Forging a Path to Growth for African Economies, from Under a Pile of Debt:

By Chinedu Okoye 

Summary:

- African governments need to adopt a balanced fiscal approach to achieve economic stability and growth.

- To build credibility, governments must enact strategic structural reforms to gain the confidence of external lenders.

- Efficient resource allocation is crucial, cutting wasteful spending and prioritizing development projects.

- Diversifying credit sources can lower debt servicing costs, including: Treasury Bills, Local Currency Bonds, Multilateral Lenders, and Eurobonds.

- Implementing these measures can reduce debt overhang, increase marginal efficiency of capital, and promote sustainable economic growth.

Growing from Debt:

High debt levels and low revenue and income are major factors impeding growth in most African economies. This can limit government spending on infrastructural, welfare and human development. Both public and private sectors are impeded by high-interest rates, presenting a major challenge for economic growth.

Governments need to borrow to augment budget deficits and to sustain FX flows needed for exchange rate stability. As a result, we've seen several African economies raise their benchmark interest rates to satisfy the demands of premium yields from foreign investors. But these are mostly short-term government securities that do not support long-term growth.

It also crowds out real investment from both local and foreign suppliers of capital (investors). African governments find themselves competing for foreign portfolio and foreign direct investments. The former provides short-term support but has little or no effect on the real economy as these aren't capital allocated to real investments. The latter is much needed as it provides long-term support and contributes to real output as capital is sunk in real assets.

Africa's debt igad increased in the past decade, in 2022 public debt was $1.8 trillion representing a 183% increase from 2010 due to high interest from private loans. The ratio of debt servicing costs to revenue is almost four times that of advanced countries. This makes it hard to grow as funds cannot be channelled to more productive sectors. There has never been a greater time when the regions governments need to be more prudent with finances.

Maximizing Available Financial Resources:

To increase output and reduce debt dependency, authorities need to create a conducive environment for investments. This usually involves the provision of tangible and intangible infrastructure that aids or encourages business. However, the debt overhang effect—debt servicing costs squeezing budgetary allocations—prevents this.

African governments are faced with a situation where they have to manage debt and build credibility. This involves prioritized spending, mild austerity measures, and a balanced fiscal approach that places as much emphasis on revenue, income generation, and deficit financing.

This approach is aimed at minimizing debt, increasing revenue, and reducing budgetary excesses. It involves allocating public funds (revenue/income and debt) towards the development of resources (human and natural resources), and the provision of critical infrastructure (transportation, power, education, security, etc.). And also policies to encourage investments 

Debt Accumulation and Growth:

High debt results from huge budget deficits, as most of these countries get their revenue from natural resources. The debt servicing costs shrinks fiscal space - reduces the available funds to be allocated to development projects, this has a negative effect on marginal efficiency of capital and has led to a stalled growth.

Since available funds comprise debt and revenue, a budgetary overhaul becomes necessary. Developing countries need to be prudent with resources and innovative with debt and revenue management in order to achieve economic stability—and subsequently growth—through a balanced fiscal approach.

An Overall Fiscal Policy Path:

African governments need to spend more, not less, but what's important is what these funds (revenue and debt) are spent on, and how these funds are raised. There are no hard and fast routes but governments need to maintain/build policy and institutional credibility, allocate and manage resources more efficiently, and empliy the use of a diverse credit instruments to reduce overall debt servicing burdens. 

1. Credibility: To build credibility, African governments need to consistently enact strategic structural reforms to gain the confidence and goodwill of external lenders.

2. Efficient Resource Allocation: By cutting out wasteful and unnecessary spending, the government can allocate more funds to development projects (infrastructure, human development, etc.), limiting the debt overhang effect and increasing the marginal efficiency of capital.

3. Diversify Credit Sources: There are different types of external lenders and instruments through which these countries can access capital:

- Treasury Bills: 90 days to 360 days 

- Local Currency Bonds: Usually 5-10 years

- Multilateral Lenders: Concessional low-cost lending from AfDB, World Bank, IMF, etc.

- Eurobond

Spreading the credit exposure across these instruments could lower overall debt servicing costs and space out payments to manage cash flow.

By making tough structural changes these countries could ensure that funds (debt and revenue) are forthcoming, while a more efficient resource allocation mechanism would reduce the debt overhang effect (a situation where high debt servicing costs clog the budget and prevent governments from spending in other sectors). Diversifying credit sources reduces the overall debt servicing costs to the lowest attainable level.

These countries need to figure out how to achieve all three, and what measures to take to ensure success, if they are to navigate their way out of stunted growth and unsustainable debt levels.