Concerns have for years been mounting over the rising debt levels in the developing world.
And for Africa, the continent is facing a severe financing squeeze that, on the back of a series of unprecedented shocks, is disrupting economic growth and endangering its long-term development.
Sub-Saharan Africa was only beginning to recover from the Covid-19 pandemic’s economic fallout when Russia’s invasion of Ukraine roiled capital and commodity markets. It drove up inflation and paved the way for higher interest rates around the world, according to Abebe Selassie, director of the International Monetary Fund’s (IMF) African Department.
The IMF has forecast that regional growth will slow for the second year in a row to 3.6% this year from 3.9% in 2022, before rebounding to 4.2% next year.
A tightening of global monetary policy to rein in inflation has led to higher interest rates, raising Africa’s borrowing costs on both domestic and international markets.
Sovereign debt spreads for the region have climbed to three times the emerging market average, leaving Africa’s frontier market countries cut off from international capital markets since early 2022.
Two countries — Zambia and Ghana — have already defaulted on their sovereign debt since the start of the pandemic.
A Group of 20-backed initiative aimed at assisting with debt restructuring is plagued by delays and has so far failed to provide relief.
The US dollar’s effective exchange rate reached a 20-year high last year, driving up the cost of servicing existing dollar-denominated debt.
This occurred amid a drop in Chinese bilateral funding — a key source of critical infrastructure financing — and a long-term decline in traditional development finance.
“All of the key sources of financing of deficits — both the current account and the fiscal deficit — really are now very curtailed,” Selassie said.
Several African countries are currently at risk of default.
The World Bank estimates that developing countries will need $2.4tn every year for the next seven years just to address the costs of climate change, conflict, and the pandemic.
But the lender must ensure that its ambitious climate agenda does not come at the expense of the pressing development needs of its African members, according to a senior bank official.
Africa’s long-term growth potentials, for sure, are enormous.
The region is set to outperform the rest of the world in economic growth over the next two years, with real gross domestic product averaging around 4% in 2023 and 2024. This is higher than projected global averages of 2.7% and 3.2%, the African Development Bank said in its latest outlook.
With a comprehensive regional growth analysis, the report shows that all of the continent’s five regions remain resilient with a steady outlook for the medium-term, despite facing significant headwinds due to global socio-economic shocks.
Despite the economic slowdown, 53 of Africa’s 54 countries posted positive growth. All the five regions of the continent remain resilient with a steady outlook for the medium-term.
The African Continental Free Trade Area is expected to be a game changer to promote inclusive growth and accelerate the achievement of the post-pandemic recovery, the 2030 Agenda for Sustainable Development and Agenda 2063 of the African Union, according to a report by the United Nations Conference on Trade and Development (UNCTAD)
Africa, assisted global partners, needs to develop its institutional capability. This will steer the continent towards sustainable economic growth to help address chronic poverty and build inclusive education and social systems.
Longer term, for any growth model to be sustainable, every country in the continent has to embark on an urgent mission to bridge the economic and social divides.