The global monetary tightening that began in 2021 has resulted in Sub-Saharan African countries facing higher financing costs when issuing new debt. Consequently, the region’s ratio of interest payments to revenue has more than doubled since the early 2010s and is approximately four times higher than that of advanced economies.
The IMF has determined that half of low-income Sub-Saharan African countries are at high risk of debt distress or are already experiencing it, and some countries, such as Kenya and Mozambique, have lost access to international markets. Moreover, rising interest rates have led to higher yields on foreign assets, causing investors to withdraw their capital from Sub-Saharan African countries. This has weakened national currencies and complicated the repayment of foreign-currency debt. It is anticipated that regional currencies will depreciate by an average of 17.4% against the US dollar in 2023, up from 6.8% in 2022, while international reserves have declined since 2021.
In response to these challenges, central banks have raised interest rates to counter currency depreciation. Authorities have also intervened in foreign exchange markets, and international lending has provided countries with crucial breathing room to adjust policies and address investor concerns. For example, as of March of this year, the IMF had lending arrangements with 21 countries in the region. Additionally, funding approvals from the African Development Bank increased from $4.5bn in 2021 to $6.1bn in 2022.
Economic projections:
FocusEconomics panelists expect SSA’s average public debt-to-GDP ratio to reach 56.9% in 2023, with a fiscal deficit of 4.3% of GDP. The region’s debt ratio is seen rising further over our forecast horizon, with the fiscal shortfall staying elevated at around 4%. As such, many African countries will likely remain at risk of debt distress in the absence of more concerted efforts by national authorities to boost revenue mobilization and/or restrain expenditures. Even with such efforts, debt restructuring may be the only option in some countries. Even as global interest rates decline in the coming years, the region’s fiscal challenges will remain.
On general financing conditions, analysts at the EIU said: “Most of the countries at the highest risk of a debt default are in Africa, reflecting high indebtedness, heavy external debt-service burdens and stretched public finances. African economies had taken advantage of low-cost international credit prior to the pandemic for budgetary and balance-of payments support, accumulating large external debt burdens as a result. However, rising interest rates have increased debt-servicing costs dramatically.”
On broader economic developments for the region, analysts at Goldman Sachs commented: “The lack of foreign capital inflows and incomplete currency adjustment processes that may weigh on domestic confidence both contribute to a lack of investment. Meanwhile, elevated inflation (eroding real incomes), tighter financial conditions, and fiscal consolidation weigh on household consumption. [ …] Put together, along with a negative impulse to external demand stemming from a slowing global economy, we expect these factors to weigh on economic growth in 2023. This, in turn, may contribute to social and political pressures that have already increased considerably across the region.”
