Many African nations facing ‘debt distress'

Gulf Today

28-02-2025

African leaders' push to mobilise domestic sources of cash to help fund billions in sovereign borrowing will face slow progress until low savings rates rise and African investors step up, experts and analysts say.
The drive to tap their own bourses, pensions and savings funds comes after punishing years when spiralling costs locked many African countries out of international debt markets and a soaring US dollar drove up their debt-servicing costs.
Borrowing at home, advocates say, would reduce reliance on volatile international markets, lower exposure to foreign currencies, and let African investors more familiar with local risks play a bigger role.
Samuel Maimbo, a development finance expert running to head the African Development Bank (AfDB) – the continent's largest development finance institution – said leaders must fix Africa's 'entire plumbing of financing' to unlock more cash.
'I want to look at domestic sources of financing,' he said.
A growing number of people agree with Maimbo on how to move the 54-nation continent on from a spate of sovereign debt defaults and ongoing cash-crunch worries, according to Reuters.
Africa's financing concerns are also a topic at the G20 finance ministers and central bankers meeting underway in Cape Town amid heightened investor uncertainty following Donald Trump's return to the White House.
'Many countries on the African continent are almost facing debt distress,' Lesetja Kganyago, governor of the South African Reserve Bank told Reuters on the sidelines of the meeting in Cape Town.
'All the countries on the African continent are small, open economies, and small, open economies depend on global trade.'
Africa's financing needs are huge. The AfDB puts the annual financing gap for structural transformation at more than $400 billion - or nearly 14% of the continent's projected GDP by 2030.
Adding to the urgency are rising debt repayments due from 2026, with analysts saying an overall structural weakening of riskier African economies is raising the spectre of more debt strains ahead.
Debt levels are high: external public debt surpassed $1 trillion in 2023, from less than half that in 2010, UNCTAD figures showed. Debt-servicing costs stood at $163 billion in 2024, having nearly trebled since 2010, according to AfDB calculations..
Only two countries - Botswana and Mauritius - have investment-grade credit ratings. Lower ratings elsewhere add to high borrowing costs, a phenomenon some leaders call an 'Africa premium.'
'A shared experience is disproportionately high costs of securing credit compared with other regions of the world,' said Rugare Mukanganga, economic adviser at Development Reimagined, the Reuters report adds.
Africa's public debt in local-currency domestic bonds was just over $800 billion in 2020, according to the International Capital Market Association, with 40% of that in South Africa alone. It pales compared with the roughly $6 trillion in Asia Pacific excluding China and Japan.
Banji Fehintola, executive director of the Africa Finance Corporation (AFC), said the continent's central banks hold $450 billion in hard currency reserves while sovereign wealth funds, pension funds and insurance firms have another $600 billion.
In September, the AFC helped the Nigerian government raise $900 million through its first-ever domestic dollar bond.
But raising billions domestically won't be easy.
Sub-Saharan Africa has a savings rate of 18%, World Bank data shows – less than half the 36% global average, due partly to its youthful population having limited disposable income.
The IMF has warned that low liquidity hinders cash mobilisation. Borrowing at home can also put people's own money at risk.
Ghana restructured local debt, damaging the savings of the nascent middle class and feeding anger that led to the ruling party's defeat in last year's presidential election.
Kenyan Finance Minister John Mbadi said the country – which has struggled to contain high commercial interest rates – was 'overborrowing domestically'.
But leaders, including current AfDB President Akinwumi Adesina, say there are solutions.
Ethiopia, which defaulted on international bonds in 2023, opened Africa's newest capital market last month, part of far-reaching, IMF-backed economic reforms.