In June 2019, the World Bank Global Economic Prospect emphasized that unsustainable accumulation of public debt has become gradually troublesome in the past years, with incentives often working against debt transparency. Over the period 2010-18, the average public debt increased by half from 40 to 59% of GDP, making sub-Saharan Africa the fast-growing debt accumulation continent far beyond over developing regions (Figure 1a). Almost all sub-Saharan African countries contributed actively to the increase of the ratio of debt-to-GDP, except 9 countries in which the ratio of debt to GDP declined (Figure 1b). More alarming, public debt as a percent of GDP has at least doubled in more than a quarter of sub-Saharan African countries, among which Angola, Cameroon, Equatorial Guinea, and Nigeria. The average number hides some heterogeneity as some in the sub-region experienced a more rapid increase than others. For instance, the median debt-to-GDP ratio has doubled in Central African countries (Angola, Burundi, the Central African Republic, Cameroon, the Republic of Congo, Democratic Republic of Congo, Gabon, Equatorial Guinea, Nigeria, and Sao Tome and Principe. ) from 26.7 in 2010 to 53.4 in 2018, while it increased by about 40% in Southern African countries (Botswana, Comores, Eritrea, Eswatini, Ethiopia, Lesotho, Madagascar, Mauritius, Mozambique, Namibia, Seychelles, South Africa, South Sudan, Sudan.) over the same period.
Figure 1. Public debt in SSA
Oil exporting countries and Heavily Indebted Poor Countries (HIPC) have been the main culprits for the rapid accumulation of public debt in sub-Saharan Africa. Surprisingly, oil exporters and countries that have benefitted from the HIPC initiative led to the rapid accumulation of public debt in sub-Saharan Africa. In two-quarters of HIPC countries, public debt as a percentage of GDP has increased by at least 50% less than 10-years after these countries benefitted from debt relief under the HIPC initiative. The initiative was designed to ensure that the poorest countries in the world are not overwhelmed by unmanageable or unsustainable debt burdens. Similarly, we observe a rapid accumulation of public debt in oil-exporting countries such as Angola, Cameroon, Chad, Gabon, Equatorial Guinea. In these countries, the debt-to-GDP ratio has more than doubled in 2018 compared to its 2010 level as fiscal deficits widened after the end of the commodity price boom in 2014. Except for Angola and the Republic of Congo, the level of debt in oil-exporting countries remains below the average level of other SSA countries. However, the rapid accumulation of public debt in the context of dropping oil prices after 2013 raises the recurrent questions of resilience and economic diversification of these economies.
Weak debt management systems, combined with important debt transparency issues, weak macro-fiscal management, greater reliance on the costlier and riskier source of financing, and adverse negative shocks explain mainly the rapid accumulation of public debt in SSA. As a consequence, debt vulnerability has increased. As of August 31st, 2019, 18 low-income countries in the region were in debt distress or high risk of debt distress under the joint World Bank-International Monetary Fund Debt Sustainability Framework. This number is high and has increased by 50% since 2010. Also, there is a shift in the composition of public debt, highlighting new vulnerabilities. In particular, the share of foreign-currency-denominated debt has increased by 12 percentage points since 2013 and representing in 2018, 36% of GDP. This exposes some SSA countries to the risk of a sudden stop of capital outflows generally observed in Emerging Markets economies.
How much should SSA countries adjust? In our recent Economic Updates for the Central African Republic, we presented fiscal efforts needed to keep the current ratio of debt-to-GDP constant and eventually reduced over time using the framework by Vegh et al. (2018). We find that the majority of SSA countries need significant fiscal efforts to keep their debt-to-GDP ratio constant. Indeed, 29 out of 47 SSA countries will need to generate primary surpluses to keep their current debt-to-GDP ratio constant in 2018 onward based on the current economic conditions. The fiscal effort required is significant and represents up to 2% of GDP for the majority of the SSA countries. The median primary surplus needed to keep the debt-to-GDP ratio constant is about 3% of GDP, with an average of 3.5% of GDP. In countries such as Angola, Burundi, Kenya, and the Republic of Congo, the fiscal effort needed is above the average level in SSA.
Figure 2. Increase in Primary Surplus Needed to Keep Debt-to-GDP Ratio Constant
Beyond urgent fiscal efforts. In line with a recent joint IMF and World Bank paper, we highlight that SSA countries, as well as other low and lower middle-income countries, should dedicate efforts to sustain their public debt by improving the quality of debt transparency and management. The overall score of the World Bank Country Policy and Institutions Assessment (CPIA) debt policy indicators in SSA is declining since 2014 highlighting the deterioration of the debt management system in SSA. The situation has been combined with important debt transparency issues in countries such as the Republic of Congo, Mozambique, and Togo. The recent cases of hidden debts highlight low capacity in debt reporting, weak legal framework and monitoring of public debt in African countries. Each case of hidden debt affects the credibility of the government, distorts the risk assessment, policy surveillance, and sovereign debt pricing. Strong management capacity can enhance debt transparency, minimize contingent liabilities, mitigate risk arising from rapid debt accumulation, and strengthen the overall macroeconomic stability. Establishing a sound public debt management and better transparency will help SSA countries to ensure that governments can borrow when they need to and in a sustainable way and embed financial needs in long-term macroeconomic and development objectives.
No pain, no gain. As documented in our recent reports, some SSA can aim to achieve a debt level consistent with an investment grade in the long-term. In that case, the fiscal effort required in the short-run will be more meaningful and painful, but such a fiscal adjustment will ensure sustainable gains in the long-run.