African Debt: Past is prologue

In 2010 the average sub-Saharan country spent 70% more on health per person ($38) than on external debt ($22). By 2020 spending on debt service was 30% higher.

That is from a long and rather depressing read from The Economist on African countries entering into a new age of austerity. The irony is that much of the debt now hobbling them was run up in the name of spending on healthcare, education and other social services. On the drivers of this particular emerging debt crisis, the piece goes on to say:

The second era of rising debt was in the 2000s and 2010s, when African countries looked beyond aid and cheap loans from multilateral institutions. From 2007 to 2020, 21 of them borrowed on global capital markets, many for the first time. China’s financiers lent $160bn to African governments from 2000 to 2020. Domestic capital markets were increasingly tapped, too. Between 2010 and 2020, African domestic debt increased from an average 15% of GDP to 30%.

African politicians stress that borrowing was needed to invest in schools, clinics and roads. But many borrowed too much, or misspent the proceeds. One Zambian source recalls that in 2014, officials sought to sell only a $500m Eurobond (a bond in a currency other than your own) but yield-hungry investors coaxed them into doubling the issuance. “We did it because we could,” he says.

The main thing different about this time is the presence of China at the table. In previous debt crises when African countries needed some forbearance from their lenders, it was western countries who had to make the call on how much to forgive and on what terms. These days, as we are seeing with Zambia, it’s near impossible to do any kind of restructuring without inviting China to the discussion.

As ever, Nigeria’s numbers continue to be far more alarming than other countries but there is hardly any panic in the discussions about the country because everyone seems to think Nigeria will figure things out somehow:

In Nigeria debt service, mostly domestic, took up a staggering 96% of government revenues last year. Part of the problem is that the government has collected little money from oil recently due to rampant oil theft, low production and the cost of fuel subsidies, which are deducted before oil proceeds reach the treasury. Bola Tinubu, Nigeria’s incoming president, promises to fix the oily mess, but so have many past presidents. Even in better-run countries, debt service is chewing up government revenue. In Ivory Coast and Senegal it accounts for about one-quarter of revenue.

Part of that is because Nigeria is a much larger economy than anyone else in Sub-Saharan Africa with deeper and better developed debt markets (although the last 8 years have tested that idea to the death).

It all looks rather bleak and the last time African countries had to undergo ‘structural adjustment programmes’ many were scarred for life by the experience. Economic growth will help a lot but it is not clear that African leaders who have a serious spending problem can usher in a golden age of growth.

Maybe it is time for Bono and Sir Bob Geldof to come out of retirement for another round of debt relief concerts.