Nigeria, Africa’s Debt Servicing Costs Hit $74bn – AfDB
Nigeria and other African countries require about $74bn for debt servicing this year amid increasingly limited access to affordable liquidity, the Vice President and Chief Economist, Economic Governance and Knowledge Management, African Development Bank Group, Prof Kevin Urama, has disclosed.
He made this statement during his opening remarks at the launch of the Debt Management Forum for Africa and the Inaugural Policy Dialogue on “Making Debt Work for Africa: Policies, Practices, and Options”, held in Abuja on Monday.
“The continent needs over $74bn in 2024 for debt service only. The figure could be much higher when hidden debt and contingent liabilities are considered. The liquidity needs for debt refinancing remain high at about an average of $10bn per year from 2025-2033. African Eurobond yields have risen to 15 per cent in 2023, double the 2019 rate, complicating debt refinancing,” he stated.
According to Urama, Africa’s public debt has surged by 170 per cent since 2010 due to structural issues in the global debt architecture, recent global and domestic shocks, and weaknesses in the continent’s macro-economic fundamentals.
He mentioned that most middle-income African countries could remain stuck in a middle-income trap for decades to come, and it could take the continent more than a century on average (108 years) to transition to a high-income status.
The World Bank’s Africa Pulse report for October 2024 projected a fragile economic recovery in Sub-Saharan Africa, projecting that it would grow by three per cent in 2024, compared to 2.4 per cent in the previous year.
The AfDB chief economist explained that the inauguration and effective operationalisation of the DeMFA was critical for responding to those persistent headwinds and building economic resilience and accelerating the continent’s development.
He disclosed that the structure of debt had changed significantly with about 49 per cent of the continent’s debt privately owned at the end of 2023, and that was expected to reach about 54 per cent in 2024.
“The changing structure of debt toward private creditors comes with opportunities and challenges. For example, African countries are paying 500 per cent more in interest costs when borrowing in international capital markets than when borrowing from multilateral development banks such as the African Development Bank, the World Bank, etc.
“Using short-term, high-cost debt to finance long-term development projects, therefore, has implications for debt sustainability and debt restructuring in the medium to long terms,” Urama added.
He noted that while the ratio of public debt to Gross Domestic Product in Africa was declining, the high cost of debt service was deepening the severity of the debt burden on the continent.
“Africa’s average public debt ratio, which rose from 54.5 per cent of GDP in 2019 to 64 per cent in 2020, stabilised at around 63.5 per cent from 2021–23 and is expected to decline further to around 60 per cent from 2024—halting a decade-long upward trend.
“Africa’s debt service costs have, however, risen sharply, diverting resources away from infrastructure investment, thus constraining future GDP growth and economic transformation. For 49 African countries, average debt service cost rose sharply from an average of 8.4 per cent of GDP in 2015–19 to 12.7 per cent in 2020–22,” he emphasised.
Nigeria’s debt rose by 10.38 per cent quarter-on-quarter to N134.30tn ($91.35bn) in the second quarter of 2024, on the back of the naira that depreciated by 47.6 per cent as of June.
Urama highlighted that access to emergency financing was largely skewed toward developed economies that need it least.
He commented, “For example, of the $650bn in SDRs issued by the IMF in 2021 to help countries navigate the adverse effects of the pandemic, Africa received $33bn, or 5.1 per cent, of the total available envelope. In addition, of the $17tn (or 19 per cent of global GDP) rolled out as fiscal measures to fight the pandemic in 2020–21, Africa’s share was only $89.5bn (0.5 per cent). And the same trends are observed in the scale and flows of the global climate finance architecture.
“Our estimates show that resources freed from these reforms could secure about $169.4bn a year in development financing, or equivalent to about 42 per cent of the estimated annual financing gap.” According to the AfDB chief economist, some estimates show that African countries lose above $1.6bn daily in capital outflows due to the combined effects of high-risk premiums, international profit shifting, illicit financial flows, corruption, etc.
“Measured annually, this could reach about $587bn – more than three times the total external financial inflows to Africa each year,” he asserted.
He argued that plugging those leakages was, therefore, critical to addressing the challenge of domestic resource mobilisation and debt sustainability challenges in Africa.
“As we shall see later in the subsequent sessions, these create a vicious cycle of high cost of capital, lack of access to long-term development finance, low investments in development projects, low productivity growth, poverty, debt vulnerability, etc.
“Africa can build and strengthen its own fiscal buffers, and address the perennial challenges posed by the global debt markets that have engrained debt sustainability challenges in African countries.
“Second, we need to learn from the recurrent debt conundrums that result from growth contractions during global shocks and uncertainties. Some of those contractions come from increased misallocation of capital across sectors in uncertain times,” he averred.
Meanwhile, the Minister of Finance and Coordinating Minister of the Economy, Mr Wale Edun, represented the Director-General of Debt Management of Office, Dr Patience Oniha, declared that the introduction of DEMFA was very significant because it focused on public debt.
According to the minister, the World Bank has, for decades, provided capacity building on various aspects of public debt management and indeed has a Debt Management Forum in which many countries have participated, and it is a welcome development to have a debt forum that is dedicated to Africa.
“Now, why is the creation of DEMFA a pivotal moment for African countries? The answer lies in two facts which a number of countries in the region are faced with. Firstly is the challenge of growing debt and debt service which have increased, resulting in constrained fiscal space for governments.
“Secondly, there is the limited access to funding and the higher cost of borrowing in the domestic and international markets. These are against the backdrop of the urgent need for pools of large capital to address the social and economic challenges of unemployment and infrastructure deficits, amongst others, while not forgetting the spending required for climate change and the social development goals.
“These challenges have been well documented and accepted as real issues which need to be attended to in order for Africa to achieve growth and development,” he added.
He maintained that DEMFA should be structured and positioned as a forum that would build on and provide more than similar institutions have done in the past, particularly with Africa as its focus.
“Consequently, on behalf of the African Finance Ministers, I would like to charge DEMFA to evolve as a forum that will provide not only much-needed capacity building in public debt management but to be innovative by coming up with new or additional tools that will improve on debt management tools and practices as we know them today. The latter is very important in order to avoid what seems to be a cycle of debt distress among African nations,” Edun asserted.
The AfDB in June launched the African Debt Managers Initiative Network, a new programme to provide home-grown solutions to Africa’s debt challenges.
AfDB’s Director, Coulibaly Abdoulaye, noted that the network would also strengthen the debt management capacity of African countries’ officials and institutions to rapidly resolve the debt challenges faced by these countries, restore macroeconomic stability and support inclusive growth, as well as promote the exchange of experiences among debt managers in regional member countries.
Also, the Director of Macroeconomic Policy, Forecasting and Research Department, AfDB, Dr Anthony Simpasa, attributed the rise in the debt profile of African countries to climate shocks.
“The current debt that we face may have also arisen because many countries, especially those that are vulnerable to climate shocks, are also finding themselves having to borrow to finance climate-related projects and the current adaptation conditions that will help them to constitute the largest proportion of instruments that are used to finance climate-related projects on the continent,” he explained.
The Assistant Director of the Strategy, Policy and Review Department, Ms Allison Holland, emphasised the need to first tackle the issue of private sector debt before shifting focus to the public sector.
“The other big challenge for me here is, well, why don’t we just let them? Why don’t we just move forward with the private sector first? Isn’t this going to be faster? The challenge here is that if any official sector involvement is needed to restore debts, so if the private sector can’t restore debts to India (10:44) then, again, the IMF is restricted from moving forward and official creditors are important,” she commented.
