Debt Distress and Climate-Resilient Development in Sub-Saharan Africa

Due to multiple external shocks since the outbreak of the COVID-19 pandemic, sub-Saharan Africa (SSA) is facing acute debt distress and new highs in the cost of foreign capital. Concomitantly, the region needs to mobilize a stepwise level of financing to meet shared climate and development goals, under the Paris Agreement climate targets and the UN 2030 Sustainable Development Goals (SDGs).
Do SSA countries have the fiscal space necessary to achieve the Paris Agreement commitments and SDGs while also servicing their external debt?
A new journal article published in the Journal of African Economics by Kevin P. Gallagher, Luma Ramos, Anzetse Were and Marina Zucker-Marques outlines the relative levels of sovereign external debt and service payments between now and 2030 for SSA countries. They calculate the fiscal space left to meet climate and development financing needs during the same period and find that the region cannot meet those pressing needs without new forms of liquidity, concessional and grant finance to complement and bend down the cost of capital and comprehensive debt relief.
Main findings:
- External debt in SSA has more than tripled since 2008, representing the largest increase in debt and the largest increase in debt-to fiscal revenue for developing countries—as capital costs have hit new highs.
- Multilateral development banks (MDBs) and private bondholders represent 60 percent of the region’s external debt, with roughly equal shares of 30 percent. China and the Paris Club are owed 12 and 5 percent, respectively.
- SSA’s external debt service is equivalent to 93 percent of the average country’s climate financing needs, and only 10 countries in the region have the borrowing space to finance those needs.
- The region urgently needs new forms of liquidity, concessional and grant-based development finance that catalyzes low-cost private finance, and for those countries in debt distress, significant debt relief across all creditor classes that is aligned with the Paris Agreement and Sustainable Development Goals.
- MDBs will need to provide between $2.4 and $34.5 billion in relief in a manner that does not harm their preferred creditor status or crediting ratings, or the burden of reduction by the private sector and official creditors will be immense.
Further inaction will not only inflict material damage globally in the form of climate change and lost market opportunities, but also further erode the legitimacy of the global financial architecture itself.
This journal article was previously published as a working paper for the Debt Relief for a Green and Inclusive Recovery Project in August 2023.
Read the Journal Article Read the Working Paper