African Economy: Debt On The Rise

Editor’s note: As Greece struggles to get through its debt crisis, it is high time we had a look at the African economy. Mawuna Koutonin says the situation with the African debt has worsened, with the IMF warning about the uncontrollable debt rise.
The views expressed in this article are author’s own and do not necessarily represent the
editorial policy of Naij.com.
Could a country whose debt increased by 13.4% and GDP grew by 12.7% in the same year be considered a fast-growing economy? What if the contracted debt had interest rate at 6%, would the country still be a fast-growing economy?
That is the story of Ethiopia, one of the media-heralded fast-growing African economies.
Now let’s take a look at the consolidated 2010 data sets of ten African countries labelled “fastest-growing economies” by the international press.
Uganda’s debt grew by 12.5% while its GDP increased only by 6.2%. Zambia’s debt increased by 12.2% while its GDP grew by 7.6%. Cameroon’s debt grew by 9.1% while its GDP increased by 2.4%. Angola’s debt grew by 9.1% while its GDP increased by 3.4%. Ghana’s debt grew by 8.8% while its GDP increased by 8%. Ivory Coast’s debt grew by 9.1% while its GDP increased only by 2.4%. Nigeria, one of the least-indebted African countries, increased its debt by 6.5% while its GDP grew by 8%. Senegal’s debt increased by 4.2% while its GDP grew by 4.3%. Kenya’s debt increased by 5.6% while its GDP grew by 5.8%.
One could easily dismiss our comparison of debt to GDP growth on the ground that debt is often contracted to make investments, which would impact GDP only in the upcoming years.
The above argument would be valid at only one condition: if African economies grew by at least 6 to 8% every year just to be able to pay the interest of their commercial debt, and, more so, to pay off the debt at maturity and still have money left to develop local infrastructure without continuing to borrow for growth.
To paint a much darker picture of the predicament of our debt increase, let’s add to the debts’ interests rate the continued depreciation of African currency against the US dollar and the euro. From 2000 to 2013, average annual currency depreciation in sub-Saharan Africa was 3-4%, amounting to 44% cumulatively over the decade, according to “Regional economic outlook. Sub-Saharan Africa,” a survey by the IMF.
Unsurprisingly, the current ratio of debt to GDP of the majority of African countries is moving over 50%, which means their cumulative debt is equal to half of their GDP. That’s very high.
Unfortunately, deceptive economists are telling our countries that their ratios are less than the ones of the developed countries like the US, which is 95% of its GDP, UK, 400% of its GDP, EU with 85% of their GDP.
According the Jubilee Debt Campaign (JDC) policy officer, Tim Jones, African countries should be careful while comparing their ratio to the ones of the rich countries. “As well as owing large debts, countries such as the US and the UK also have large debts owed to them. Most of the debt owed by and to the UK is through banks, rather than the government. Taking account of debts owed to the UK, whether to the government or private sector, external debt is around 20%. This is lower than many developing countries, as well as EU members such as Ireland and Spain,” he declared.
Put simply, the real ratio to debt of rich countries is only 20%, while the one of African countries is moving to over 50%, regardless of the fact that many African countries had recently rebased their GDP to look much bigger. Ghana had increased its GDP by 60% just with clever mathematical formula invented by international financiers. Nigeria went through a similar process of GDP rebase to become the biggest economy in Africa.
The above statement means that, without the GPD rebase gimmicks, our countries’ debt to GDP ratio might be much larger, even worrisome.
We have all heard about the ‘Africa Rising’ rhetoric. The story goes like this: Africa is the new frontier of opportunities. With double-digit growth in many sub-Saharan African countries, it’s time to take Africa seriously and seize opportunities.
The well-orchestrated media coverage of that narrative resulted in an accelerated growth of direct foreign investment in Africa but also in new channels of financing like the Eurobonds.
Not all debts are bad, but as Nobel prize-winning economist Joseph Stiglitz put it: “The financial sector loves to find people to prey on, and their most recent prey are governments in developing countries. They get overindebted, they get a bailout from the World Bank and the IMF and they start over again. I think it’s unconscionable, but their memory is short and their greed is large, so it’s going to happen again.”
Nick Dearden, the director of the World Development Movement, advised developing countries to use borrowed funds to reduce commodity dependency: “Getting more minerals out of the ground may be very beneficial for Western nations … but if it’s not developing African economies in a genuine way they’re likely to be left with the debt and none of the resources they’ve invested in.”
Funny enough, in order to get the money back, the main goal of fighting corruption in Africa is not to reduce poverty or improve good governance anymore, but to make sure African countries can pay back their debt to their commercial creditors, the IMF and the World Bank.
It’s likely that poverty rate would continue to increase on the continent, because there would be no money left for social development, regardless of GDP growth. All the net value created by Africans would be transferred out of the continent. The future of the continent is being mortgaged.

Mawuna R. Koutonin