Africa's Looming Debt Crisis
Updated: Nov 5, 2020
Africa as a continent has about 1.3 trillion dollars in debt obligations which represents 57% of the continents 2.3 trillion-dollar GDP, a sum that boggles the mind considering Africa is the poorest continent on earth. When looking at it holistically the 1.3 trillion dollars in debt constitutes only 2% of the 69.3 trillion-dollar global debt obligations of which the IMF says is 82% of global GDP.
If we break it down by continent the 1.3 trillion dollars in debt seems miniscule compared to 90% of global debt that other continents carry. Asia and Pacific nations (Japan is the largest carrier of debt with 12 trillion dollars) has 24 trillion dollars in debt which constitutes 80% of GDP (Japan’s debt constitutes 240% of GDP), North America has 23 trillion dollars in debt which constitutes 100% of GDP, Europe as a continent has 16 trillion dollars in debt which constitutes 74% of GDP, and South America has 3 trillion dollars in debt which constitutes 75% of GDP.
Region Debt to GDP Gross Debt Total of World Debt
Asia and Pacific 79.8% $24,120 34.8%
North America 100.4% $23,710 34.2%
Europe 74.2% $16,225 23.4%
South America 75.0% $2,6993 3.9%
Africa 56.9% $1,3131 1.9%
Other 37.1% $1,2311 1.8%
World 81.8% $69,298 100.0%
In absolute terms, over 90% of global debt is concentrated in North America, Asia Pacific, and Europe — meanwhile, regions like Africa, South America, and other account for less than 10%.
Yet when we hear about global debt obligations we always hear about Africa and how Africa is not able to pay back debt obligations or how African nations are seeking debt forgiveness. Historically most of the debt carried by African nations came from one place, the World Bank, a financial institution created and managed by the United States and the European Union that provides loans and grants to developing nations for the purpose of capital projects (bridges, roads, and other infrastructure projects). The World Bank was initially created after World War II to help European nations rebuild, France was the first recipient of a loan from the World Bank, but eventually it would change its focus to nation building with the hopes of eradicating poverty.
The World Bank currently holds roughly one-third of Africa’s 600 billion-dollar foreign debt obligations, foreign governments holding another third, and private investors/lenders holding the rest. It is believed that China and Chinese private banks who often have either direct/indirect links to the government hold much of the debt, as much as 350 billion dollars making China Africa’s largest creditor. Unlike the World Bank and other western nations who lend to Africa the Chinese lending is often under-reported if reported at all.
Looming Debt Crisis
The COVID-19 crisis is sending African economies on a free fall like the rest of the world, but unlike the rest of the world, African countries cannot print money carelessly. The United States, which is the worlds second most indebted country, at the onset of the global pandemic printed almost 3 trillion dollars out of thin air with the signature of President Donald Trump, and currently there are plans to print another two trillion dollars six months later. In a span of six months the United States will literally print triple the amount of money of Africa’s two trillion-dollar annual GDP, without any consequences to the country’s financial health, fear of currency devaluation, or credit rating status.
Africa on the other could not print a dollar without their currencies getting hammered in the financial markets, interest rates on foreign debt obligations and government/private bonds would increase, credit ratings of African nations would plummet, and an immediate currency devaluation would occur overnight.
With very few resources and government revenues declining due the global economic recession African nations are under immerse pressure to continue servicing their foreign debt obligations. The servicing of foreign debt obligations in some African nations are as high as 60% of government revenues which forces more than 30 African nations to spend more revenues for payment of foreign debt obligations than the government spends on healthcare for their populations.
As revenues continue to decline the African nations, who for a decade have seen GDP growth and coffers filling up with foreign reserves, are now on track to repeat the debt crisis of two decades ago. In 2000 with the highs of commodity trading many African nations took on heavy foreign debt obligations and when the global economy collapsed and commodity prices fell, the burden of interest payments caused many African nations to forgo services for their people in order to pay those debts. Many African nations eventually defaulted on those debt obligations because cutting government services was no longer enough to pay the loans to the IMF and other lenders. In 2005, wealthy nations and financial institutions forgave 100 billion dollars in debt so the African economies could recover from the global recession.
Since 2005 African economies have seen tremendous economic growth with some nations doubling GDP, a rise of the middle class throughout Africa, and a lending boom. Here we are now in 2020 with 600 billion dollars of foreign debt obligations a collapsed global economy and many African nations on the cusp of defaulting. African leaders concerned with 44 billion-dollars in debt obligations due this year requested from the G-20 governments a suspension of payments and were offered an eight-month suspension of payments totaling 11 billion-dollars for the poorest nations.
Many African nations prior to the pandemic were already scrambling to renegotiate debt obligations with their foreign creditors because commodity prices were already falling. Angola for instance relies heavily on the export of oil for all government revenues and will have less in revenue this year than foreign debt payment obligations, without new terms Angola will certainly default on those loans. Some African nations worry that requesting help from foreign nations or banks of any loan modifications will cost them in the long term with increased interest rates, which already are the highest in the world, or will completely lock them out of the credit market in the future.
If the global pandemic continues at its current rate and GDP growth continues to decline globally the future of Africa looks dire and many African governments will have extremely difficult decisions to make. As government revenues decline the biggest of those decision will be whether they will service foreign debt obligations or buy medicine. Failure to pay foreign debt obligations will have economic consequences in the future but what will it mean for their people if they do service those debts.
The developed nations to date have printed almost eight trillion dollars to combat the global pandemic, feed their people, and save failing companies while denying African nations a suspension of 44 billion-dollars in foreign debt payment obligations due this year.