African Development Bank (AfDB) Chief Economist Rabah Arezki has reflected on governance and growth in Africa, following the launch of the 2021 edition of the African Economic Outlook on the topic ‘Life after debt’.
Arezki, also doubles as Vice President for Economic Governance and Knowledge Management. As he discusses strategies to rebuild stronger African economies, he started by saying that, to cushion the economic and social impacts of the COVID-19 pandemic, many governments in the continent announced fiscal stimulus packages that averaged about 3% of GDP.
This he says caused a surge in the gross financing needs of the continent, which has been financed partly by ramping up debt. The average debt-to-GDP ratio, which had somewhat stabilized at around 60% of GDP at the end of 2019, is expected to climb by 10 to 15 percentage points by 2021.
He went on to state that, the composition of Africa’s debt continues to shift towards commercial and non-Paris Club creditors, and from external to domestic sources. The Paris Club, which used to account for more than half of Africa’s external debt, now accounts for only about 27%.
“Africa owes the rest of the world about $546 billion – equivalent to one-quarter of its GDP and nearly equal to the size of its annual revenues of $501 billion. The recent debt accumulation has been driven mainly by the depreciation in exchange rates, growing interest expenses, and high primary deficits.”
He stressed that, debt relief matters now because a large number of countries are in debt distress or at high risk of debt distress. Out of the 38 low-income countries with DSA ratings, six are currently in debt distress and Sierra Leone and 13 others are at high risk of debt distress.
According to him, shorter maturity of debt and increasing interest expenses on the public debt (about 18% of revenue) have exposed countries to higher refinancing risks. Increased reliance on external commercial debt has exposed countries to higher exchange rates and market risks. Debt relief would help create the fiscal space required to cushion the pandemic’s impact and drive a fast and sustainable economic recovery.
The 2021 African Economic Outlook (AEO) recommends three blocks of reforms to improve the process of debt resolutions and the nexus with governance and sustainable growth. Reforms to the international financial architecture of sovereign debt to promote orderly restructuring and resolution.
The current global architecture requires better coordination among creditors, which can be achieved by establishing a wider forum that brings together official bilateral, multilateral, and private-sector creditors to agree on common terms for debt restructuring and resolution.
Arezki, opined that, to get to the root of Africa’s debt problem and avoid the need for future debt jubilees, the relationship between debt, governance, and growth must be strengthened. “Governance reforms that block leakages in public finances, improve transparency in debt management, and promote the efficiency of public investments would have to be reinforced. Growth-friendly policies that focus on accelerating digitalization and promoting free and fair competition are required to grow Africa out of the COVID-19 crisis and avoid a looming debt crisis” he said.
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