IMF to Africa: Put away the credit cards
First, the good news: there has been a modest increase in economic growth in sub-Saharan Africa, according to the International Monetary Fund’s (IMF) latest regional economic outlook. This growth, projected at about 3.5% in 2018, is nearly a percentage point higher than last year, mostly thanks to stronger global growth and improved prices for commodities such as oil, aluminium, iron ore, copper, cotton, tea and vanilla.
But “these conditions are not expected to last very long”, warns Papa N’Diaye, a senior IMF official.
That’s not the bad news.
The real worry is the number of countries struggling with ballooning debt.
The IMF says that six African countries are in debt distress — Chad, Eritrea, Mozambique, the Republic of Congo, South Sudan and Zimbabwe. Another nine countries are at high risk of debt distress.
One statistic illustrates the scale of the problem: over the past four years, repaying national debt has, on average, tripled as a percentage of national expenditure — from 4% in 2013 to a whopping 12% in 2017.
A major reason for this debt was the sharp decline in oil prices in 2014, which forced oil exporters such as Angola, Chad and Gabon to borrow heavily to cover the shortfall. Elsewhere, countries borrowed to fund major investments in public infrastructure, although these investments were not always wise — just ask Mozambique, which now has an expensive fleet of tuna fishing boats that are rusting in the harbour.
N’Diaye says it’s not too late for heavily indebted countries to escape the debt trap but it requires the immediate implementation of consolidation plans.
The IMF did not comment on the irony of it sounding the alarm on debt, when its infamously expensive structural adjustment programmes precipitated Africa’s last major debt crisis, which began in the 1980s.
Another irony: it may have been African countries’ success in emerging from that last debt crisis that leaves it on the brink of a new one.
Justin Sandefur and Divyanshi Wadhwa of the Centre for Global Development said: “Economic growth converted a number of major African economies from low- into lower-middle-income countries ... in the process they seem to have fallen into an awkward middle ground: not facing any imminent crisis, they were too successful for most kinds of concessional finance from the multilateral financial institutions, but still fragile enough that the cost of finance from commercial creditors was high.”
This time around, it is private creditors rather than other countries or international institutions that hold much of Africa’s debt.
One way to address the looming debt crisis is for African countries to start raising more taxes. As The Economist explains: “Disaster can still be averted. Sudden spending cuts would leave half-finished infrastructure projects to rust, and could potentially exacerbate the debt crunch by tipping economies into recession. Instead, research from the IMF suggests that the least costly way to deal with fiscal imbalances in Africa is to raise the region’s meagre tax-to-GDP [gross domestic product] ratio, which has crept up by just a couple of percentage points this century.”
Abebe Aemro Selassie, director of the IMF’s African department, said: “Policymakers need to seize the opportunity provided by favourable external conditions to turn the current recovery into durable strong growth by taking domestic policy steps to reduce fiscal imbalances and raise medium-term growth potential.
“Prudent fiscal policy, especially domestic revenue mobilisation, is critical to make room for key infrastructure and social spending. On average, there is scope to raise tax revenues by three to five percentage points of GDP over the next few years. Reforms to nurture a dynamic private sector are needed to provide the foundations to raise the low level of private investment, for example by boosting intra-Africa trade and deepening access to credit.”