AfDB Sees No Risk of Systemic Debt Distress in Africa

LAGOS (Capital Markets in Africa) – The African Development Bank has downplayed the risks associated with rising debt levels on the continent, saying policy makers should find a balance between fiscal management and funding development.

While the median ratio of government debt-to-gross domestic product rose to more than 50% in 2018 from 25% in 2008, bringing the continent’s total external debt burden to almost $500 billion, “Africa does not have a systemic debt crisis,” AfDB President Akinwumi Adesina said.

“While there is no cause for alarm, greater prudence is needed,” Adesina said at the launch of the lender’s African Economic Outlook report. “We all must now collectively focus on sustainable debt management and greater reliance on domestic resource mobilization to finance rising fiscal deficits.”

The report points out that rising debt levels not only reflect the end of the commodity super-cycle and slowing export revenues, particularly among commodity producers, but also a more stable macroeconomic and governance environment that is allowing more African countries to tap international bond markets — some for the first time and at 30-year maturities.

Growing debt across the continent also masks “substantial heterogeneity,” according to the report. “What really matters about debt is the quality of investments that debt is used for and not just its level.”

The bulk of the debt is spent on infrastructure, which remains a major challenge for many countries, Adesina said. “Governments can improve the cost effectiveness of their expenditures on infrastructure by sharply focusing on quality, improved efficiency of public expenditure, while promoting greater participation of private sector in the provision of infrastructure.”

While the continent isn’t facing a systemic debt crisis, governments should take steps to ensure debt sustainability in the long term, according to the report.

“We must watch the quality of debt, the mix of debt in terms of concessional and non-concessional, the potential negative effects of rising domestic debt in crowding out private-sector access to finance, the increasing level of non-Paris Club bilateral debt, and rising volumes of Euro bonds,” Adesina said.

Source: Bloomberg Business News