A new report by the African Export-Import Bank (Afreximbank) reveals that East Africa is now the most indebted region on the continent. This growing debt crisis is affecting economic stability across African nations, triggering divestment, declining investor confidence, and threatening the region’s ability to service its loans. The issue of indebtedness has been compounded by external factors such as the COVID-19 pandemic, global inflationary pressures, and geopolitical events such as Russia’s invasion of Ukraine, all of which have exacerbated borrowing costs for African economies.

The report, titled State of Play of Debt Burden in Africa 2024: Dynamics and Mounting Vulnerability, highlights how the continent’s total loans in default reached a staggering $149.4 billion in 2022. This represents the highest level in three decades, showcasing the increasing challenges that African countries face in managing their sovereign debt loads.

The Impact of Global Economic Conditions

The global economic situation over the last few years has placed immense pressure on many African economies. Rising interest rates globally have not only increased the cost of borrowing but have also reduced access to capital markets for several African countries. As central banks, particularly in the US and Europe, raise rates to curb inflation, African nations have faced higher debt servicing costs, leading to delayed repayments and, in many cases, defaults.

For many African economies, the COVID-19 pandemic served as a catalyst for financial distress, as governments were forced to increase spending on healthcare and social services while experiencing a significant drop in revenues due to reduced economic activity. The pandemic also exposed the structural weaknesses of African economies, many of which are overly dependent on external borrowing and commodity exports, leaving them vulnerable to external shocks.

Moreover, Russia’s invasion of Ukraine in 2022 triggered a global commodity price surge, especially in energy and food prices. For African nations heavily reliant on energy imports, such as Kenya, this further strained their fiscal positions. At the same time, increased inflation forced central banks worldwide to raise interest rates, directly impacting the cost of servicing foreign debt.

East Africa Leading the Debt Crisis

East Africa, home to some of the fastest-growing economies on the continent, now finds itself grappling with high levels of indebtedness. According to the Afreximbank report, the debt-to-GDP ratio in East Africa averaged 54.5% over the seven-year period between 2017 and 2023. Kenya and Tanzania are identified as major defaulters in the region, with Kenya defaulting on $305 million owed to private creditors and Tanzania defaulting on a combined $5.8 billion owed to both official and private creditors.

Kenya’s fiscal struggles can be attributed to its ambitious infrastructure spending, including large-scale projects such as the Standard Gauge Railway (SGR), which were largely financed through external borrowing. While these projects were intended to spur economic growth, the returns have been slower than expected, putting pressure on the country’s ability to meet its debt obligations.

In 2022, Kenya’s public debt stood at over $73 billion, and the country’s debt service-to-revenue ratio reached 63%, far exceeding the recommended 30% threshold set by the International Monetary Fund (IMF). Despite efforts to stabilize its fiscal situation through tax reforms and austerity measures, the high cost of debt servicing continues to limit Kenya’s ability to invest in critical sectors such as healthcare, education, and infrastructure.

Debt Sustainability Concerns Across Africa

Beyond East Africa, the issue of debt sustainability is a continent-wide concern. The Afreximbank report shows that more than half of the 52 African countries assessed are either at high risk of or already in debt distress. Countries like Sudan, Zimbabwe, Ghana, and Zambia feature prominently in the list of major defaulters, with Sudan and Zimbabwe defaulting on over $20 billion and $8 billion, respectively.

The report emphasizes that many African countries are teetering on the brink of a debt crisis due to the upcoming capital repayments on numerous international bonds starting in 2024. The risk of a “domino effect” looms large, where one country’s default could trigger a broader financial crisis across the region.

However, there is some optimism. The report notes that 2023 saw a 13% decline in loan defaults, bringing the total down to $129.9 billion. This improvement was partly due to debt restructuring efforts by distressed sovereigns, which allowed them to renegotiate terms and ease their repayment burdens.

A Shift in Africa’s Creditor Landscape

One of the most significant changes in Africa’s debt situation over the past decade is the shift in its creditor base. Traditionally, African countries relied on multilateral institutions like the IMF, World Bank, and Paris Club creditors for financing. However, in recent years, there has been a marked increase in private sector lending and borrowing from non-Paris Club sources, including China.

As of 2023, private debt accounted for more than half (54.3%) of Africa’s total external debt, highlighting the growing role of commercial lenders. While private lending offers more flexibility, it also comes with higher interest rates and shorter repayment terms, making it riskier for many African nations.

China’s role as a lender has also come under scrutiny. While it has provided much-needed infrastructure financing to several African nations, particularly through its Belt and Road Initiative (BRI), concerns have been raised about the sustainability of these loans. Countries like Angola, Kenya, and Zambia have significant exposure to Chinese loans, and suspicions have emerged about potential defaults on these loans since 2016.

In response, China has taken steps to address these concerns. In 2022, it cancelled $5.3 billion worth of loans to 17 African countries as part of its debt relief efforts, signaling a shift towards a more accommodative stance in its lending practices.

Key Defaulters: Zambia and Ghana

Among the key defaulters in 2023 were Zambia and Ghana, two countries that have faced severe economic challenges in recent years. Zambia became the first African country to default on its sovereign debt in the COVID-19 era when it missed a $42.5 million Eurobond payment in 2020. Since then, it has been in negotiations with creditors to restructure its debt, which stood at $14.3 billion at the end of 2022.

Ghana, once hailed as one of Africa’s economic success stories, has also struggled with its debt burden. In 2023, the country defaulted on over $4 billion in local currency debt and is currently undergoing debt restructuring as part of a broader economic stabilization program supported by the IMF.

The Road Ahead: Debt Relief and Policy Reform

Moving forward, African countries will need to adopt more sustainable debt management strategies to avoid further defaults. This will likely involve a combination of debt restructuring, increased domestic revenue mobilization, and prudent fiscal management. The IMF and World Bank have been working with African countries to develop debt relief programs and provide technical assistance on improving debt sustainability.

Additionally, there is a growing recognition that African countries must diversify their economies and reduce their reliance on external borrowing. This will require greater investments in sectors such as manufacturing, technology, and renewable energy, which can generate long-term economic growth and reduce vulnerability to external shocks.

Photo source: Google

By: Montel Kamau

Serrari Financial Analyst

12th September, 2024