During the 20th century, Africa’s need to develop and increasing financial assistance from the developed countries and global institutions in terms of credit saw the continent become dependent on borrowing. Increases in interest rates, such as when the 1980 global recession struck and the growth of emerging markets such as China also increasing access to credit, some African countries now find themselves at risk of a debt crisis that has the potential to further hamper economic growth.
According to Vincent Mutua, an economics scholar, the increase in borrowing from African countries over the decades and poor economic performance has worsened Africa’s debt problem over the years. “The financial assistance should have contributed to an increase in production, promoted growth, created jobs, and brought in more tax revenue and foreign exchange to many African countries, although due to rising interest rates, mismanagement, and corruption, it has only seen their debt increase,” he said.
Between 2009 and 2018, the total debt owed by African countries increased from Sh ($220.44 billion) to Sh ($530.22 billion), according to the World Bank. With COVID-19 and geopolitical tensions such as the Russian invasion of Ukraine, the total debt has soared to Sh ($644.86 billion) as of 2021. This indicates that Africa still depends on foreign trade and assistance rather than increasing intra-regional trade. To reduce the dependency on borrowing, Africa needs to fasten the full implementation of the African Continental Free Trade Area (AfCFTA).
By trading among themselves, African countries could benefit by growing their industries internally, thus improving economic growth and increasing revenue. This would go a long way in having adequate capital to service their debt while avoiding adding to their debt and continuing with economic development. Recently, the continent has taken a step in the right direction as nations have started increasing intra-African trade. According to the United Nations Economic Commission for Africa (UNECA), trade between African countries has risen to 20% as of 2022.
“Once all African countries agree on AfCFTA and it is fully implemented, Intra-African trade is set to increase to new heights, meaning less impact from the geopolitical tensions and reduced reliance on borrowing from overseas lenders. In the long run, this would translate to Africa coming closer to its dream of being debt free and relying on itself for development,” said Mutua.
However, as African countries continue to head towards increased intra-African trade, they still face several challenges. For instance, the lack of transparency and accountability around African governments has contributed to the rising debt that many economies currently find. According to the IMF, over 20 African countries are at high risk of debt distress.
Many of them find themselves in this situation as their governments have failed to improve their economies from the credit. Instead, it has gone into the pockets of corrupt officials or projects that have failed to yield returns. “Some African governments have been guilty of going behind their citizens to borrow money which ends up being wasted on projects that neither return yields nor benefit the public, such as Mozambique and South Africa,” said Mutua.
Mozambique saw its debt increase without results after some of its state-owned companies were responsible for borrowing billions of dollars without parliament approval, which was misappropriated. South Africa has faced a similar scenario as well. African countries can improve their economies and record growth with improved transparency and accountability.
For instance, through good governance and accountability, the government of Rwanda has been able to reduce its debt and develop the country, to emerge as one of the fastest-growing economies in the continent. In recent years, it has reduced its debt-to-GDP ratio from 70% to 40%.
In some worst cases, African countries have also negotiated with their lenders for debt relief. The idea is that reducing or eliminating one’s debt would allow the country to have more revenue to invest back in its people and the economy as a whole. Doing so helps improve living standards by reducing poverty and inequality.
According to Vincent Mutua, debt relief is, without a doubt, a powerful tool to reduce poverty and inequality. However, other measures must accompany it, or it will eventually fail as it does not address the root causes of debt. “African countries should not be accustomed to debt relief and restructuring as it makes them careless with borrowing; if they lack proper policies and strategies to invest, develop and increase their revenue, then it can only spell doom for them,” he said.
Africa’s debt problem will continue to be a burden until African countries take up the right tools to be self-sufficient. “With the right policies in place, these tools can help countries manage their debt burden and improve their economic situation,” Mutua added.