A Fairer Deal for Africa: Reshaping Debt in the Global Financial Architecture

In 1944, at the Bretton Woods Conference, the current global architecture was born. Eight decades later, it is clear that it is no longer fit for purpose, especially in regard to sovereign debt management for countries in the Global South.

 African leaders are currently gathered in Nairobi, Kenya, for the 59th Annual Assembly of the African Development Bank and the 50th meeting of the African Development Fund. This year’s theme is Africa’s Transformation, African Development Bank Group, and Reform of the Global Financial Architecture. 

The issue of reforming the global financial architecture has been a hot topic for the past few years. Clarion calls for reform have grown louder in recent years, championed by influential figures like Mo Ibrahim, Vera Songwe, President William Ruto of Kenya and the UN Secretary-General António Guterres, who have emphasized the need to radically transform the global financial architecture to ensure “it delivers effectively and fairly for everyone”. 

A combination of the pandemic, geopolitical instability, climate shocks and high energy and food prices due to the Russia-Ukraine war, has left a scar on the global economy. And, unfortunately, when the global economy sneezes, Africa tends to catch a cold. In recent years, millions of people have been pushed into poverty and progress on sustainable development goals stalled. One of the culprits of this situation is mounting debt pressures. 

Now, the term “debt” is often associated with fiscal irresponsibility and poor economic management. However, debt is a significant tenet of the public expenditure framework and a country’s macroeconomic toolkit. According to the International Monetary Fund (IMF), a government's debt portfolio is typically the largest financial portfolio in the country and it often contains complex and risky financial instruments that could create a substantial risk to the government's balance sheet and the broader economy if not managed efficiently. 

In the past decade, public debt in developing regions has increased significantly. According to a report by UNCTAD, almost 30% of global public debt is owed by developing countries. In 2022, public debt in Africa skyrocketed to $1.8 trillion from approximately $648 billion in 2010–a percentage increase of 178%. Mounting debt pressures have exacerbated economic vulnerabilities and highlighted the need for comprehensive structural reforms in global financial systems to support sustainable development in the region.

Good debt, bad debt

Like natural resources, debt is a two-edged sword. 

Debt can be a critical tool for economic growth and development. Many governments utilise public debt to invest in critical infrastructure projects, drive economic and political reforms and ultimately better the lives of their people. For instance, Senegal has strategically leveraged debt to fund some of its infrastructure projects under its "Plan Sénégal Émergent" (PSE). Under the PSE significant investments have been made in the Blaise Diagne International Airport, the Dakar-Diamniadio Toll Highway, and the Regional Express Train. These projects have transformed Senegal's infrastructure, improved connectivity, boosted tourism and promoted economic growth. Another example is Ethiopia. The East African country has utilised debt to finance some of its ambitious infrastructure projects in the energy and transport sectors including the Addis Ababa-Djibouti Railway Project and the Grand Ethiopian Renaissance Dam (GERD). Likewise, Nigeria has also relied on debt–specifically Chinese debt–to fund some of its massive transport infrastructure projects including the Lagos-Ibadan rail, Itakpe-Warri rail, Abuja-Kaduna rail, Lagos Blue Line Metro rail and the Abuja Metro rail.   

However, when debt reaches unsustainable levels, it can hinder economic growth and negatively impact the livelihoods of citizens. For debt to be effective, it must be properly managed, transparent, and utilized to drive growth. Unfortunately, this is not always the case. Many governments lack fiscal discipline, leading to heightened fiscal pressures and adverse economic outcomes.

Key trends driving Africa’s debt position 

The debt conversation is a tale as old as time. 

In 1966, the IMF and the World Bank joined forces and launched the Heavily Indebted Poor Countries (HIPC). The objective was simple– to ensure that poor countries were able to effectively manage their debt burden. In 2005, to catalyse progress towards achieving the Sustainable Development Goals (SDGs), the HIPC Initiative was complemented by the Multilateral Debt Relief Initiative (MDRI). This combined effort helped reduce the debt levels of participating African countries and redirected resources to critical economic sectors. For example, last December, Somalia reached the HIPC initiative completion point, achieving debt service savings of $4.5 billion. These funds have played a major role in strengthening the East African economy. Nonetheless, several African countries still struggle to maintain long-term debt sustainability.

