Nigeria, others explore measures to reduce $74 billion debt servicing burden

The Minister of Finance and Coordinating Minister of the Economy and his counterparts across the African continent, yesterday, opened conversation on strategies to reduce the burden of debt servicing, estimated at $174 billion in 2024.

The ministers, at the launch of the Debt Management Forum for Africa (DeMFA) and Inaugural Policy Dialogue on ‘Making Debt Work for Africa: Policies, Practices and Options’ in Abuja reckoned that several African countries, more than before, are in debt distress and in need of urgent strategic interventions. The gathering, organised by the African Development Bank Group (AfDB), were unanimous that besides the need for a review of the skewed global financing architecture, there are a lot more concerned countries could do in terms of plugging leakages, leveraging domestic markets and maximising natural resources to avail critical finances for socioeconomic development.

Vice President and Chief Economist, Economic Governance and Knowledge Management, AfDB, Prof. Kevin Urama, in opening the forum, said the debt management initiative has become more critical for responding to persistent headwinds and building economic resilience and accelerating the continent’s development today.

Urama noted that Africa’s public debt has surged by 170 per cent since 2010 due to both structural issues in the global debt architecture, recent global and domestic shocks, and weaknesses in Africa’s macroeconomic fundamentals.

The development has heightened debt burdens weighing on public finances, diverting resources away from infrastructure investment, thus constraining future GDP growth and economic transformation.

He added that most debts were contracted during a protracted period of low-interest rate regimes in the global market.

Urama said: “Africa’s debt service costs have, however, risen sharply, diverting resources away from infrastructure investment, thus constraining future GDP growth and economic transformation. For 49 African countries, average debt service cost rose sharply from an average of 8.4 per cent of GDP in 2015–19 to 12.7 per cent in 2020–22.

“According to the African Economic Outlook Report (AEO) 2024, in 2024, African countries are expected to spend around $74 billion on debt service, up from $17 billion in 2010, of which $40 billion is owed to private creditors, representing 54 per cent of total debt service.

“As of today, 20 African countries are in debt distress or at high risk of debt distress. And refinancing risks could further increase going forward, especially for countries with large bullet redemptions.” The Chief Economists said further that the implication is that while developed countries can sustain high levels of debt with low debt service burdens, developing countries, including in Africa, particularly the most vulnerable among them, are devoting an increasingly large proportion of their fiscal resources to servicing public debt, and worsening poverty rate.”

Amid the deepening debt challenges for countries, external financial flows to Africa have suffered from tightening global financial conditions and other domestic and external factors.

“Foreign direct investment (FDI), official development assistance (ODA), portfolio investment and remittances—fell by 19.4 per cent in 2022, reversing a strong immediate post-pandemic recovery in external flows. This leads to what I call the paradox of debt and development financing in Africa,” Urama said.

But the market failures in the global financing and debt architecture are not entirely to blame for Africa’s fiscal and debt challenges. There are well known domestic drivers of cost of capital which countries need to address

According to some estimates, corruption costs Africa $148 billion every year and about $90 billion leaves the continent annually in the form of illicit financial flows.

“In total, some estimates show that African countries lose above $1.6 billion daily in capital outflows due to the combined effects of the high-risk premiums, international profit shifting, illicit financial flows, corruption, etc. Measured annually, this could reach about $587 billion – more than three times the total external financial inflows to Africa yearly. Plugging these leakages is therefore critical to addressing domestic resource mobilisation and debt sustainability challenges in Africa,” Urama said.

Nigerian Minister of Finance and Coordinating Minister of the Economy, represented by the Director-General of the Debt Management Office, Patience Oniha, commended the African Development Bank for instituting DeMFA with its focus on public debt.

Oniha said the initiative would address the challenge of growing debt and debt service, limited access to funding, and the higher cost of borrowing in the domestic and international markets.

She charges DeMFA to evolve as a forum that will provide not only much-needed capacity building in public debt management but also to be innovative by coming up with new or additional tools that will improve debt management tools and practices as we know them today.