Debt: Have African states learned their lesson from history?

With debt levels rising sharply and continued heavy dependence on volatile commodity revenues, African countries are once again in a position of economic vulnerability. A situation that they have suffered in the past and that could happen again.

« Beware, danger!  »This is essentially the message of the rating agency Moody’s to African countries, whose debt trend is again on the rise. In a report published on 18 February, the teams of the financial institution thus recall that « the debt burden has now almost doubled compared to 2010 and seems unlikely to decrease, which raises concerns about its sustainability ». These comments are unequivocally corroborated by the figures: the average debt ratio of sub-Saharan African countries now stands at 52% of GDP, compared to 27% in 2010. This worrying increase is due in large part to the ever-increasing appetite of African governments for international bond markets (the famous « Eurobonds », whose issues have continued to multiply, see graph below). Admittedly, in absolute terms, these debt levels seem reasonable compared to what has sometimes been seen elsewhere (98% in France, 107% in the United States and up to 238% in Japan), but they evade the nature of the risk of default by these countries, which are both highly dependent on their exports of raw materials – at volatile prices – and ill-equipped to mobilise domestic tax revenues. From this point of view, the current epidemic of coronavirus, which left China in early December 2019 and is now infecting the world economy, is only the latest illustration of this structural risk associated with the continent.

The evolution of African Eurobond issues since 2003: a worrying progression

Another concern highlighted by Moody’s is a « greater dependence » than in the past on commercial or bilateral loans (China, with its « money for commodities » barter system, is clearly singled out here), which are much more expensive than denominational loans granted by multilateral financial institutions (World Bank, IMF, African Development Bank).

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Learning from History

An unvarnished observation that can only lead us to ask ourselves this question: Have African governments learned nothing from history? It is easy to forget this today, but the first years of the post-independence period were a prosperous period. Buoyed by favourable commodity prices, African economies experienced strong growth, which lasted until the late 1970s. However, the economic structure of the continent’s countries already bore the seeds of future difficulties: a cash economy entirely geared towards the export of primary products with low added value, corruption and clientelism, weak regional integration, etc. Subsequently, the sudden and lasting fall in the prices of exported raw materials and the explosion in debt-servicing interest rates in the early 1980s caused the continent to plummet. The Bretton Woods institutions (IMF and World Bank) were called in as reinforcements and imposed a drastic and uncompromising regime. This is the era of structural adjustments, the decline and decay of states, which will last until the end of the 1990s and will weigh very heavily on the populations. However, the first years of the new millennium mark a turning point. After twenty years of sacrifice, the economic situation on the continent is finally improving significantly. Debt has been brought under control, public finances have been put on a sound footing and inflation has been brought under control. All these favourable factors have enabled Africa to return to growth (4.7% on average per year over the period 2001-2018).

Economic choices

Today, it is all these hard-won gains of the past two decades that must be protected, particularly by avoiding short-sighted decisions to go into debt now and let future generations pay for it later. This would simply be a repetition of past mistakes, without learning from them. There is no such thing as inevitability and, here again, the study of the economic choices of certain African nations can be instructive. In this regard, it is revealing to note that the African countries most capable of adapting to a potential drop in their revenues, still according to Moody’s, would be Rwanda, Mauritius, and Côte d’Ivoire, i.e. countries with relatively diversified economies and where the public authorities have put in place strategies for rapid recovery of the sectors in order to capture the largest possible portion of the value added produced, a guarantee of less sensitivity to variations in the price of raw materials. Everyone has their own choices and growth trajectories. However, these trajectories are still subject to change in the light of the lessons of history.