How debt has reached record levels in Africa

DW (English)

Africa is in the middle of a debt crisis. The level of debt has reached record levels, and it is holding back development in countries across the continent. How did debt become such a problem? DW's Tomi Oladipo explains.

Transcript

00:00Across Africa, governments are running out of money, and debt is a major reason why.

00:05As a government, spending 5-10% of your income on interest payments is generally considered manageable,

00:12but for roughly half of Africa, it's now between 20-30%,

00:16and that leaves far less money for essential services like health or education.

00:21Public debt has risen sharply.

00:24In 2010, African governments owed about a third of their yearly economic output.

00:28By 2020, that figure was closer to 60%, and in places like Ghana, Zambia, or Kenya, even higher.

00:36Now the bills are due, and many countries can't pay.

00:40So how did we get here?

00:42In the 2010s, there was a lot of borrowing.

00:44Many countries took advantage of low global interest rates to get funds for major infrastructure projects and public services.

00:51The idea was simple.

00:53Borrow money cheaply, build roads, ports, and power plants,

00:56grow the economy, and pay it back later.

00:59And how does debt work?

01:01A government sells bonds to investors, basically IOUs.

01:04The government receives the cash, pays interest yearly, and returns the full amount on a set date.

01:10For example, if you borrow $2 billion, you might pay $100 million a year in interest over, say, 10 years,

01:17and return the full $2 billion at the end.

01:19Who are the lenders?

01:22It used to be mostly Western governments, the World Bank, and the IMF.

01:26But after the 2008 global financial crisis, they pulled back.

01:30So African countries turned to more costly private lenders and China.

01:35The higher interest rates that's brought have to do with perception,

01:38because it's not just about whether you can pay what you owe, but about whether lenders think you can.

01:43Credit rating agencies grade countries on how risky they are to lend to.

01:49Lower grades mean paying higher interest.

01:52Many African countries are labeled high risk,

01:54even when their economies look similar to others with better scores.

01:58And that's often influenced by stereotypes and negative media coverage.

02:03Now, remember all that borrowing in the 2010s?

02:06Vorrow cheap, invest, grow, and pay back?

02:08Well, a lot's happened since then.

02:10The pandemic, the war in Ukraine, inflation, rising global interest rates,

02:15and shocks to the commodity markets, which African countries rely on.

02:19So they're not earning enough money to pay their old loans,

02:21and new borrowing is more expensive.

02:24Meanwhile, domestic costs are rising, populations are growing,

02:28climate disasters are hitting harder, and people need health care and education.

02:33So a few countries have defaulted and had to enter negotiations to find a way out.

02:38Nine countries are in debt distress, meaning they're struggling to pay,

02:42while more are at risk.

02:45So South Africa was able to, in partnership with the EU,

02:50get a G20 declaration on debt within the finance track,

02:55which was not an easy task given the current context as well.

03:01That declaration acknowledges that there is a need for urgent reform of the G20 Common Framework

03:07that allows, you know, timely and effective resolution of debt challenges,

03:14not just for African countries, but for developing countries more broadly.

03:18But also what that means is being able to implement those solutions

03:24allows African countries to then open up their fiscal space

03:29to be able to channel more resources in critical sectors like education and health,

03:34where many of these countries have had to make a choice between debt service payments

03:39and meeting those development objectives.

03:42So the question isn't whether African countries can repay these debts,

03:45but what they must sacrifice to do so.

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