How Africa is cleaning up its rising debt mess

Policy reforms and reduction in energy subsidies have helped, says the IMF

In Summary

• IMF says no African state has sought comprehensive debt relief in over a year

• This indicates a trend of growing fiscal hygiene across the continent

No African state has sought comprehensive debt relief from the IMF since Ghana’s request more than a year ago
No African state has sought comprehensive debt relief from the IMF since Ghana’s request more than a year ago

Countries in Africa are showing signs of improving fiscal management as they navigate through a cascading set of global shocks that exacerbated their debt vulnerabilities.

Remarkably, no state has sought comprehensive debt relief since Ghana’s request more than a year ago, signalling a trend of growing fiscal discipline across the region.

The improvement bucks the trend of recent years, given that several economies, including Ethiopia, Mozambique and Chad, sought debt restructuring or relief from their creditors in previous years.

In its latest analysis, the International Monetary Fund attributes the decline in debt relief requests to the efforts of some nations to adopt policy reforms and structural adjustments, especially in the energy sector.

IMF cites Angola, Gambia, Nigeria and Zambia as examples of countries that have reduced energy subsidies and increased development spending, thereby creating fiscal space and enhancing growth prospects.

"But many are lagging, especially in efforts to increase revenues, such as broadening the tax base, reducing tax exemptions and increasing the efficiency of tax administration," the Fund notes.

For instance, it shows that African states "raised only 13 per cent of the gross domestic product in revenues in 2022, compared with 18 per cent in other emerging economies and developing countries and 27 per cent in advanced economies".

Many are lagging, especially in efforts to increase revenues, such as broadening the tax base, reducing tax exemptions and increasing the efficiency of tax administration

This discrepancy highlights the urgency for many African nations to broaden their tax bases, cut down on tax exemptions and enhance the efficiency of tax administration.

While many states on the continent turn to subsidies to cushion the populace from the high cost of living, energy subsidies are often seen as a way to provide affordable and reliable electricity to the population, but they also have significant drawbacks.

They are costly, inefficient and regressive, as they benefit mostly the wealthy and the urban dwellers, while crowding out spending on health, education and infrastructure.

However, policymakers in Africa face a huge tension between elevated development needs and low domestic resource mobilisation.

This, the IMF argues, creates difficult policy tradeoffs and may lead to excessive indebtedness.

Nonetheless, the IMF's September 2023 review showed about a quarter of African economies still have some fiscal space and can use it to continue making vital investments in human and physical capital.

Still, several nations face substantial adjustment challenges, and relying solely on fiscal consolidation may not suffice to achieve fiscal sustainability. Moreover, such an approach might not be advisable.

In October 2021, the IMF identified more than 20 low-income African countries as being in or at risk of debt distress.

Despite rising overall debt levels, these countries have managed to support their economies with help from development finance institutions and multilateral lenders, avoiding excessive private debt accumulation.

Additionally, the IMF has provided Africa with $33 billion in special drawing rights (SDRs), boosting liquidity without increasing debt.

However, the transition from the G20’s Debt Service Suspension Initiative (DSSI) to its successor, the 'Common Framework for Debt Treatment beyond the DSSI', has been slower than expected, with only Chad, Ethiopia and Zambia participating so far.

Meanwhile, African countries have been seeking to increase their voice and influence in the global financial architecture and are advocating for more favourable and flexible debt solutions that take into account their specific needs and circumstances.

African countries are also exploring new and innovative ways to leverage their natural resources and assets to access finance and reduce their debt vulnerabilities through mechanisms available to many developed countries.

Angola has agreed with China to use its oil production as collateral for debt repayment, while also securing a grace period and lower interest rates.

Several African nations are also implementing reforms to improve debt management and transparency, alongside diversifying their financing and revenue sources.

Kenya, for instance, has introduced a new Public Finance Management Act to cap public debt and requires parliamentary consent and public disclosure for new loans.

Nigeria is enhancing tax compliance and revenue through a Voluntary Assets and Income Declaration Scheme, and has issued green bonds to fund renewable energy and environmental projects.

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