Guest Editor’s column: Simi Siwisa, Absa Group Head of Public Policy
For the IMF, the rapid debt accumulation in more than 40% of African economies is a key concern. This is particularly troubling given limited appetite to implement another debt forgiveness initiative, such as the Highly Indebted Country (HIPC) Initiative, by major creditor countries.
The HIPC Initiative resulted in debt reduction packages for 36 countries, 30 of them in Africa, providing $76 billion in debt-service relief over time. This included Ghana, Zambia, Uganda, Nigeria and Mozambique. In addition, Seychelles restructured its sovereign debt in late 2016.
Some commentators, including the former African Development Bank (AfDB) President Dr Donald Kaberuka, have argued that average debt-to-GDP ratios in African countries are lower than those of developed countries and thus sovereign debt challenges remain manageable. However, this analysis fails to consider country-specific dynamics in some key African countries – where debt service costs as a percentage of government revenue have been the fastest rising budgetary item. Debt service costs have started to crowd out investment and social services expenditure in many African countries.
Related to this, some countries in debt distress have limited economic diversification, exchange rate fluctuations and are vulnerable to commodity cycles. The increase in foreign currency denominated debt, including Eurobonds, will also impact debt repayment profiles.
Similarly, the IMF correctly states that “with several countries facing increased foreign exchange and refinancing risks, it is critical to enhance debt management frameworks and transparency”.
The other challenge is that, historically, there have been some repeated incidence of debt distress in some countries. A country that has experienced debt forgiveness is likely to fall into debt difficulties again.
In 2020, Mozambique, Zambia, Ghana, Kenya and South Africa are facing debt-related pressures. The link between sovereign debt, economic growth and bank profitability means that consideration must be given to innovative approaches to support operations and customers.
Debt dynamics, as with other challenges in our environment, remain a key consideration and will require considered responses, innovative solutions and agility. Maximising client value creation and strengthening risk management approaches to limit the impact on operations is key.