Diverting Development: The G20 and External Debt Service Burden in Africa
In many ways the African continent has been poised for take-off. The continent is home to many of the key ingredients for a successful 21st century economy with 60 percent of the world’s solar resources, 30 percent of proven transition mineral reserves and enough wind potential to provide the entire continent enough electricity to meet its needs 250 times over. Moreover, the population in the region is expected to almost double by 2050, reaching 2.5 billion. To tap into this potential, the African continent needs to increase investment levels in a stepwise manner by 2030 from both domestic and external resource mobilization.
Because of an onslaught of largely external shocks over the last half decade, Africans have had to divert attention from their development prospects to servicing an unsustainable level of external debt payments. Africa’s development prospects will be perpetually diverted if the continent does not receive significant debt relief through forums like this year’s Group of 20 (G20) gathering in South Africa.
In a new working paper by the Boston University Global Development Policy Center and Institute for Economic Justice highlights five core flaws in the G20 Common Framework since its inception and offers analysis of the current debt landscape and the vulnerabilities of African countries. The paper also recommends concrete policy reforms for the G20 that would improve the debt relief process and ensure sustainable growth in Africa.
Key findings
- Africa’s debt and debt service payments: Despite Africa’s relatively low external debt stock ($746 billion, or 25 percent of the continent’s gross national income), debt service payments are at their highest levels since the last debt crisis in the early 2000s. This increase is due to the rise in principal repayments and the higher cost of borrowing that resulted from Africa’s growing reliance on commercial lending in addition to concessional finance.
- Compared to other developing regions, the cost of borrowing in Africa is significantly higher. In 2023, bond yields in Asia and Oceania averaged 5.3 percent, and in Latin America and the Caribbean, they averaged 6.8 percent. In contrast, Africa’s bond yields averaged 9.8 percent, highlighting the region’s unique challenges in accessing affordable financing.
- Impact on fiscal space and imports: Africa’s high debt cost is eroding fiscal space and reducing the capacity to import.
- Debt servicing consumed 16.7 percent of African government revenues in 2023, marking the largest increase among developing regions.
- 14.8 percent of African export earnings are devoted to debt service in 2023, up from 4.5 percent in 2011. In the same year, interest payments alone accounted for 4.7 percent of exports.
- Debt servicing versus development: On average, between 2024 and 2030, annual debt service will amount to 137.4 percent of Africa’s annual climate finance needs.
- At least 30 African countries allocate more funds to servicing debt interest — excluding principal repayments — than to public health.
- In 2023, for the first time, Sub-Saharan African nations spent more on debt interest payments than on education.
- The G20 Common Framework is ill-equipped to deal with Africa’s debt predicament, as the Common Framework (1) is slow, with prolonged negotiations on a case-by-case basis; (2) provides minimal debt relief, preventing countries from embarking on new development paths; (3) fails to ensure fair participation from all creditor classes; (4) lacks linkages between debt relief and future development goals; and (5) excludes countries that need debt relief.
Policy recommendations
- Streamline the process: Implement an automatic two-year debt service standstill when countries enter the Common Framework, and prevent interest accumulation during negotiations to incentivize all creditors to participate. During a widespread crisis, shift from case-by-case negotiations to a group-based approach for countries in debt distress.
- Enhance the debt relief envelope: Adjust debt relief amounts based on an enhanced Debt Sustainability Analysis (DSA) that includes climate risks and investment needs to ensure adequate capacity for long-term recovery.
- Strengthen creditor participation: Create a simple “fair” Comparability of Treatment (CoT) rule that considers risk pricing and concessionality. Introduce relief formats to accommodate creditors’ distinct preferences: re-profiling for official creditors, Brady-like bonds for bank loans, and buybacks for bondholders. Protect multilateral creditors’ debt relief with fresh replenishments of MDBs from advanced countries.
- Align debt relief with development goals: Link debt relief to sustainable growth by conducting pre-feasibility studies during the debt standstill negotiations, focusing on countries’ own priorities, Nationally Determined Contributions (NDCs) and the UN 2030 Sustainable Development Goals identified by countries Integrated National Financing Frameworks (INFF). As part of the debt relief agreement and supported by international financial institutions (IFIs), countries would commit to investing in these identified projects.
- Expand eligibility: Broaden the Common Framework’s eligibility to include middle-income countries and emerging markets facing debt distress.
Overall, the authors argue that debt relief will be no panacea for Africa. The level of relief needs to free up fiscal and borrowing space to make sound investments in growth enhancing structural change to break the insidious cycle that many countries in the continent endure. This policy moment offers a unique chance to reshape the global debt architecture and deliver on the promise of a prosperous future for Africa.