Africa’s debt stocks have grown significantly over the past decade. Understandably, African governments took advantage of historically low interest rates in the 2000s and borrowed heavily from international capital markets and China.
But debt has become more expensive lately.
Since 2020, the impacts of COVID-19 and the ongoing war in Ukraine, coupled with deteriorating climate conditions, have led to downgrades in the credit ratings of African governments, thereby increasing borrowing costs and making access to international debt markets prohibitively expensive.
According to data from the United Nations Conference on Trade and Development, Africa’s public debt reached $1.8 trillion in 2022. In 2024, African countries will pay $163 billion in external debt service, according to the African Development Bank.
One in five people worldwide lives in countries that are in debt distress or at risk of debt distress. Two-thirds of low-income countries – most of them in Africa – fall into this category, while eight of the nine countries currently in debt distress are on the continent, according to the United Nations Economic Commission for Africa 2023.
Factors that have contributed to the worsening debt crisis in Africa include a population explosion and rapid urbanization, huge infrastructure needs, and the declining availability of official development assistance and concessional financing.
Recently, collective voices have been raised by African Ministers of Finance, Planning and Economic Development calling for decisive action to reform the global financial architecture in light of rising debt and to stimulate the investments needed to achieve sustainable development and climate goals around the world.
Experts believe that the global financial system is structurally unfair to developing countries in general and African countries in particular, and that there is an urgent need for some decisive reforms to address the problem of debt accumulation in Africa.
According to the Italian Institute for International Political Studies (ISPI, 2020), providing debt instruments to African countries on more favorable terms or in cash, in exchange for existing debt, would not only provide immediate liquidity but would also address long-term debt sustainability concerns.
In the absence of better mechanisms to assist Africa’s debt-ridden countries, more governments will struggle to service their obligations, limiting their ability to invest in providing for their countries’ essential development needs.
This becomes even more important in light of the need to enhance efforts to address the challenges of climate change in the region, through effective measures to adapt to and mitigate climate change.
In light of these challenges, practical engagements supported by African-led development finance institutions, such as the African Development Bank, are needed to reform the global financial architecture and ensure the transition from multilateralism to a multilateral system of the global financial system – one that is more agile, more inclusive, more flexible and more realistic in responding to the changing nature of the challenges facing African countries today.
In parallel, there is also the crucial role played by sector-specific development finance institutions such as the Shelter Africa Development Bank and other relevant institutions that are part of the founding partners of the Alliance for African Multilateral Finance Institutions (AAMFI) – established under the auspices of the African Union, to support the implementation of Agenda 2063.
Its formation underscores Africa’s commitment to self-reliance and sustainable economic development.
AAMFI, a consortium of African-owned and -governed multilateral financial institutions whose members also include the African Trade and Investment Development Insurance (ATIDI), the African Export-Import Bank, the Trade and Development Bank Group, the African Finance Corporation, the African Reinsurance Corporation (Africa-Re), ZEP-RE (PTA Reinsurance Company), the East African Development Bank (EADB) and the African Solidarity Fund (ASF), is believed to address Africa’s development finance needs, advocate for Africa on global financial issues, develop innovative financing instruments and support sustainable financing strategies.
AAMFI is strategically positioned to lead financial reforms on behalf of the continent. As the saying goes, if you want to go fast, go alone. If you want to go far, go together.