The World Bank says about half of sub-Saharan African countries are either defaulting on their obligations or at high risk of default in the current year, when inflation is expected to hit double digits in many countries. vast areas of the continent, with a growth rate of 3.1% in 2023.
The debts of the countries of the brown continent are estimated at around a trillion dollars in 2022, since they have multiplied by five since 2000, and 66% of the debts are concentrated in 9 countries led by South Africa, while 22 countries are suffering from their inability to meet their financial obligations to creditors, according to the International Monetary Fund, which pointed out that debt repayments amounting to around $100 billion a year put pressure on the budgets of many countries and take more than 15% of the gross product.
lack of local resources
From Egypt, economist Dr. Abdullah Al-Shennawy explains in his interview with “Sky News Arabia Economy” that the main reason for resorting to foreign debt and borrowing is the lack of domestic resources, i.e. i.e. the gap between the required investment rate to be achieved to reach the target growth rate and the domestic savings rate. He pointed to the expansion of Africa’s public debt, as middle-income countries’ debt levels reached unprecedented levels in contemporary history, as global debt reached 28% of GDP in 2020. , due to the increase in public spending in response to the outbreak of the Corona pandemic and the loss of revenue due to the economic recession.
Stifle investment and undermine growth
Dr Al-Shennawy adds: “Rising debt obligations have stifled investment and undermined growth. Of the total external debt of the African continent, for example, South Africa holds 15%, Egypt 13 %, Angola 7%, Morocco and Sudan 6% About 15-20 African governments have allocated the equivalent of 20% or more of their annual revenue to servicing public sector external debt in 2021, and this is evident in the strain of external debt servicing on public finances in highly indebted countries like Angola, Sudan, Tunisia and Zambia, where they rank uncomfortably high on a longer list of countries including Cameroon , Chad, Djibouti, Ghana, Mauritania, Mozambique and Senegal.
The heavy debt burden on public finances will continue to undermine the ability to channel funds to economic and social development projects and the ability to withstand external shocks.
But what is the level of external debt that has a negative impact on economic growth?
Economist Dr. Al-Shennawy answers this question by saying, “External debt can be beneficial if it results in reducing liquidity restrictions, providing an additional source of development finance and meeting infrastructure needed for growth, but foreign debt affects growth by reducing capital accumulation, which leads investors to lower their expectations of returns due to their expectation of higher tax rates, and also limits growth economy by reducing the productivity of factors of production as African countries are less willing to adopt higher tax rates. cost policies, and finally economic growth is negatively affected indirectly by affecting public spending on social services, education and health, in addition to weak exports, low mobilization of savings and the rate of high inflation when African countries start paying external debt service.
Safety limits for external debt
And the high external debt balance may negatively impact economic growth through a negative impact on private investment due to the expectation that governments may raise taxes in the future to service the debt , so foreign and local investors will refrain from investing in debtor countries. , which leads to a decrease in economic growth, according to Dr. Al-Shennawy, who explained that the security limits for the external debt are 150% of the gross domestic product, that is, say that the external debt balance should not exceed 1.5 times the gross domestic product, while if the state wants more precaution, the debt safety limits can be considered to be within 100% limits .
The economist, Dr. El-Shennawy, proposes a scenario for Africa to get rid of the trap of external debt, along four axes:
• Considering public debt is inevitable
It is not possible to imagine a situation in which a country or a government can manage its operations without debt, and in appreciating this inevitability, the questions that must be asked in seeking to dismantle this structure are, where does the debt?, how is it used?, and what terms are associated with it? Thus, the source of the use and the justification of the religion are crucial considerations.
Capital controls
The clear ultimate objective of the Bretton Woods institutions was – and still is – to protect the interests of international business, ensuring that African economies provide favorable environments for investors, that African economies are characterized by wages and consistently low labor costs, and that African economies do not maintain capital controls, so capital inflows and outflows remain easy.
It also does this by consolidating export-oriented growth strategies even in economies unable to produce and export enough, which leads to an exacerbation of the balance of payments of these economies.
• The debt crisis cannot be avoided without focusing on growth
As long as policy makers ignore the importance of growth, we must forget about Africa’s ability to emerge from the debt crisis. Yet, despite this fact, “neoliberalism” (ideological thinking based on economic liberalism) consistently creates a framework that prevents African governments from focusing on growth.
• Dismantling the neoliberal model
The focus on neoliberal political reforms is inappropriate for Africa because of the same initial arguments that African governments have used to pursue mixed economies – economies in which the government plays a leading role, not just as as an arbiter but also in facilitating and even driving the expansion of productive capacities.
A desperate step to restore the global economy
In turn, economist Ali Hamoudi says in his interview with Sky News Arabia: “African countries have been facing financial difficulties for many years, and with the accumulation of debt on some African economies due to the increase borrowing amid unexpected domestic spending, African countries have resorted to defaulting on their external debts or threatening to default in a desperate attempt to restore global economy and debt sustainability.
For example, in 2021, six countries, Chad, Eritrea, Mozambique, Republic of Congo, South Sudan and Zimbabwe, were classified as having bad debts, African governments having issued a record $7.5 billion in sovereign bonds, 10 times more than in 2016. The International Monetary Fund has downgraded Zambia and Ethiopia’s ratings from junk to junk.
This year, with the high global inflation rate, high borrowing rates and the strong dollar, it has become more difficult to repay debts and generate funds, which has made the situation very complicated in a certain number of countries like Ghana, Malawi, Zambia, Tunisia and Egypt, according to Hamoudi.
Hammoudi, an economist, adds: “I am not surprised to see some African countries defaulting on their external debts. Most of these African countries have high debt-to-GDP ratios, and they’re spending a larger percentage of their income to finance debt servicing, and that’s not sustainable, and they’re expected to reach a point of imbalance where they cannot repay their debts.”
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