Insight from Thought Leaders: Is More Debt the Way Forward in Africa?

Navigating the discourse on whether “more debt is the way forward” reveals a spectrum of perspectives from prominent thought leaders in the economic arena. This exploration taps into the insights of renowned figures, each contributing a unique viewpoint to the complex debate.

Advocates for increased borrowing argue that a reasonable approach to debt can catalyse economic growth, facilitating crucial investments in areas such as infrastructure, innovation, and social programs. They underscore the importance of responsible borrowing as a strategic tool, particularly in environments with low interest rates, enabling governments and businesses to seize opportunities and foster development.

Conversely, sceptics caution against an overreliance on debt, emphasising potential risks like economic instability, escalating interest payments, and the long-term burden on future generations. Their stance advocates for a balanced approach, urging fiscal discipline and the exploration of alternative financing mechanisms to circumvent the potential pitfalls associated with unchecked indebtedness.

Ultimately, AfricatTradeHub seeks to distil the essence of these diverse perspectives, providing a comprehensive understanding of the ongoing debate. It emphasises that the heart of the matter lies in how well debt is managed and allocated, urging for a nuanced approach grounded in a profound understanding of the economic landscape and the implementation of prudent fiscal policies.

Our findings on the topic 

The trajectory of debt has been upward for decades, paralleling economic growth. Policymakers hinge their hopes on substantial growth to guarantee sustainability, understanding that without an expanding GDP, governments will struggle to generate the necessary revenue to curb escalating debts.

However, the current scenario paints a different picture as debt levels soar to unprecedented heights, surpassing anything witnessed in peacetime except during major wars. According to the Global Africa 2023 Report, the total debt stock owed by African governments stands at over $1.8 trillion. This prompts a critical examination: is the reliance on continual debt escalation a sustainable strategy for the future?

From our point of view, due to the current underdeveloped state of most African countries, debt is inevitable. However, more debt is not the right step if certain factors are still in play, as the reasons for the debt do not correlate with the results.

One of the factors to consider is the sovereign debt restructuring process, which only focuses on the contractual obligations that the debtor state owes its creditors. This process is flawed because it ensures that the debtor state’s efforts to address issues of poverty, inequality, and unemployment, as well as the nation’s vulnerability to climate change and biodiversity loss, take a backseat to meet its debt servicing responsibilities.

Apart from being flawed, this process runs counter to the interests of the international community in tackling global issues like inequality and climate change.

It is believed that if creditors and debtors agree to approach debt negotiations in a way that takes into account the financial, economic, social, environmental, human rights, and governance aspects of sovereign debt crises, then there can be a middle ground for the debt issue.

Another factor to consider is the Western rating agencies. Many African countries borrow from private-sector lenders to minimise their dependence on aid or policy-conditioned loans from official creditors. The loan rate is controlled by Western rating agencies.

Over the years, the Western rating agencies have been accused of overstating the risk of lending to African countries. To mitigate this, the African Union (AU), through the African Peer Review Mechanism (APRM), plans to establish an independent African Credit Rating Agency to provide alternative and complementary rating opinions for the continent.

Impact of debt

Examining the aftermath of the recent crisis, policymakers have concentrated on mitigating systemic risk from a highly leveraged financial system. However, our analysis of debt and economic activity in industrial countries reveals a significant correlation: elevated debt levels negatively impact growth.

Specifically, when public debt reaches around 85% of GDP, further increases can notably impede growth, with a 10% point rise reducing trend growth by over one-tenth of 1% point. For corporate debt, the threshold is around 90%, with approximately half the impact. While household debt’s threshold is estimated at around 85% of GDP, the impact remains imprecise.

This underscores the severity of debt challenges in advanced economies, exacerbated by the anticipated surge in public debt due to ageing populations. As governments face mounting promises and ageing drives up debt, growth is projected to decline. The interplay between rising debt and falling growth reinforces a concerning cycle. The takeaway is clear: advanced countries with high debt levels must take swift and decisive action to address fiscal concerns, as delay will intensify the negative impact on growth, making adjustments more challenging.

It’s crucial to note that while our findings indicate a threshold for the impact of public debt on growth, this doesn’t suggest authorities should stabilise debt at this level. On the contrary, prudent fiscal management aims to keep debt well below this threshold, recognizing the unpredictable nature of extraordinary shocks.

Similarly, acknowledging the adverse effects of a highly indebted private sector on the real economy, current efforts focus on increasing the cost of credit and limiting funding availability. Further measures could involve reducing government subsidies and preferential treatment for debt. Ultimately, the solution lies in fostering increased savings.

READ ALSO: How Realistic is the African Continental Free Trade Agreement?