Domestic borrowing on the rise in SSA as gov’ts grapple with pandemic-related expenses

The rising public debt levels in Sub-Saharan Africa have become a growing concern in recent years. As of December 2022, the number of countries in the region at high risk of external debt distress or in debt distress stood at 22, underscoring the urgent need for a comprehensive approach to addressing this issue.

According to recent data, public debt in Sub-Saharan Africa has more than tripled since 2010, with a marked increase in the run-up to the COVID-19 pandemic. The pandemic-related expenditures have further exacerbated this issue, leading to a shift in the composition of public debt towards domestic borrowing. By the end of 2021, domestic debt accounted for nearly half of outstanding public debt, highlighting the growing reliance on domestic financing.

However, this shift towards domestic borrowing poses its own set of challenges. Domestic borrowing can put significant pressure on the financial system and the broader economy, particularly if the government crowds out private borrowing. Moreover, domestic borrowing often comes with higher interest rates, which can lead to higher debt service costs in the long run.

The increase in non-concessional debt and nontraditional creditors holding a larger share of outstanding debt further complicates the situation. As a result, public debt service payments have increased significantly, consuming a large share of exports and revenue. This has left many countries in the region vulnerable to debt distress, as indicated by the high debt service ratios. In particular, the ratios of total public debt service to exports and revenue have reached 28% and 41%, respectively, underscoring the potential risks to economic stability.

The rise in sovereign spreads has also narrowed the number of countries with market access, creating refinancing risks for countries with large Eurobond redemptions. This could have serious implications for the ability of these countries to service their debt, potentially leading to defaults or restructuring, which could further exacerbate their economic difficulties.

Addressing the rising public debt levels in Sub-Saharan Africa will require a concerted effort by governments, creditors, and international organizations. In particular, improving debt management practices, implementing sound fiscal policies, and exploring innovative financing mechanisms can help reduce reliance on debt and improve economic stability.

One key area for improvement is debt transparency. Greater transparency and disclosure of public debt can help promote accountability and improve the efficiency of public spending. This would involve improving debt recording and reporting practices, as well as enhancing debt management capacity at the national level.

In addition, improving debt sustainability analysis can help countries better understand the potential risks associated with their debt levels and develop appropriate strategies to manage them. This would require strengthening debt sustainability frameworks and enhancing debt monitoring mechanisms, including the use of early warning indicators to identify potential debt distress risks.

Another important area for action is debt relief. While debt relief initiatives have been implemented in the past, more needs to be done to ensure that debt relief is comprehensive and targeted at countries most in need. This could include exploring innovative debt relief mechanisms, such as debt-for-nature swaps or debt-for-climate swaps, which would help address both the debt and environmental challenges facing the region.

The rising public debt levels in Sub-Saharan Africa pose significant challenges to economic stability and growth. Addressing this issue will require a comprehensive approach, including improving debt transparency, strengthening debt sustainability analysis, and exploring innovative debt relief mechanisms. Only through concerted efforts by governments, creditors, and international organizations can we hope to address the growing debt burden in the region and promote sustainable economic development.