Africa must undertake deep structural reforms and strengthen governance to achieve the growth needed to reduce debt and lift millions out of poverty. By Jason Mitchell.
Sub-Saharan Africa's economy picked up momentum this year, with growth forecast to reach 3.8% in 2024 from 3.4% in 2023, according to the IMF. It could even surpass 4% next year. Yet, many countries in the region are stuck in a debt quagmire with little sign of escape.
The African Development Bank estimates that Africa’s total external debt increased to US$1.15trn by the end of 2023 from US$1.12trn in 2022. With global interest rates at their highest level in decades and multiple bond debt securities reaching maturity, Africa is set to pay out US$163bn just to service debts in 2024 – up sharply from US$61bn in 2010. The IMF estimates that Sub-Saharan African countries will be running an average fiscal deficit of 3.7% of GDP this year, piling up their debts even further.
In April 2024, 20 African countries – including Zambia, Ethiopia, Ghana, Chad, Kenya, Tunisia, Malawi and Mozambique – were either in external debt distress or at high risk of succumbing to it, according to the IMF. The growing burden of debt repayments threatens the region's ability to achieve the UN's Sustainable Development Goals by 2030, particularly in health, education and infrastructure.
"It's almost impossible to generalise with a single summary statistic that would capture what's going on in the region," said Abebe Aemro Selassie, the director of the IMF's African department. "There's huge heterogeneity. While we see a pick-up in growth compared to the immediate aftermath of Covid-19, this growth remains fairly tepid, averaging just below 4%, and in per capita terms, even lower at around 1.5%.
"Before the pandemic, external conditions were generally benign – robust growth, low interest rates and significant access to capital markets. High commodity prices for a part of that period were also favourable for commodity-exporting countries. Coupled with a lot of reforms that countries had been doing, it facilitated a lot of investment in countries (notably in infrastructure, in human capital) allowing fairly good economic growth and a lot of positive momentum. That was halted by the pandemic for most countries. With limited capacity to limit the effect of the pandemic on their economies, notably very limited domestic capital markets and constrained access to international markets, recovery from the pandemic has been very slow."
Furthermore, high fertility rates in Africa remain a major issue, as they lead to weak per capita economic growth. The continent's population topped 1.5 billion for the first time in 2024 and is projected to increase by 950 million, reaching 2.5 billion by 2050, according to the United Nations Economic Commission for Africa. The fertility rate stood at 3.8 in 2024, high compared to other world regions and declining only gradually.
"To facilitate poverty reduction in the region, ideally, you want to see growth closer to 3% or more in per capita terms," said Selassie. "This corresponds to nominal growth of 6%–7%. There's a lot of heterogeneity in circumstances but some of the smaller countries are in quite a lot of acute difficulty. And the issues are interlinked. The fact that you have very low growth means that you're not creating enough employment, you're not creating enough activity to raise revenues, to address the spending needs and so on. Reforms and financing are needed to address economic imbalances over time and facilitate growth and job creation."
One of the key issues is that the structure of African debt has shifted dramatically over the past two decades. Bilateral debt now accounts for 27% of the total, down from 52% in 2000, while commercial debt has increased to 43% from 20%, according to the AfDB. This shift reflects a move from primarily official creditors – such as wealthy Western states and multilateral development banks like the World Bank and the IMF – to a more complex mix of private creditors, including insurance companies, pension funds, hedge funds and investment banks. The rise in private and commercial debt has introduced challenges, including higher interest rates, shorter maturities and greater exposure to market fluctuations.
Moreover, following the US$100bn in debt relief provided under the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI) three decades ago, African countries have piled on the debt again. The debt burden surged to 68.6% of GDP in 2023 from 39.3% in 2008, according to Afreximbank. External debt alone has jumped to 41.6% of GDP from 18.8% during the same period.
In parallel, over the past 10 years, there has been a major move towards domestic debt, which accounted for about 50% of total public debt in Sub-Saharan Africa by 2021, up from 30%, according to the AfDB. The increase has also crowded out lending to the private sector.
Many African countries are now suffering from a funding squeeze, made worse by the decline in traditional financing sources, such as official development assistance from bilateral and multilateral donors. China has also adopted a more cautious approach, becoming reluctant to issue large loans amid its own economic slowdown. Consequently, African governments have turned to alternative, often more expensive, financing options like Eurobonds and commercial loans.
These risks are reflected in Africa’s high borrowing costs. As of September 2 2024, Kenya's 10-year bond yield was 16.9%, South Africa's 9.22%, Zambia's 26.4% and Nigeria's 19.59, while in the United States it was only 3.91%.
