Unsustainable debt. Debt distress. Debt trap. These dire terms are once again back in the headlines, just a decade after the global financial crisis of 2008-2009.
In the past five years alone, public debt in the poorest countries has increased from 36 percent of GDP to 51 percent of GDP. In addition, debt-service ratios in some countries are rising at an alarming pace, threatening countries’ ability to invest in much-needed infrastructure, education, health and many other needs crucial for lifting their citizens out of poverty and achieving the international community’s Sustainable Development Goals by their 2030 deadline.
Emerging debt vulnerabilities are particularly acute in Africa. Fitting, then, that key stakeholders assembled for a high-level conference on “The Future of Debt Management” last week in Dakar, Senegal. The event, organized by the World Bank to mark the 10th anniversary of its Debt Management Facility program, brought together more than 100 policymakers and government officials, debt management experts, donors, providers of technical assistance, and civil society representatives.
This gathering was an important opportunity to take stock of rising sovereign debt in Africa. The proportion of low-income countries in debt distress or facing a high risk of it has doubled since 2013, according to data from the joint World Bank-IMF Debt Sustainability Framework. Several factors are at play – bad luck, bad policies, bad investments and bad governance. Bad luck because of declines in commodity prices, natural disasters, and conflicts. Bad policies, such as ill-advised fiscal and monetary policy expansions in some countries. Bad investments, which resulted from imprudent borrowing, weak analysis and/or unscrupulous lending practices for investments that failed to deliver the growth and revenues they promised. Bad governance, due to lack of political will to address corruption and broken models. Governments get a short-term financial boost as they take on debt now, but obligations stay for many years – often after the government has left office. We need government processes that are transparent, and where data and information are made available throughout the project lifecycle.
Debt has increasingly come at higher interest rates and borrowers may face higher repayment costs. An increasingly diversified creditor base poses challenges for coordinated debt restructuring. Lack of transparency surrounding some transactions creates additional uncertainty and risk.
The Dakar meeting served as a reminder that Africa’s financing needs are massive and urgent. According to the World Bank’s latest poverty estimates, 26 of the world’s 27 poorest countries are in Africa and the continent hosts more than half the world’s poor. This means that 413 million people there are living on less than $1.90 a day. By 2030, if current trends continue, nearly nine out of 10 of the world’s extreme poor will be in Africa.
Hundreds of billions of dollars are needed to provide the critical services that can help eliminate poverty – between $640 billion and $2.7 trillion per year by World Bank estimates. Debt financing is, therefore, crucial for development, and borrowing countries need to find a way to prudently take on debt to grow. However, many developing countries lack the tools, institutions, or know-how to do so.
This is where debt management advisory programs such as the Debt Management Facility (DMF) come in. Launched in 2008 to help low-income countries strengthen debt management, it has so far provided support to 75 countries.
In Uganda, DMF’s work helped the government reorganize its debt-management office. It now regularly publishes its strategy for debt management, along with quarterly debt bulletins and regular analyses of debt sustainability. In Kosovo, DMF helped the country develop a debt-management strategy that was published for the first time on the government’s website.
While the DMF program can help address many challenges related to debt management, it cannot address them all. Countries themselves, through their leaders, policymakers and citizens, must find the political will necessary to insist on the prudence in debt management and transparency in borrowing that are necessary to avoid the pitfalls of excessive debt.