On Tuesday May 24, 2024, Development Reimagined hosted an event “How Should Africa Reimagine Debt and Development Finance?” This event, held as an Official Side Event during the African Development Bank Group Annual Meetings, gathered experts, policymakers, and stakeholders to explore innovative solutions for Africa’s debt and development finance challenges.
The aftermath of the COVID-19 pandemic has led to an increase in inflation and interest rates, significantly elevating the costs associated with debt servicing. Presently, African countries collectively allocate approximately USD 130 billion annually to debt servicing, with a substantial portion dedicated to interest payments alone. This financial strain not only impedes vital poverty-alleviation efforts but also exceeds incoming funds, intensifying economic pressures. Moreover, the continent grapples with significant financing gaps to achieve Sustainable Development Goals (SDGs), as indicated by the estimated USD 130-170 billion annual infrastructure finance deficit.
In recent years, African external debt dynamics have shifted dramatically. Nearly half of this debt is now owed to private creditors, a substantial increase from 10.1% to 18% per country between 2005 and 2020. This rise, fueled by a surge in sovereign bond issuance, especially in foreign currencies with high interest rates, has heightened concerns about investment risk.
Despite historical examples, like Brady Bonds providing some relief through debt conversion, solutions for private sector debt relief remain elusive. Initiatives like the G20 Common Framework face criticism for slow negotiations and a lack of interim debt suspensions, providing limited assistance to African nations. Consequently, countries like Kenya are resorting to costly measures such as reissuing Eurobonds at higher rates, impeding economic progress. Amid ongoing challenges, new strategies like debt swaps and debt courts are emerging, indicating continued efforts to address Africa’s debt burden. Below are some key highlights from the event.
H.E. Amb. Albert Muchanga, Commissioner for Economic Development, Trade, Tourism, Industry, and Minerals at the African Union Commission provided opening remarks, reminding us of the current reality, “[when the private] market came into the picture, and most developing countries access loans from bond markets and bilateral creditors, but during COVID-19, debt distress emerged…as we’re speaking now, three African countries have defaulted on their debts”
Dr. Hanan Morsy, Deputy Executive Secretary and Chief Economist at the United Nations Economic Commission for Africa, set the tone by providing insights into the current state of debt and development finance in Africa, reminding us that Africa is the youngest continent and is only getting younger every year.
Mr. Olivier Pognon, Director of the African Legal Support Facility (ALSF), provided a presentation on “Strategies for Debt Relief,” highlighting the importance of building legal and institutional capacity for effective debt management.
The event moved into a panel discussion, moderated by Ms Hannah Ryder, CEO of Development Reimagined. Panelists included, Mr Olivier Pognon, ALFS, H.E. Ahmed Shide, Minister of Finance, Ethiopia, Mr. Jean Yves Adou, Acting Director for M&E, APRM, Ms. Mavis Owusu-Gyamfi, Executive Vice President, ACET. The panel had six key takeaways:
1) There is an urgent need for stronger, and more effective Multilateral Development Banks – including building the capacity of African financial institutions – to provide concessional finance. Indeed, Dr Morsy noted, “we need better capitalization of these banks and more concessional finance windows to ensure better utilization of balance sheets.”
2) Steps must be taken to Reimagined the World Bank and IMF’s Debt Sustainability Analysis (DSA). Mr Pognon noted that “we must build our capacity on debt sustainability”. This sentiment was echoed by Dr Morsy, who noted that the “IMF and World Bank’s DSA should go beyond liquidity to focus on solvency, and African countries need to build their own capacity for stronger DSA scenarios” – this includes African institutions and governments formulating their own DSAs and scenarios, as stressed by African experts and policymakers during a DR event in 2023.
3) Going forwards, there must be a focus on strengthening African countries legal frameworks and institutional capacity building. As Ms Owusu-Gyamfi stressed “Some countries like Zimbabwe have great legal and regulatory framework but implementation is another story…..We need to create a standard legal and regulatory debt framework”
4) There is a need for coordination amongst African borrowers and collective bargaining in debt relief. As Mr Pognon noted, “building robust legal and institutional frameworks is essential for effective debt management and negotiation”. Going forward, this coordination and negotiation power will enhance African borrower’s agency within the international financial architecture.
5) Debt is not a bad thing – and can be used to invest into growth-producing, productive assets, is critical. As H.E Shide noted, debt can be used to encourage growth, noting that “most of our loans in Ethiopia are concessional. In addition, we have invested in railway, highway and capacity building. We have created usable assets to generate growth and we need to ramp up to continue a growth trajectory”. Ms Owusu-Gyamfi shared this sentiment, reflecting that [in 40 years] “we would have diversified our economy so we are not dependent on a handful of commodities that throws us in a debt crisis.”
6) African governments need a clear strategy on dealing with domestic and private sector debt. As Commissioner Muchanga raised during his opening speech, African countries are dealing with a complex number of creditors, each with their own terms. As a recent report by DR shows in some cases, countries will have as much as US$5 billion in Eurobond debt servicing obligations alone. Therefore, now is the time for African countries and institutions to come together, share experiences, and coordinate on a clear strategy on how to effectively manage private sector debt and future finance.
Watch the event “How Should Africa Reimagine Debt and Development Finance?” live from the AfDB Annual Meetings in Nairobi, here.
