Abstract
This paper provides a trajectory of Africa’s debt levels over the past decades. We observe that, the continent’s debt-to-GDP is rising and approaching levels that could potentially cause distress and reverse economic gains registered over the period. While Africa’s growth prospects are promising, the real interest rates could be rising in the future due to slowing growth in emerging markets and tighter global financial conditions. With the interest rate–growth differential as the main drivers of overall debt dynamics, we argue that, African countries should aim at high real growth rates as a key element of their debt sustainability strategy. Overall, this paper recommends that policymakers could reduce the debt-to-GDP ratio by accelerating growth and improving primary balances.
Highlights
Most countries need substantial financial resources to support its development agenda
The continent’s debt-to-Gross Domestic Product (GDP) is rising and approaching levels that could potentially cause distress and reverse economic gains registered over the period
Taking an average over three-year periods, we find that between 2015 and 2017, while Africa’s debt as a share of GDP stood at 56.58 percent which is higher than the 55 percent debt-to-GDP ratio suggested by the International Monetary Fund (IMF), it is slightly below the debt benchmark ratio of 60 percent of GDP prescribed by the African Monetary Co-operation Programme (AMCP)
Summary
Most countries need substantial financial resources to support its development agenda. This is because the scaling-up of productive public investments, through massive borrowing, while increasing debt ratios in the short run, can lead to higher growth, revenues, and exports and lower debt-to-Gross Domestic Product (GDP) ratios in the long-run. Investments in public capital yield positive productivity and cost-saving effects. Absorptive capacity constraints, such as coordination problems or supply bottlenecks during the implementation phase of public investment projects, may result in large costs overruns that adversely affect the budget. Both efficiency and absorptive capacity, play key roles in determining the final impact of public investments on growth, and a country’s repayment capacity of the borrowed funds to support capital investments.
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