When African Development Bank Group member states meet from 27 to 31 May in Nairobi, Kenya for the 2024 Annual Meetings, the question of African debt will be one of the key discussion points. The event's theme is: "Africa's Transformation, the African Development Bank Group and the Reform of the Global Financial Architecture".
The Bank Group estimates that Africa's total external debt, which stood at $1.12 billion in 2022, had risen to $1.152 billion by end-2023. With global interest rates at their highest level for 40 years and as multiple bond debt securities issued by African countries reach maturity, there is no shortage of challenges in 2024. Africa will pay out $163 billion just to service debts in 2024, up sharply from $61 billion in 2010.
The growing burden of debt repayments has the potential to threaten achievement of the Sustainable Development Goals on the continent, particularly in health, education and infrastructure.
A complex creditor base
Median public debt has fallen to 65 percent of GDP compared with 68 percent in 2021 owing to the positive effects of debt relief measures, including the Debt Service Suspension Initiative. Still, African countries are carrying a higher level of debt than before the onset of the Covid-19 pandemic, when it stood at 61 percent. Twenty-five African countries are already carrying excess debt or have a high risk of doing so.
"A multilateral approach demands that we understand the nature of the debt itself, what is changing and how we can respond to it," said President of the African Development Bank Group, Akinwumi Adesina, at the Doha Forum in December 2023, on the theme of: "Decoding the Debt Dilemma--Unveiling Multilateral Solutions".
According to the Bank Group, the structure of African debt has changed considerably. Bilateral debt now represents 27 percent versus 52 percent in 2000, whereas commercial debt accounts for 43 percent of total debt up from 20 percent in 2000.
"The expansion and fragmentation of the creditor base has complicated debt settlement by the Bretton Woods institutions," explained President Adesina with concern.
Slow settlements
One of the difficulties of debt resolution is the extreme length of time it takes. Of the four African countries - Chad, Ethiopia, Zambia and Ghana - that have applied for debt treatment under the G20 Common Framework, only Zambia has completed the process enabling it to benefit from the facility in 2023.
"Reforming the global architecture of the financial system and debt to reduce costs, time frames and the legal complications of restructuring African countries' debts is a matter of urgency," insisted Mr Adesina at the Bank's 2023 Annual Meetings in Sharm El-Sheikh, Egypt. He urged African countries to avoid high costs and limit the possibility of a new debt crisis, and to push for increased transparency and global coordination between creditors.
Risk
The other debt-related problem lies in the "Africa premium" that countries on the continent must pay when they access capital markets, despite data showing that default rates in Africa are lower than in other parts of the world. A Moody's analysis of the default rates for global infrastructure shows, for example, that Africa ranks higher, at 5.5 percent, than Asia, at 8.5 percent and Latin America, at 13 percent.
Yet the perception of risk in Africa, reflected by the global ratings institutions, results in an often unjustified increase in borrowing costs for African countries.
Repayment time frames
Short time frames for debt repayment remain another thorny issue.
Senegal's former President Macky Sall deplored the short time scales for debt repayments during the 2nd Summit on Infrastructure Funding in Africa. "Apart from a few exceptional cases, our countries are often obliged to repay debts for very significant amounts and long-term infrastructure in very short time frames," he pointed out in February 2023. The same observation also applies to education loans. School-building loans have to be repaid before students have even joined the workforce. He expressed support for cancellation of African debt, stating that this was not "insurmountable" for G20 countries.
"Long-term development cannot be based on short-term loans," said American economist, academic and public policy analyst, Jeffrey Sachs. "The loans granted to Africa should have at least a 25-year term, or longer. Short-term borrowing is dangerous for long-term development,"
A place at the table for Africa
Since the debt crisis of the 1980s, the international community has alternated between various options for debt treatment. Restructuring, suspension, relief and cancellation have, in different cases, allowed African countries to reduce excess debt and tackle liquidity or solvency crises.
The African Development Bank member states meeting in Nairobi will be asked to identify various options for reforming the global financial system, given that debt treatment is impossible without fundamental reforms. The global financial architecture, as currently constituted, does not meet Africa's expectations, as its countries, without exception, are developing and therefore facing multiple globalised challenges.
"Reforming the current international financial architecture so that it is fit for orderly debt restructuring is a matter of urgency. Debt settlement in Africa, especially outside the Paris Club processes, has often experienced problems and delays, with costly economic consequences," said President Adesina at the Bank's 2023 Annual Meetings. Speaking in September 2023 at a round table discussion at the United Nations 78th General Assembly, he insisted on the necessity of structural reform so that it worked correctly. "To create a fairer and more equitable world, we must [first] change the structure, operation and performance of the global financial architecture."
The African Development Bank has already indicated its willingness to play a leading role in advancing this cause. It is strengthening its institutional capacity, transparency and responsibility, and increasingly coordinating its actions with other sister institutions and governments to resolve the debt problem.
Along with the Inter-American Development Bank, it has spearheaded bold financial innovations to enable the International Monetary Fund to channel Special Drawing Rights (SDRs) to countries that increasingly need them through the multilateral development banks. Both institutions have developed an innovative mechanism, structured like a hybrid capital instrument, which can be shown as equity on their balance sheets. They also use a Liquidity Support Agreement, concluded between contributing shareholders, to guarantee that countries that contribute to SDRs can still account for them as reserves. "This will transform SDRs from static foreign reserve assets into dynamic lending instruments, at an affordable cost, to finance development, while preserving their reserve asset status, at zero cost to taxpayers in SDR-rich countries," added Mr Adesina.
Working together
The African Development Bank is advocating a "renewed partnership" to enable African countries to access funding appropriate to their needs. "This goes beyond the financial aspect. "It is more about how we work together to optimize resources by engaging with governments, the private sector and other stakeholders to introduce significant changes," explained President Adesina at a meeting in Abidjan with Ajay Banga, then a candidate for the presidency of the World Bank. Mr Banga spoke of the need for the World Bank Group to develop a close partnership with the African Development Bank Group to achieve transformative results.
Regardless of the necessity for African countries to be better represented on the bodies that fund development or the urgency of promoting increased transparency and global coordination between creditors to support the orderly treatment of sovereign debt in Africa, the continent must emerge from the meetings in Nairobi with innovative ideas. This will allow African countries to have more say in current or future discussions for bold and effective reforms that can resolve African debt over the long term. To achieve this, "Africa must act as a single entity" against headwinds and tides, as Jeffrey Sachs has advocated, just as it did in 1964.
