IMF warns on Africa’s rising debt to GDP ratio, offers five key decisions to be made

The International Monetary Fund (IMF) said the average debt ratio to gross domestic product (GDP) in sub-Saharan Africa has increased to 60 per cent as of the end of 2022.

According to the IMF in a report obtained on Wednesday, the average debt ratio to GDP has nearly doubled in just a decade in Africa, rising from 30 per cent recorded in 2013.

IMF said there is debt distress already in more than half of the low-income countries in sub-Saharan Africa, where debt repayment has also become much costlier.

“The region’s ratio of interest payments to revenue, a key metric to assess debt servicing capacity and predict the risk of a fiscal crisis, has more than doubled since the early 2010s and is now close to four times the ratio in advanced economies.

“As of 2022, more than half of the low-income countries in sub-Saharan Africa were assessed by the IMF to be at high risk or already in debt distress,” the IMF said.

As the debt crisis looms, IMF said African governments need to do five things, namely, focus on re-anchoring fiscal policy through a credible medium-term strategy, undertake fiscal adjustment to bring debt back to a safer level, mobilize more domestic revenue, strengthen budget institutions to improve the implementation of fiscal plans and get people on board as they prepare for public resistance to reforms.

Breaking down some of the points, IMF noted that: “Sub-Saharan African countries tend to rely excessively on expenditure cuts to reduce their fiscal deficits,” but mobilising more domestic revenue is favourable.

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“Although this may be warranted in some circumstances, revenue measures, like eliminating tax exemptions or digitalizing filing and payment systems, should play a greater role.

“Mobilizing domestic revenue is less detrimental to growth in countries where initial tax levels are low, whereas the cost associated with reducing expenditures is particularly high given Africa’s large development needs,” the report said.

On undertaking fiscal adjustment to bring debt back to a safer level, IMF said in the coming years, most countries in the region will need to reduce their fiscal deficits in the coming years.

“For the average country, the amount of adjustment is about 2 to 3 percent of GDP. This adjustment seems feasible given historical experience—in the past, countries in sub-Saharan African countries improved their primary balance by 1 percent of GDP a year over two to three years.

“But not all countries face the same challenge. About a quarter of the region’s economies still have some fiscal space and can use it to maintain and even increase vital investments in human and physical capital.

“On the other hand, a few countries have very large adjustment needs; for them, it is unlikely that fiscal consolidation alone will be enough to ensure fiscal sustainability. It may need to be complemented by debt reprofiling or restructuring,” IMF noted.

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