As the population grows, African nations require substantial capital to invest in critical social and physical infrastructure for development–an estimate from the African Development Bank puts this at $130 - $170 billion annually but there is a financing gap of $100 billion. To meet this need, they borrow funds either domestically, typically from their domestic capital markets, or externally from bilateral or multilateral creditors and external private markets i.e. Eurobonds. However, many countries encounter an international financial architecture that is unequal, exacerbating their debt burden. This inequity often forces them to borrow from more expensive sources, increasing their risk and vulnerability to default. In this section, we will diagnose some specific structural challenges African countries face in the current financing landscape.  

Let’s start with the cost of borrowing. When developing countries borrow money to finance railways or build hospitals, they have to pay much higher interest rates in comparison to their counterparts. A 2022 report by Brookings highlighted that Least Developed Countries (LDCs) allocate an average of 14% of their domestic revenue to interest payments, compared to developed countries, which dedicate only about 3.5%, despite having significantly larger debt stocks. These higher borrowing costs are based on lower credit ratings and shoddy valuations of African economies. In the absence of an African credit rating agency, countries will continue to face the possibility of being downgraded by the big three –Moody's, Fitch and Standard & Poor's (S&P)– and alienated from the international credit market. Ghana is a prime example and more recently, Kenya and Cameroon have faced the wrath of foreign credit rating agencies. These rating agencies have debunked claims of bias indicating that they adopt a standardised approach everywhere, but many are not convinced. In response to this, plans are underway by the African Union to launch a Pan-African credit rating agency which will reflect the true realities of the continent’s diverse economies and improve its reputation in international markets. Only time will tell if the international creditors have been unduly harsh with their evaluation of African economies or if things really are as dire as it seems on the continent.  

A report by UNCTAD reveals that countries in Africa pay interest rates four times what the US pays and a staggering eight times higher than Germany. High borrowing costs make it difficult for developing countries to finance important projects, undermining debt sustainability and progress towards sustainable development. Again, interest payments are growing faster than other public expenditures in the continent. This means that governments are spending money on interest repayments in lieu of investing in critical human development sectors such as health, climate change and education. 

Apart from the stark credit ratings, another important explanation for these exorbitant interest rates is the maturity mismatch of debt. In an ideal world, the maturity of debt should coincide with the lifespan of the project it finances. However, many African countries tend to borrow to finance gargantuan infrastructure projects (some of which tend to end up as white elephants) which can take years and sometimes decades, to generate any returns. Short-term Eurobonds, which have become popular in the continent, force governments to scramble for funds to repay the debt before the project produces any significant revenue. This mismatch exposes investors to risk and the uncertainty triggers a demand for a higher interest rate to offset the potential risk of missing a repayment.  In order to avert a looming Eurobond debt trap, African governments need to prioritise using bond proceeds to fund viable and profitable projects that can generate revenue to service the debt. Refinancing existing debt with new Eurobonds should not be the motivation. More importantly, governments must take charge of the bond issuance process by rejecting extortionary rates and welcoming only favourable bids. 

But it’s not just about how much debt is owed, it is to whom it is owed. In recent years, non-Paris Club bilateral creditors and commercial creditors have become major sources of Africa’s sovereign debt. Most debt is owed to private creditors, who charge African countries higher interest rates. In 2010, private creditors held 30% of African debt. By 2021, this share had risen to 44%. Expectedly, China has emerged as a leading creditor. The share of debt owed to China rose dramatically from just 1% of total external debt in the mid-2000s to 14% by 2021 (although we have seen a decline in lending since 2016 due to domestic economic woes, policy shifts and concerns about the continent's debt burden). In 2022,  Chinese public and private lenders held approximately $63 billion and $24 billion of Africa’s external debt respectively–much of this borrowing has been used to fund shiny infrastructure projects across the continent. 

