Africa’s fiscal position improves, but debt is still a challenge

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Harare - The African Development Bank (AfDB) says African countries’ fiscal balances improved fairly in the past two years, with the weighted average overall deficit-to-GDP ratio inching down to 4.8 percent in 2019 from 5.9 percent in 2017.

In its African Economic Outlook report 2020, the development bank attributed the improvement in the fiscal balances to the stabilisation in commodity prices and higher tax and non-tax revenues for large natural resource exporters.

The revenue-to-GDP ratio rose by 0.3 percentage point on average for the 54 African economies, but by more than 1 percentage point among oil exporters, such as Angola, whose ratio rose 2.2 percentage points.

“Several non-oil intensive countries also managed to narrow deficits in the past two years, a result of winding down large fiscal expansions and improving domestic resource mobilisation. Others had to cut spending in the face of mounting debt burdens.

“Among those with the largest reductions in expenditure-to-GDP ratios in 2019 were Congo (8 percentage points) and Zambia (4 percentage points), both driven by significant fiscal consolidation efforts to contain debt. A majority of African countries reduced expenditure-to-GDP ratios in 2019, although exceptions such as South Sudan remained. Priorities for reform include shifting the balance from current spending toward funding infrastructure gaps and improving medium-term planning,” stated the bank in the report.

The bank affirmed that structurally large fiscal deficits remained a source of concern for African economies, where they stem mostly from a lack of improvement in revenue mobilisation in non-resource-abundant economies. The continent still exhibits lower revenue to GDP ratios than peer low- and middle-income economies, and progress has stalled in key areas, such as implementing comprehensive income tax reforms and rolling out sales or value-added taxes to encourage formal business registration in the informal sector.

With regards to the debt situation on the continent, the report revealed that debt was still on the rise. Public and publicly guaranteed debt levels were high and rising in most African economies, with the median ratio of government debt-to-GDP climbing over 56 percent in 2018, up from 38 percent 10 years earlier.

The continent’s total external debt burden reached nearly $500 billion, with euro-bonds more than a fifth of that. The upward trend in external debt ratios is partly a by-product of the end of the commodity super cycle, and slowing growth and export revenues, especially among commodity producers. But it also stems from a more stable macroeconomic and governance environment, which allowed more African countries to tap international bond markets for the first time, some at 30-year maturities.

“African governments have had a structural shift in debt composition, with less reliance on concessional lending from multilateral institutions and official Paris Club creditors, broader access to long-term finance from international capital markets, and increased access to financing from emerging bilateral creditors, such as China.

“Similarly, higher domestic borrowing (reaching more than 35 percent of GDP) in part reflects elevated government spending and capital investment needs to close the infrastructure gap. But it also reflects gradually slowing inflation, greater monetary credibility, and stronger ability to market domestic currency debt to international creditors.

“The rising debt trend across African countries masks substantial heterogeneity. In 2017, the ratio of external debt to exports ranged from around 5 percent of exports of goods and services (Algeria) to more than 400 percent (Ethiopia) and even more than 600 percent (Sudan). On 31 August 2019, the IMF’s Debt Sustainability Assessment report for Africa’s low-income countries showed eight countries classified in debt distress 2 and another 11 countries at high risk of debt distress 3.

“For these economies, debt burdens could undermine long-term growth prospects, especially if foreign funding dries up suddenly as monetary policy normalises in advanced economies. The continent’s other 18 low-income countries all had moderate to low risk of debt distress. While Africa is not experiencing a systemic debt crisis, there is a substantial need to improve the debt–investment and investment–growth links to ensure long-run debt sustainability,” stated the bank.  

 

 

 

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