuel price changes in its economy. All that spending put too much pressure on their fiscal space. So while spending on infrastructure was not a bad idea, without other fiscal reforms, it exposed the countries to more debt risk.
The last category of countries took advantage of their stable fiscal space to borrow from external commercial markets. This category is a subset of the borrowers, but they were not as focused on taking on large infrastructure projects. In 2007, Ghana issued its first Eurobond, increasing its debt stock to over 66% of its GDP from 42% in 2005. This debt resulted in a moderate default risk for the country.
So, despite the boom in African economies in the early 2000s, countries responded differently, and their responses informs how exposed they were to the shocks experienced afterwards.
Act one: commodity price fluctuations and the global recession
The first "act of God" was food price hikes in 2008. As you can see in the chart below, the commodity price index was driven by food and fuel prices that were particularly high in 2008, 2011 and 2014. This was driven by increased demand for food and commodities in these emerging economies, but supply was too slow to catch up. With most African economies overgrowing, income was also increasing, and with it came an increased demand for more. This led to increased inflation and slowed growth.
Then the global recession happened in 2008, which led to a decline in foreign investment in African countries. As the chart below highlights, after a consistent rise in foreign direct investment inflows into Sub-Saharan Africa (SSA) from around $7 billion in 2000 to $38 billion in 2008, the inflows dropped to $32 billion in 2010.
Let’s look at the impact on the savers, spenders and borrowers.
First, the savers. As we showed before, countries like Nigeria and Botswana saved when their commodity prices were high—crude for Nigeria and diamonds for Botswana. When commodity prices were high (2008, 2011 and 2014), they continued to enjoy high growth, but this changed in 2015 when crude oil and other minerals’ prices crashed. Ideally, these countries could have fallen back on their savings—and Botswana did at different times when it's economy contracted including during the pandemic in 2020 when the pandemic hit, but Nigeria couldn’t.
You see, after 2008, Nigeria’s policies were majorly expansionary. Between 2009 and 2011, savings into the ECA was not steady, and there were several withdrawals from the account around the same time.
But Nigeria’s expansionary fiscal policy didn’t stop there. The country also took on more loans, especially external loans. In 2012, Nigeria issued its first Eurobond, and borrowed more afterwards. Likewise, the Central Bank of Nigeria prioritised exchange rate stability over low inflation, which led to an expansionary monetary policy, despite its high inflation, as you can see below.
So, when the oil price crash happened in 2015, Nigeria barely had enough to fall back on, and the economy crashed—foreign investment exited, and the country fell into a recession. Throughout this time, and even when crude oil prices recovered briefly in 2018 and 2019, the government didn’t save and borrowed even more.
So, the next crash in 2020 caused the economy to fall even harder. Still, the Nigerian government continued to borrow and spend like never before. Today, the government’s revenue barely covers the interest paid on loans.
Borrowers like Ghana and Ethiopia had already borrowed to the point of having moderate debt risk. So they attempted to reduce their spending when the global recession happened.
In Ghana’s case, the act of God further exposed the vulnerabilities that the economy was experiencing years before the crisis happened. But despite Ghana’s contractionary fiscal stance, it maintained its moderate debt distress risk in 2010. In 2015 and 2020, Ghana suffered a power crisis, causing it to maintain its debt distress risk position.
On the other hand, Ethiopia was already suffering from a 40% inflation rate and had reserves that could only meet 1.5 months of imports in 2008. So the Ethiopian government did a few things to restore sanity to its economy: reduce government spending, focus pro-poor spending, reduce its fiscal deficit and increase its revenue by implementing tax reforms. This allowed the government to earn more money while reducing its expenses and inflation. Eventually, its moderate debt distress risk was reviewed to low in 2014. But shortly after, it started to borrow again, incurring new debts of over $4 billion between 2014 and 2015. The country’s crisis came from drought (in 2016 and 2020) and political uncertainty, which reduced the country’s income and growth.
So far, we’ve seen how countries have responded differently to the various fiscal situations they faced. On the one hand, the savers who continued to save like Botswana could absorb the shocks that came with the various commodity crises. Nigeria, initially a saver, ate into all its savings before the rainy day and was exposed to shocks just like the borrowers—Ghana and Ethiopia.
Fail to plan, plan to fail
Today, while most countries are going through significant economic crunches caused by the pandemic, the impact is not the same across all countries.
The countries that splurged, like Ghana, Nigeria, Ethiopia and Zambia, have hit severe debt distress and are struggling to repay their loans. Countries like Ghana and Zambia are undergoing IMF restructuring programs to return to sustainable debt levels. In contrast, countries that saved revenue, like Botswana, feel less impact of the more recent crisis (Covid-19 and the geopolitical wars). Although Botswana had to use some of its sovereign wealth funds, it has maintained a low debt distress risk.
Finally, countries that spent on critical infrastructure for high growth, and maintained fiscal prudence, like Rwanda, could withstand the crisis's impact. However, Ethiopia was not so lucky. The country suffered from droughts, and locust infestations that halted agriculture production, reduced its revenue and made it a high-debt distressed country.
The past two years have been quite damning for various African countries and have plunged them into significant debt, many of which have been due to reckless fiscal decisions made in the past. While debt relief will be great for these countries, particularly those living in them, there is no guarantee that they will not end up in the same situation years later.
