By Telesphor Magobe , The Guardian
EXTERNAL debt servicing poses a big challenge to development particularly in Africa where poverty levels are still rife. About 534 million out of 1.1 billion poor people live in sub-Saharan Africa – with the poverty threshold at $2.15 (about Sh5, 500) a day, according to Global Multidimensional Poverty Index (GMPI) 2023.
However, due to external debt servicing, spending on development projects and social services can be compromised in some countries to cope with external debt servicing.
In its April 2024 World Economics and Prospects Briefing, UN Department of Economic and Social Affairs reports “that 10 countries are in debt distress, while 52 others are in moderate or high risk of debt distress. Out of these 62 countries, 40 are in Africa.”
According to the April 30, 2024 least indebted countries (LIC) list, nine countries are in debt distress, 25 countries are at high risk, 26 countries are at a moderate risk and seven countries are at low risk of debt distress. On this list, Tanzania’s debt status is moderate and with status public debt improves welfare and enhances growth.
Debt distress occurs when a country fails to meet its financial obligations and debt restructuring is required to mitigate the situation. That is an indebted country negotiates with creditors to reduce the interest rate, extend the debt repayment term or reduce the loan balance.
IMF (2022) suggests that if well-managed, public debt can be conducive to economic development, facilitate consumption and enable long-gestation investment that is critical for growth and social development in a country. Yet, this may appear to be more of an ideal than a reality, especially in Africa where some countries grapple with loan servicing to the extent of spending less on their priority sectors and services.
The concept of public debt (which covers all public sector debts) refers to government borrowing, non-financial public enterprises and financial public enterprises, government long-term obligations (unfunded liabilities of social security funds) and known and anticipated contingent liabilities (ongoing restructuring of financial institutions and triggered guarantees for public–private partnerships), according to IMF.
Raga et al. (2022), working for ODI, an independent, global affairs think tank based in the United Kingdom, suggest that IMF and the World Bank have developed some thresholds of public debt risk indicators and debt sustainability analysis (DSA) frameworks for countries based on their income level [least indebted countries (LICs), emerging markets].
According to the authors, joint IMF and World Bank DSA focusing on LICs aims at ensuring that countries which received debt relief are on a sustainable development track, allow creditors to better anticipate future risks and tailor their financing terms and help recipient countries balance their needs for funds and ability to repay their debts.
“A typical DSA exercise involves assessment of relevant indicators at the macroeconomic level (growth and interest rates), debt service (payment of principal and interest) and debt profile (composition by maturity, currency denomination, investor base/market access) as well as the risks associated with these indicators.”
According to the UN Department of Economics and Social Affairs, debt levels are particularly high in the continent’s larger lower middle-income economies, including Egypt at 92 per cent of GDP, Angola at 84.9 per cent, and Kenya at 70.2 per cent.
The UN report says for many African countries, the growing debt levels and associated high debt servicing costs are an impediment to long-term sustainable economic growth prospects. Revenue has also not kept up with expenditure needs.
“In sub-Saharan Africa, average government revenue declined from 19.7 per cent of GDP in 2010 to 17.5 per cent in 2023. Shrinking revenue in the face of higher debt servicing costs further limits the scope for public expenditures, setting back progress towards sustainable development goals (SDGs) while increasing pressure for additional borrowing.”
The UN report suggests that most African countries have historically relied on external debt in the form of long-term concessional financing from multilateral and bilateral lenders, or non-concessional private finance. It says to diversify financing sources and reduce risks of external debt vulnerabilities, many countries have increasingly turned towards domestic debt markets over the past two decades, reflecting a trend seen more broadly across developing countries.
“Domestic debt has, however, presented a new set of challenges on debt sustainability. The S&P Global Africa Domestic Debt Vulnerability Index ranks Egypt, Ghana, Kenya, Mozambique, Angola and Zambia among the most vulnerable countries as of 2023.”
To mitigate this vulnerable situation, the UN Department of Economics and Social Affairs recommends African countries to improve macroeconomic policies, debt management and regulatory frameworks to ensure long-term sustainability of domestic debt. This can be done in three ways, according to the UN Department of Economics and Social Affairs.
First, a stable macroeconomic environment, especially a low and stable inflation rate, is necessary to build investor confidence and appetite in medium- and long-term government debt instruments. Second, a broad investor base, including non-financial institutional investors, is also required to reduce the risk of a private credit crunch caused by overexposure of financial institutions to government lending, and third, proceeds from debt must be used productively – by investing in projects with high economic returns – to ensure governments’ ability to sustainably service debt obligations.
No comments :
Post a Comment