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To avoid a debt crisis, the International Monetary Fund (IMF) has proposed steps for Sub-Saharan Africa.
According to a recent analysis on its website, the average debt ratio in Sub-Saharan Africa has nearly quadrupled in a decade, rising from 30% of GDP at the end of 2013 to nearly 60% of GDP by the end of 2022.
Not only has the debt increased, but repayment has become much more expensive.
The analysis also indicated that the region’s interest payment to revenue ratio, a crucial statistic for assessing debt servicing capacity and forecasting the likelihood of a fiscal crisis, has more than doubled since the early 2010s and is now close to four times that of advanced nations.
More than half of Sub-Saharan Africa’s low-income countries were deemed high risk or already in debt difficulty by the IMF as of 2022.
To avert a regional debt crisis, the IMF highlighted five policy initiatives African states may take to ensure the sustainability of public finances while still meeting the region’s development goals.
The first step, according to the report, is to create clear debt goals that balance debt sustainability with development objectives, rather than focusing solely on short-term deficits.
“In many sub-Saharan African countries, fiscal policy often prioritizes short-term goals without a clear long-term plan. This lack of planning leads to frequent breaking of fiscal rules and a growing public debt,” it stated.
Furthermore, African countries should make fiscal reforms to reduce debt to a manageable level.
According to IMF staff analysis, many countries in the area will need to eliminate budget deficits in the coming years. The typical country’s adjustment amounts to around 2% to 3% of GDP.
“On the other hand, a few countries have very large adjustment needs; for them, it is unlikely that fiscal consolidation alone will be enough to ensure fiscal sustainability. It may need to be complemented by debt reprofiling or restructuring,” it stated.
The IMF also urged that Sub-Saharan African countries avoid cutting spending to alleviate fiscal imbalances. Although this may be justified in some cases, revenue strategies such as reducing tax breaks or digitizing filing and payment systems should play a larger role.
According to the Britton Wood financial institution, mobilizing domestic revenue is less harmful to growth in countries with low initial tax levels, whereas the cost of cutting expenditures is particularly high given Africa’s large development demands.
The fourth approach is to enhance budget institutions in order to improve fiscal plan implementation by assisting governments in avoiding budgetary slippages and lowering the danger of extra-budgetary commitments, which are common in the region.
Finally, the IMF emphasized that public approval should be a fundamental concern in policy design, such as by carefully timing reforms and implementing compensatory measures.
“Public acceptance of reforms depends more generally on the ability of governments to convince the population that they will use public funds in an efficient, fair, and transparent manner,” it concluded.
