While the debt boom casts a shadow over global economic growth, experts warn that sub-Saharan Africa, where several countries have already defaulted, is experiencing its worst crisis.
Rising interest rates and over-indebtedness are already limiting countries’ ability to finance their growth, as several African leaders highlighted in appearances at the World Economic Forum in Davos.
The beginnings of the crisis
After the global financial crisis of 2007-2009, central banks in industrialized countries generally kept interest rates low, and countries in the Global South, which had mostly borrowed bilaterally or from international financial institutions, gained unprecedented access to financial markets.
“Many developing countries in desperate need of injecting cash into their economies rushed into these low-cost loans, markets without rules or regulations,” said Kenyan economist Attiya Waris, who also serves as an independent expert for the United Nations.
He added that the International Monetary Fund encouraged them to do so.
The money helped provide a much-needed boost to many African economies, but countries that depend on the export of raw materials such as oil, minerals and wood came under severe pressure when commodity prices began to fall in 2015.
The Covid pandemic further aggravated the situation.
Falling commodity prices squeezed the foreign currency earnings needed to service their loans.
Several countries took out new loans to pay off their existing debt, creating a debt spiral that prevents investment in vital infrastructure, health systems and education.
The World Bank last year estimated that 22 countries were at increased risk of debt distress, including Ghana and Zambia, which have defaulted on their external debt.
Also on the list were Malawi and Chad, which has an IMF aid program.
Ethiopia, which Fitch Ratings placed into partial default in December, is also negotiating a rescue package.
Private lenders block deals
In 2022, African public debt stood at $1.8 trillion, a 183 percent jump since 2010, having grown about four times faster than economic output, according to UN data.
Gathered under the auspices of the G20, Western public creditors and several partners, including China — which has often been accused of setting debt traps with easy loans for infrastructure — are trying to work out a debt restructuring for 40 African countries.
These debt agreements are based on the principle of equal treatment — all creditors must participate.
However, deals for African nations have been difficult to conclude, as private lenders are often confused by the terms.
Private investors — including investment funds and pension funds — have emerged in recent years to become the leading lenders to African nations.
In 2022, they held 42 percent of Africa’s external public debt, compared with 38 percent for multilateral institutions such as the IMF and World Bank, and 20 percent held by other nations.
Of the 20 percent held by other nations, China was the largest lender to Africa, with 11 percent alone.
“China is often portrayed as the ‘big bad’, but it has understood the importance of giving some air to states in deep trouble and is now joining the efforts, even if it takes some time,” said Mathieu Paris. , coordinator of the French Platform for Debt and Development, which brings together more than a dozen citizen groups to push for sustainable debt restructuring.
The case of Zambia is instructive. After two years of tough negotiations, the country in June 2023 reached what was billed as a “historic” debt restructuring deal.
But it was only for $6.3 billion of the $18.6 billion foreign debt. Worse, it would only apply if private lenders agreed to take a similar hit and US asset manager BlackRock — one of Zambia’s biggest private debt holders — was caught off guard.
“BlackRock has blocked all negotiations” for Zambia, said economist Waris.
Inflation and poverty
With higher interest rates adding more pain to already crushing debt, “African countries are experiencing dangerous exchange rate fluctuations and inflation is steadily increasing,” said Ghanaian economist Charles Abugre.
“The daily impact is dramatic for poor people: we’re seeing an explosion in the cost of transport, food, housing, while real wages have stagnated,” he added.
For Amine Idriss Adoum, senior director at the African Union Development Agency, “the real question today is not knowing how to get out of debt, but how to borrow smart.”
While debt restructuring is important, it “should not come at the expense of investment in infrastructure, health and energy” to support the growth of economies and societies.