Furthermore, one of the most pressing problems has been the rise in debt servicing costs since the pandemic. For low-income countries in Sub-Saharan Africa, the average gross financing needs – the total funds governments require to cover their deficits and debt repayments – remained high at almost 10% of GDP at the end of 2023, according to the World Bank. In 2023, the debt service to government revenue ratio was above 30% in several countries – including Angola, Zimbabwe, Malawi and Mozambique – according to Afreximbank. By 2023, it was reported that Ghana was spending up to 70% of its tax revenue on debt servicing, Kenya 30%–40% and, before seeking debt relief, Zambia close to 50%.
"[Debt servicing costs] are the main concern," said Zuzana Schwidrowski, director of macroeconomics, finance and governance at Uneca. "And it has to do with the changing structure of the debt from official creditors to the private sector. There was a lot of enthusiasm for African countries approaching the Eurobond market. It almost felt like they had graduated. 'Now we are not subject to all that conditionality from the IMF', they thought. But the debt they took on was not transparent. They assumed a lot of hidden debt as well.
"To me, without growth, almost nothing will be resolved. Growth is really the key focus. We need to think about how to generate growth that is inclusive and can address socioeconomic problems. If African countries focus on the fiscal side alone, it will not solve the debt issue."
Social unrest
The debt issue has been accompanied by increased social unrest in the region. Since June 2023, Kenya has been gripped by anti-government protests, initially triggered by opposition to tax increases proposed by President William Ruto’s administration. These taxes were seen as worsening the cost-of-living crisis, particularly among the country’s youth and lower-income populations.
As the protests grew, they expanded into broader demands for better governance and the resignation of President Ruto, reflecting widespread frustration with the government's handling of economic issues. While considered necessary by international creditors such as the IMF, the government's tax increases remain deeply unpopular among a population already struggling with tight budgets.
The Nigerian government feared that similar protests could erupt due to abrupt economic reforms. Shortly after taking office in May 2023, President Bola Tinubu relaxed longstanding foreign exchange restrictions, which caused the naira to fall by 70%. At the same time, his administration removed fuel subsidies, ending a policy that had been in place since the 1970s. These changes dramatically impacted the standard of living, increasing the risk of social unrest.
"The amount of debt that governments piled on pre-Covid – some of it infrastructure related – has not really had the benefits that they expected," said David Omojomolo, emerging market economist at Capital Economics. "It has proved to be a millstone. A lot of countries have piled on foreign currency-denominated debt as well. The recent devaluations we have seen have made paying back that debt a lot harder.
"During the protests that happened in Kenya, there was criticism of the IMF. There were IMF placards, which is really interesting. There are voices on the continent, even from domestic policy analysts, who have talked about, say, Nigeria's wonky implementation of the fuel subsidy removal. Should it have been more gradual? Should you have cushioned the impact?"
The unrest in Kenya highlights the delicate balance between addressing the debt issue and meeting the needs of struggling citizens. For example, in 2021, African countries allocated on average only 3.7% of their GDP to education, according to the World Bank. They are spending only 5% on healthcare.
"Public debt has surged in many African countries, and debt services has become costlier," said Andrew Dabalen, the World Bank’s Africa region chief economist. "To ensure fiscal sustainability, governments have responded by cutting costly spending (for example, Nigeria’s fuel subsidies) or raising taxes (as it was the case of the 2024 finance bill in Kenya). This has further reduced the purchasing power of their citizens.
"Protests in Kenya, Uganda and Nigeria have been attributed, among other things, to high levels of youth underemployment, elevated cost of living, poor governance and a decline in public services. In this context, the timing of higher taxes in some of these countries exacerbates an already combustible situation."
This economic mismanagement is further exacerbated by embezzlement and a lack of transparency in government spending, which contribute to the misallocation of resources and the accumulation of debt. For instance, Africa's public investment efficiency gap is estimated at 39%, meaning that out of one dollar spent on investment, only 61 cents effectively translates into infrastructure, while the remaining 39 cents is wasted due to corruption, mismanagement of public funds and poor selection of projects, according to the AfDB. This inefficiency drains vital resources and hampers infrastructure growth.
"As an institution, of course, we are working with governments as they are trying to make these very, very difficult trade-offs," said Selassie. "As such, it is understandable that questions are raised about our role. At the same time, I can assure you that our main role is to provide countries with financing and advice on policies that have worked elsewhere. And the financing we provide when conditions are difficult buy time for countries to address the difficulties they are facing. We try to be balanced in our advice.
