Debt, Growth and Stability in Africa: Speculative Calculations and Policy Responses†[On International Integration of Emerging Sovereign Bond Markets]

Since 2014, almost all African countries have experienced an increase in public debt and a change in its nature. The ratio of public debt to GDP has doubled, and sovereign debt is changing from concessional credit provided by official agencies to market-based loans from private institutions. This paper attempts to answer three questions that are being asked with increasing urgency in this setting. First, has the quality of institutions and policies, critical to sustaining higher levels of debt, improved since the debt relief era of the early 2000s? Second, will debt markets get to know emerging Africa well enough before the next crisis? Third, have resolutions of defaults in Africa been orderly so that debtor governments are not herded into traps set by foreign creditors? Our calculations suggest that the answer to all three questions is ‘no’. To avoid another debt crisis, the paper recommends preventive measures. The policy responses involve full transparency in debt accounting, greater realism in growth forecasts and diligence in matching the region’s seemingly limitless public investment needs with limited long-term development finance and weak public-sector capacity to manage infrastructure investments. More specifically, we recommend that African governments treat increases in commodity prices as temporary—not permanent—shocks; that in deciding how to finance public investment, governments compare the marginal cost of funds from taxation with market terms; and that governments not finance long-term infrastructure projects with short-term money from abroad, regardless of the conditions on which these loans can be contracted.