Everyone is in debt. According to the Institute of International Finance (IIF), the global level of indebtedness rose by $15 trillion due to the blow the pandemic inflicted on the global economy. In 2020, The IIF expected global debt to exceed $277 trillion or 365 percent of global gross domestic product (GDP).
The situation is especially worse for Africa’s emerging markets, where debt to GDP might reach 250 percent this year. While this might look manageable by global standards, the problem is that many of these countries lack the capacity to sustain their debts. An ever-growing part of their budgets must therefore go towards debt servicing. Sub-Saharan Africa is the region with the fastest growing debt burden in the world, according to various international bodies.
Chinese “policy banks” have always extended large loans to Africa, Central Asia and Latin America. Now, there is a steady decline in official lending by the China Development Bank and the China Exim Bank to African countries. In 2021, lending will require far more due diligence and may come from alternate sources like Chinese state-owned enterprises and commercial banks.
Today, we take a look at two pressing debt concerns in Africa – Zambia’s debt default and Nigeria’s budget deficit.
Zambia’s debt default
In 2020, Zambia was the first African country to default on its debts. Zambia defaulted on a $42.5 million Eurobond in November. Zambia is Africa’s second-largest copper producer, and as copper prices have plummeted over the past three years, servicing repayments on its estimated $11 billion debt profile has become increasingly difficult.
At least $3 billion of Zambia’s debt pile is owed to China. Zambian officials managed to negotiate a deferral with the China Development Bank on a $391 million payment that was due in October 2020. However, Zambian Eurobond investors have rejected proposals by the government to restructure and reschedule the repayment terms for the instrument by another six months. Primarily, they are concerned that any debt financing will be used to pay off Chinese loans before theirs.
Incredibly, the country’s gigantic debt is expected to grow to over 120% of gross domestic product (GDP). Meanwhile, President Edgar Lungu has been accused of autocracy, at the expense of economic management and public accountability. Arbitrary policies have scared off foreign investors. The Central Bank governor was reportedly fired for challenging Lungu’s decision to print more money.
Angola is facing a similar debt crisis. Donors have pledged to relieve Africa’s fifth-largest economy of around $6.3 billion in debt but this relief will not save Angola yet. Angola, Ghana, and Nigeria spend close to half of their government revenues on interest payments. According to S&P Global Ratings, two-thirds of all interest payments in sub-Saharan Africa go to private creditors.
In South Africa, the Covid-19 shock is now projected to result in a budget deficit of 14.6% of GDP and increase the debt stock past 80%. In Nigeria, it is even worse.
Nigeria’s budget deficit
On Thursday, 31st December, President Muhammadu Buhari signed the 2021 appropriation bill of N13.59 trillion. The bill shows an expected revenue of N7.99 trillion and estimated expenditure of N13.59 trillion, equalling a budget deficit of N5.6 trillion which would be financed, in part, by borrowings of N4.69 trillion. Already, 24% of the total expenditure is designated for debt servicing, a whooping N3.3. trillion.
Crude oil remains Nigeria’s dominant revenue earner. Over the years, the Nigerian government has struggled to finance its budget mainly due to low revenue caused by oil price volatilities. The result of this is an increasing budget deficit and borrowing from both domestic and international bodies. In September 2020, the nation’s public debt stood at a total of N32 trillion.
In the third quarter of 2020, Nigeria recorded a decline in oil revenue of 42.3 per cent to N842.09 billion, compared with a benchmark of N1.459 trillion. Yet, key parameters of Nigeria’s 2021 budget include an oil production benchmark of 1.86 million barrels and a price benchmark of 1.86 million barrels per day. Experts have questioned the feasibility of revenue targets. The inability to meet crude production or price benchmarks will expand the deficit and make the budget largely unimplementable.
Large debt profiles are crippling growth in developing countries. What is the solution to Africa’s debt crisis?
G20 countries like the United States and China have offered relief to Africa’s poorest countries, one that should last until mid-2021. But even these plans – to provide breathing space in the wake of the coronavirus crisis – may not be enough. According to the International Monetary Fund (IMF), African states need almost €410 billion to pay off all foreign debts due by 2023.
To build durable economic recoveries, countries will need to achieve long-term debt sustainability. They will need to adopt prudent management strategies. Ultimately, African countries need to increase their domestic revenues to make debt financing more sustainable. They also need to improve the efficiency of public spending so that economic growth is improved.