In a press conference on the sidelines of the African Summit, which concluded its work in the Ethiopian capital, Addis Ababa, Albert Muchanga, Commissioner for Economic Development and Trade in the Union, said that the step aims to help member states improve their financial governance by monitoring sufficient data on their financial conditions.
The step aims to reach an early warning system that helps creditor financial institutions and debtor countries to develop scenarios for quick solutions to avoid any negative consequences. In addition to facilitating oversight and advising on any potential distress.
This comes as countries such as Nigeria, Ghana and Zambia struggle to avoid the potential economic impacts of default or restructuring that they announced.
Scary jump
The debts of African countries increased 5 times during the period between 2000 and the end of 2022. 66 percent of Africa’s external debt is concentrated in 9 countries, led by South Africa with a share of 15 percent. According to the International Monetary Fund, 22 African countries are already suffering from debt burdens or not. able to meet its financial obligations to creditors.
During the past two decades, African countries have been excessive in lending without using those loans to move the production wheel, which constitutes a double blow to African economies. As debt service premiums amounting to about $ 100 billion annually squeeze the budgets of many countries and deduct more than 15 percent of GDP; Excessive lending also opened the door wide to increasing rates of corruption and widening the class gap in many African countries, especially those with fragile regimes.
What are the consequences of that?
- Experts predict serious consequences that could result from successive defaults on the debts of African countries.
- Some of the countries in the region most affected by the debt crisis have begun to take rapid measures to limit the negative effects and restore investor confidence.
- The news of Ghana’s default on its international debt and Nigeria’s announcement of its inability to pay arrears amounting to $50 billion out of its total debt of $102 billion sparked great panic among global investors, followed by downgrades in the credit ratings of some African countries.
- African countries that rely heavily on external debt and financing to support their public finances are facing a real danger, in light of expectations that international financing institutions will stop feeding economies that are less able to repay.
- While Nigeria resorted to addressing the crisis by restructuring the domestic debt of about $45 billion, by issuing long-term bonds to local and international investors, South Africa tended to devalue the rand and raise bond and deposit yields in order to restore the momentum of foreign investment.
On the other hand, Ghana has already embarked on a program to restructure the domestic sovereign debt, estimated at about $25 billion, despite the great controversy that accompanied that step, which the government described as “necessary” to address the raging debt crisis.
and put debt
- The debts of most African countries are divided into four groups. The first is the Paris Club group, which is the largest creditor. The second is the international financing institutions group, which includes the International Monetary Fund and the World Bank. The third group includes a number of commercial banks. The fourth group includes bilateral debts with a number of Eurasian countries, especially China.
Although most countries of the African continent enjoy huge natural resources, this does not relieve the debt pressure on African economies, for many reasons represented in the inability to optimally exploit those resources, in addition to the deteriorating situation of the global economy and the tightening of monetary policies in Western countries, Rising costs of debt servicing, inflation, interest rates and a significant increase in the cost of risk, and the loss of most African currencies in value against major currencies.
The pressure of external debt service on public finances is evident in highly indebted countries such as South Africa, Angola, Sudan, Nigeria, Ghana and Zambia.
Expert look
- Mark Plant, Director of Finance and Development at the Center for Global Development working with the World Bank, confirms that debt servicing costs are the biggest concern for heavily indebted countries. He told Sky News Arabia that the high debt burden leads to catastrophic repercussions on the population, and also has serious consequences for government spending and directly affects any government budget.
Plante suggests that debtor governments face one of two options to meet their obligations. The first is to raise taxes to cover the growing debt service or cut some planned spending.
Blunt warns of the danger of the two options on the overall economic performance, as higher taxes reduce people’s incomes and productivity, and thus lead to a reduction in consumer spending.
On the other hand, Blunt believes that reducing government spending will mean a defect and a shortage in government services such as health, education and social services, or a reduction in investment in infrastructure such as roads, bridges and electricity generation. Hence the poor economic performance. in general.
Kevin Orama said; Chief Economist at the African Development Bank The debts of African countries are not large, but many African countries are facing the dilemma of not being able to repay under the current economic conditions.
“If you look at the size of the continent’s debt, it is less than the size of debt in other regions of the world, but the real problem lies in the fact that most African countries cannot pay regularly and thus face the problem of falling into a bad debt crisis,” he said.
Eric Asibi, professor of economics at the University of Ghana, says the sharp rise in the debt-to-GDP ratio adds to economic pressures already exacerbated by other international factors.
Asibi explains that debt restructuring as part of measures to get the economy back on track is the only option now available to heavily indebted African countries like Ghana and others.
“Restructuring is a painful process, but it is necessary if done well,” he explains.
Asibi points out that the current situation, despite being tragic, provides an opportunity to change public behavior, reset the economy and shift towards expansion in productive sectors such as agriculture and industry, and prompt banks to focus on investing in the real sector.
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