Africa is being hamstrung by high debt service costs – The Mail & Guardian

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Kenya

Africa’s high cost of borrowing creates a vicious cycle of higher taxes, social unrest and limited investment in the just energy transition.

Kenya’s #RejectFinanceBill2024 protests were indicative of this trend. (Photo by LUIS TATO/AFP via Getty Images)

Africa needs economic pioneers. Without clear and decisive leadership to address the high cost of capital and find innovative solutions to economic stagnation, the continent will be left behind in the 21st century.

“Can Africa claim the 21st century?” was the question asked by the World Bank in a book of that title published in 2000 that detailed the institution’s often ineffective funding efforts on the continent. 

Africa’s quest for economic transformation since independence has been impeded by a debt crisis, not from excessive borrowing but from the high cost of securing capital. Despite relatively low borrowing levels compared to advanced economies, African countries are burdened by exorbitant debt service costs, often referred to as the “African premium”.

The high level of debt interest hinders the ability of governments to invest in crucial areas such as health, education and infrastructure. African governments often find themselves cash strapped amid high levels of unemployment, corruption and growing demands to industrialise their economies while closing the digital divide.  

Half of all new entrants into the global workforce will come from sub-Saharan Africa by 2030, presenting a demographic dividend. But this potential workforce remains untapped because of stagnant economic growth, poor skills programmes, uncontrolled urban migration and underused resources. 

The Economist describes Africa as a “corporate desert” plagued by decades of mediocre leadership and a “destination anywhere” approach to development. Moreover, Africa attracts less than 1% of global private capital investment and accounts for only 3% of global GDP. 

To confront these issues, African leaders must first address the debt crisis to release capital which will go on to promote innovation, youth upskilling, entrepreneurship and industrialisation. 

According to the African Development Bank, the continent’s external debt stood at $1.15 trillion by the end of 2023. Furthermore African governments spent up to $164 billion on debt service in 2024, a sharp increase from $64 billion in 2010. 

It is for this reason David McNair, executive director of the One organisation, proposed the Cost of Capital Commission for G20 South Africa, which aims to address Africa’s high cost of securing capital, as well governments’ fiscal and liquidity challenges. 

The commission was endorsed by Finance Minister Enoch Godongwana at the First G20 finance meeting in December 2024 and will be integrated under the Africa expert panel, led by former finance minister Trevor Manuel. 

Gondogwana argued that debt sustainability cannot be solved through the G20 Common Framework for Debt Treatment implemented in 2021, which often delays debt resolutions. He stated that countries should be allowed to “undertake appropriate reforms to support sustainable and inclusive economic growth”.

President Cyril Ramaphosa echoed the call for debt sustainability for low-income countries as a priority for South Africa’s G20 presidency at the World Economic Forum in Davos, Switzerland, in January. According to Ramaphosa, “Finance institutions should derisk and support more financing for emerging and developing economies.”

While Africa’s external debt has quintupled in over a decade, rising from $230 billion in 2000 to $1.15 trillion in 2023, this reflects the continent’s need to fund development projects and offset the cost of crippling debt service. In other words, African governments continue to borrow to keep up with basic services, debt payments and the interest incurred.

Africa’s high cost of borrowing creates a vicious cycle of higher taxes, social unrest and limited investment in the just energy transition. 

Kenya’s #RejectFinanceBill2024 protests were indicative of this trend, where the financial burden of the International Monetary Fund’s (IMF) interest rates were passed on to civilians, which was met with widespread disapproval. Africa’s debt-service dilemma limits infrastructure development and the continent’s ability to scale business enterprises and enact regional trade programmes. 

In 2023, the African Union passed legislation for the establishment of the African Credit Rating Agency to counter the overpricing and inaccurate credit rating methodologies of S&P, Moody’s and Fitch rating agencies. 

A localised credit rating agency should generate an alternative database for evaluating African investment ventures. This is important to reduce dependence on Western agencies and boost the continent’s economic self-reliance.

In an interview in Africa Business magazine, Akinwumi Adesina, president of  the AfDB, highlighted the importance of addressing the “unjust risk premium” that inflates borrowing costs to African countries. 

The AfDB’s $318 billion capital base is only double Africa’s $164 billion debt service costs and pales in comparison to the $1.15 trillion overall debt. Compounding the issue, said Adesina, was the low share of special drawing rights grants released by the IMF during the 2008 global financial crisis and the Covid-19 pandemic, of which Africa received $33 billion (4.5%) of the total $650 billion. 

In pursuit of championing the Africa agenda, South Africa’s G20 presidency should focus on overcoming barriers to accessing capital. Reforming multilateral development banks such as the IMF, the World Bank and even the Bank of China, ought to take centre stage at the G20. Protracted negotiations from COP19 show that pledges are no longer enough to release much-needed capital for climate mitigation or for development goals.

African governments need to improve their evaluation records either by enacting better governance or through more accurate assessment of the continent’s risk investment data. 

The proposed Cost of Capital Commission is a crucial initiative to reduce Africa’s borrowing costs and free up both public and private capital investments for long-overdue continental modernisation. Africa’s debt service dynamic stifles economic growth and undermines governments’ autonomy in charting a new development path.

At the same time, African leaders need to take ownership of the continent’s economic future by setting ambitious goals for the youth. Beyond stabilising the debt crisis, African leaders must articulate transformative policies, reduce dependence on the Global North and rally citizens behind a bold vision of economic growth. 

South Africa and the African Union, as members of the G20, must work together to advocate for a new framework of finance for development to ensure the continent can harness its youth potential and mineral resources to be part of global economic progress.

Nkateko Joseph Mabasa is a writer, climate advocate and policy analyst.





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