Public-debt levels pose significant risk to economies across Africa

18 January 2018 3 min. read

Amid a range of challenges facing the African economy, public debt, although not in the foreground of issues, appears to have crept into high-risk territory. Research from consulting firm Control Risks reveals that public debt rates on the continent have increased by more than 125% over the last ten years.

The African economy appears to be caught in no man’s land, between highly promising economic indicators on the one hand and nearly crippling economic conditions on the other. With a largely young population, the continent is expected to have one of the largest workforces in the world in decades to come, a major portion of which will be digitally connected in the next five years.

However, in recent times, the economy has been navigating a rough patch, primarily due to a drop in commodity prices. A number of economies on the continent are heavily dependent on natural resources, such as oil and precious minerals. As oil and commodity prices dipped, primary revenues of many countries took a huge dive. In fact, the richest countries by GDP on the continent, i.e. Nigeria and South Africa, are both economies that have diversified, to some extent, beyond the commodity-trade.

In addition, the continent faces a severe deficit in funding for infrastructure, which hinders many economies in their ability to diversify. As a result, these countries have had to rely on external borrowing to finance development projects, which has built up a massive amount of public debt over the last decade, according to a new report from consulting firm Control Risks.

Public debt in Africa

Control Risks is an international consulting firm, specialising in risk analysis. The firm supports clients across the globe with securing their organisation’s development, primarily by identifying risks in the market where they operate. In a new paper titled ‘At Debts Door,’ the firm has highlighted the grave public-debt scenario in Africa, as firms seek to strategise their entry into the market.

According to the firm, external borrowing on the continent has skyrocketed in recent years, particularly since the recovery of the global economy from the financial crisis. As per the firm’s data, public debt on the continent currently exceeds $40 billion, and has increased by more than 125% over the last decade, resulting from friendly Eurobonds rates and increased lending capacity in the international arena.

In addition, most countries currently lack the capacity to repay these loans. Naturally, oil-dependent economies are struggling at present. However, the firm warns that even diversified economies such as Nigeria or Kenya are under risk of default, as most loans are taken for large infrastructure projects where the monetary benefits will most likely start flowing in much later than payment deadlines.

Three decades ago, a similar trend of loan defaults culminated in the debt crisis of the 1980s and 1990s in Africa, which required multi-lateral debt relief to resolve. In the process, economic development in a number of African countries was brought to a virtual halt, and indigenous industries collapsed, leading to broad social and political strife.

Relief efforts, which supported 30 countries, continued well into this century, the latest beneficiary being Chad. The country received a debt alleviation of more than $1 billion in 2015. The report states that, although there is no risk of such a crisis occurring again in the very near future, current trends are eerily similar to those at the start of the previous crisis.