By Africa Links 24
Published on 2024-04-04 09:26:48
The economic downturn brought about by the Covid-19 pandemic led countries to significantly increase their government expenditures to address humanitarian and health emergencies. However, this was accompanied by a decrease in government revenues and disruptions to global demand and supply, resulting in a significant rise in sovereign debt levels worldwide. Developing economies saw their public debt, both domestic and external, increase by over 40% to $26.9 trillion in 2019-20. The number of countries with public debt exceeding 60% of GDP also rose from 45 to 71 during the same period.
The risk of debt crises in the Global South, particularly in Africa where interest payments on external debt have become a major expenditure item, has been a focal point at the biannual meetings of the World Bank and IMF. The disproportionate threat of debt crises faced by Africa can be attributed to entrenched inequalities in the international financial architecture, which have subjected African entities to high borrowing rates that hinder growth, infrastructure investment, job creation, and external balance improvements.
Despite decades of engagement with Bretton Woods institutions, 33 African countries remain among the least developed in the world. In sub-Saharan Africa, job creation lags behind the rate needed to absorb new entrants into the labor market. The inequalities in access to affordable financing may exacerbate global challenges such as climate change and poverty-induced migration.
At the most recent World Bank-IMF Annual Meeting in 2023, discussions centered on the challenges faced by countries in the Global South in dealing with debt burden. The IMF has called for enhanced multilateral coordination and debt resolution to prevent debt distress, especially in Africa. The upcoming World Bank-IMF Spring Meetings in April are likely to focus on debt sustainability issues in Africa.
Africa has been particularly disadvantaged by the current international financial system established after the Bretton Woods Conference. The region faces a significantly elevated risk of sovereign default, with a high percentage of countries in debt distress or at risk, and all recent external debt defaults occurring in Africa.
Despite comparatively low levels of Covid-19 response spending, African countries have struggled to return to pre-pandemic growth levels. The unequal treatment of African nations in the international financial system is evident in the disparity in interest rates compared to advanced economies, as well as the dependence on foreign currencies for debt issuance.
The structural inequalities have far-reaching consequences, leading to challenges in debt sustainability, economic growth, and poverty reduction. The limited fiscal space available to African governments due to high debt servicing costs has forced cutbacks in critical social and public investment initiatives.
The escalating debt burden and economic challenges in Africa have implications beyond the continent, such as increased migration flows to Europe driven by poverty and insecurity. Structural reforms are needed to address the asymmetric risk perceptions and provide equal access to affordable financing for all countries.
Efforts to alleviate the debt burden should include measures such as placing caps on interest payments and modernizing systems like Special Drawing Rights to reflect population weights and environmental considerations. Reform of the global financial architecture is crucial to creating a more equitable system that can address pressing global challenges like climate change and migration. A reformed system will benefit not only Africa but countries worldwide in fostering global prosperity and stability.