The shift from multilateral and Paris Club creditors to private and non-Paris club creditors in the last decade makes coordination tricky and complicates debt restructuring efforts by the Bretton Woods Institutions–the IMF and the World Bank–when required. This is mainly due to the absence of a formal mechanism for coordinating all private creditors.

Another thorny issue is that an increasing percentage of debt stock is in the form of Resource-backed loans (RBLs). Resource-backed loans are borrowing mechanisms which countries use to fund infrastructure and development projects in exchange for future streams of income from its natural resources, such as oil or minerals. While this sounds like a sweet deal, it comes with its pitfalls. Oftentimes, the structure of these loans, particularly their size, terms and repayment schedule is not favourable for the country. A study by the Natural Resource Governance Institute (NRGI) analyzed 52 resource-backed loans made between 2004 and 2018, totalling more than $164 billion. Of these, 30 loans, valued at $66 billion, were made to sub-Saharan African countries. The 2014 commodity price crash exacerbated the debt problems in 10 of the 14 countries that used natural resource-backed loans, highlighting the risks and challenges associated with this financing method.  In the words of AfDB President, Akinwumi Adesina, “resource-backed loans are non-transparent, expensive and make debt resolution difficult”. RBLs are simply rushed loans plagued with opaqueness that often fail to serve the best interest of the borrowing country. To manage the impact of these loans on public debt, governments must establish policies that institutionalize RBL protocols to make these back-door deals more transparent and fair to the host country. 

There is also the exchange rate problem which impacts the debt burden through various channels. When local currencies depreciate against foreign currencies, especially the US dollar, the cost of servicing foreign-denominated debt surges. This is because more local currency is needed to purchase the same amount of foreign currency for debt repayments. The International Monetary Fund (IMF) highlights the severity of this issue: approximately  40% of public debt in sub-Saharan Africa is external, with over 60% of that debt denominated in US dollars in most countries. This heavy reliance on a single, strong currency creates a significant vulnerability to exchange rate fluctuations and threatens debt sustainability.

Life or debt? 

Debt servicing has important implications for the economy and, concomitantly, the lives and livelihoods of people. Today, 3.3 billion people reside in countries that spend more on interest payments than on social sectors such as education or health, according to the UN–in Africa, this is approximately 57% of the population or about 751 million people. African governments are now faced with the difficult choice of servicing their debt or serving their people. These funds could have been redirected to growing the economy e.g. building a primary health care facility in a rural town or providing subsidized loans to local businesses to allow them to scale.

Ultimately, African countries need to strike a balance where they maintain fiscal discipline and ensure that they utilise debt effectively. Furthermore, countries need to think of a multi-pronged approach to generate the finance required for development. Traditional borrowing alone is not sufficient. Governments can consider innovative instruments such as  debt2health swaps, green bonds and tax restructuring as a way of generating the capital required for development. There is also the political economy element, which is beyond the scope of this paper. But, debt management in the absence of strong and inclusive institutions can be a herculean task. Thus, political reforms should be considered alongside technical solutions.

Moving forward

If the current trend persists, the region’s public debt stock will continue to balloon, shrinking the fiscal space, crowding out private investment, increasing sovereign risk, and hindering the ability of governments to invest in human and physical capital and to respond to future shocks. 

It is clear that there is an appetite for change to the current status quo. But action is paramount. The Marrakesh Framework: An African Agenda for Global Financial Architecture Reform is a good place to start. 

The framework envisions a global financial architecture where Africa is seen not just as a recipient of aid from the Global North  but as an active contributor to the global financial landscape. Upon successful implementation, the framework could unlock more affordable financing options for African countries, enhance African representation and influence across international financial institutions and ultimately lead to improved debt management strategies. 

This is not just good news for African Finance Ministers who have had a hard time managing the fiscal space of their economies. A more inclusive financial system has the potential to improve the lives of all Africans by fostering economic opportunities and unlocking the continent's vast potential.