"The criticism comes with doing the work that we do. But I can assure you that we are a much, much-changed institution. The first thing we try to do is encourage countries to come up with their own reform programmes, which has domestic political buy-in, and we see how we can work with that.
"In the past, in the 80s and 90s, we were criticised for being too intrusive and making choices for countries on what exactly the policy, the balance between those considerations, should be – for being very didactic. Our role is to highlight what the quantum of adjustment, quantum of reforms are needed. Second, we also do quite a bit of work in identifying governance weaknesses in many countries."
He said the IMF undertakes governance diagnostics work in many countries, highlighting where particularly public finance management institutions can be strengthened and improved.
"The pay-off to this takes a bit of time, but we do that. The issue of strengthening the social contract in our countries is perhaps one of the biggest challenges that our countries are facing.
"We have a very boisterous democratic dispensation in many countries, increasingly in the region. How to make sure that during this period, governments and policymakers communicate effectively to show exactly why reforms are needed – and make the case about choosing option X versus option Y – is one of the big challenges they are facing."
Immediate problem
The high debt burden creates an immediate problem for many African countries. Although the anticipated wave of defaults has not materialised, with only Zambia and Ghana officially defaulting, several countries are teetering on the precipice. To avoid the catastrophic costs associated with default, these countries are forced to drastically cut spending on essential services like education, healthcare and infrastructure.
Furthermore, the complexity of restructuring African debt is compounded by the differing interests of creditors. Private creditors, such as banks, are mainly focused on earning market-based returns, unlike traditional concessional creditors. The growing share of private creditors raises the cost of African debt, as many of their loans are issued on market terms. Additionally, the lack of a formal coordination mechanism among these creditors further complicates effective restructuring efforts.
In December 2022, Ghana became the second African country to default, suspending debt service payments on its external government debts, including foreign currency bonds, commercial loans and bilateral debt. The government also launched an US$11bn domestic bond exchange to reduce interest payments.
By July 2023, Ghana invited domestic pension funds to exchange C31bn (US$2bn) in investments for bonds with an 8.4% interest rate, down from 18.5%. In 2024, Ghana made further progress, reaching agreements to restructure US$5.4bn with official creditors and US$13bn in international bonds. In June 2024, an agreement in principle was reached with international bondholders to restructure its dollar bonds.
Moreover, as well as Zambia and Ghana, Chad and Ethiopia have turned to the G20’s Common Framework, established in November 2020, for help in restructuring their debts. The framework aims to address insolvency and liquidity challenges but faces its own set of limitations. It has also turned out to be a prolonged process, with Zambia only reaching final agreement with private creditors in March 2024.
As a preferred creditor, the IMF ensures its loans are repaid before those of other creditors. This priority is essential for the IMF, which is why it is not prepared to waive its own debts.
Schwidrowski said: "The IMF’s stance on debt relief is partly driven by the need to maintain the revolving nature of its funds, ensuring that repayments are used to support other countries in need. However, this approach also means that some African countries continue to struggle with their debt burdens without much-needed relief."
Addressing Africa's debt burden is essential but only part of the solution. Long-term economic growth also depends on boosting productivity, particularly in agriculture. Despite employing 42% of Africa's workforce, agriculture remains 60% less productive than the economy-wide average, trapping many workers in low-wage jobs that perpetuate poverty, according to the AfDB.
The continent is home to one-third of the world's minerals, including many that are critical to the global energy transition. Yet many African countries do not process their minerals. Guinea, for example, supplies almost 30% of the world's bauxite but hardly any alumina refining happens in the country.
"There's a wider theme here as well in terms of how Africa can get that robust plus 5% growth on average," said Omojomolo. "There's a lot of interest in the critical minerals on the continent, for example. It's all well and good just selling your commodities and having them refined off the continent, but these countries need to move up the value chain. There is this general sense that the ways of before when the region got growth through its commodity inheritance needs to change, the economy needs to diversify. "
Dabalen believes that investing in human capital is one of the main ways to revitalise and sustain growth.
"One in three working age people will be African by 2075," he said. "Investing in health, nutrition and education as well as working with the private sector for the creation of more and better job opportunities will enable Africa’s youth to power sustained and inclusive growth."
Sub-Saharan Africa stands at a crossroads. While there are signs of economic recovery, challenges related to debt and governance remain major obstacles. Without deep structural reforms, sustaining long-term growth could prove difficult. Yet the potential for positive transformation exists. By prioritising structural reforms and improving governance, Africa can lay the foundation for a more economically stable future.
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