Africa’s External Debt Projected to Reach $1.13 Trillion in 2023, Says Adesina

Dr. Akinwumi A. Adesina, President of the African Development Bank Group, revealed that Africa’s total external debt, which stood at $1.1 trillion in 2022, is expected to increase to $1.13 trillion by 2023. He made this announcement during his keynote speech at the Paris Club on June 20, 2023.

Several factors contribute to this rise. The lasting impact of the Covid-19 pandemic on economies and their fiscal space, resulting in downgrades for several countries, is one factor. Additionally, escalating energy and food prices due to the Russian-Ukraine war, as well as the mounting costs associated with adapting to climate change, have played a role.

The tightening of monetary policies in the US and Europe has led to increased interest rates, resulting in higher debt servicing costs. These combined factors have put 25 African countries at risk of high debt distress or have already pushed them into debt distress. Consequently, external debt service payments for 16 African nations will increase from $21.2 billion in 2022 to $22.3 billion in 2023.

Africa’s debt structure has undergone significant changes over the past decade, marking a trend that began in the mid-2000s. The African Development Bank (AfDB) highlighted five noteworthy trends impacting debt development:

1. Non-Paris Club bilateral and commercial creditors have become major sources of Africa’s sovereign debt, with bilateral debt declining from 52% in 2000 to 25% in 2021, while commercial debt’s share increased from 17% in 2000 to 43% in 2021.
2. Yearly bond issuances in Africa surged from an average of $10 billion in the early 2000s to approximately $80 billion between 2016 and 2020. This trend was driven by the global search for higher yields in emerging markets due to low interest rates.
3. China’s share of Africa’s debt escalated significantly, rising from 1% in the mid-2000s to 14% of total external debt by 2021, primarily attributed to infrastructure financing.
4. Interest rates on debt have diverged over time, with multilateral debt at 1%, bilateral debt at 1.2%, China debt at 3.2%, and private debt at over 6.2%. The tenor of debt has also varied between creditors.
5. Resource-backed loans have become more prevalent, with African countries signing 30 natural resource-backed loans worth $66 billion between 2004 and 2018. However, the commodity price crash in 2014 resulted in severe debt problems for ten out of the fourteen countries utilizing such loans.

To address Africa’s debt challenges, Dr. Adesina outlined key measures:

Firstly, given the diverse nature of creditors, including those outside the Paris Club, addressing debt treatment, restructuring, and resolution has become more complex. Expanding the Paris Club to include non-Paris Club and commercial creditors is essential.

Secondly, promoting greater debt transparency across all creditors is crucial.

Thirdly, countries should refrain from relying on non-transparent natural resource-backed loans due to negotiation power asymmetry and potential compromises of their future.

Fourthly, expanding market-derived concessional financing can support countries and reduce dependency on expensive short-term debt. The African Development Bank Group’s ADF market-option can mobilize $27 billion for low-income countries.

Fifthly, deploying partial credit guarantees at scale can help countries access capital markets, issue bonds with lower coupon rates, and longer maturities.

Sixth, leveraging the Special Drawing Rights (SDR) re-channeling to the African Development Bank can multiply financing for African countries by 3–4 times, with a liquidity support agreement.

Efforts should also be directed toward tackling systemic risks in Africa. To this end, the African Development Bank and the African Union are collaborating to establish an African Financial Stability Mechanism, which will mutualize funds and shield against spillover effects from global shocks.

Addressing Africa’s debt challenges requires a comprehensive and collaborative approach involving various stakeholders to ensure sustainable economic growth and stability in the region.