Africa’s Debt: Three Concerns, Three Remedies

30 Pages Posted: 22 Jul 2019

See all articles by Shantayanan Devarajan

Shantayanan Devarajan

World Bank Middle East and North Africa Region

Indermit S. Gill

World Bank - Poverty Reduction and Economic Management Network (PRMVP)

Kenan Karakulah

World Bank - Macroeconomics, Trade and Investment Global Practice

Date Written: July 19, 2019

Abstract

Since 2014, almost all African countries have experienced an increase in public debt and a change in its nature. The ratio of public debt to GDP has doubled, and sovereign debt is changing from concessional credit provided by official agencies to market-based loans from private institutions. This paper attempts to answer three questions that are being asked with increasing urgency to avoid another debt crisis. First, has the quality of institutions and policies of African countries, critical to sustaining higher levels of debt, improved since the debt relief of the early 2000s? Second, will debt markets get to know emerging Africa well enough before the next crisis? Third, have the resolutions of recent defaults in Africa been orderly so that debtor governments are not herded into traps set by foreign creditors? Our calculations suggest that the answer to all three questions is ‘no’. To avoid another debt crisis, the paper recommends preventive measures that involve full transparency in debt accounting, greater realism in growth forecasts, and diligence in matching the region’s seemingly limitless public investment needs with weak public sector capacity to manage infrastructure investments. More specifically, we recommend that as a rule African governments treat increases in commodity prices as temporary — not permanent — shocks; that in deciding how to finance public investment, governments compare the marginal cost of funds from taxation with market terms of borrowing; and that governments avoid financing long-term infrastructure projects with short-term money from abroad.

Keywords: Africa, debt, public debt, government

Suggested Citation

Devarajan, Shantayanan and Gill, Indermit S. and Karakulah, Kenan, Africa’s Debt: Three Concerns, Three Remedies (July 19, 2019). Duke Global Working Paper Series No. 2019/09. Available at SSRN: https://ssrn.com/abstract=3422880 or http://dx.doi.org/10.2139/ssrn.3422880

Shantayanan Devarajan (Contact Author)

World Bank Middle East and North Africa Region ( email )

1818 H Street, NW
Washington, DC 20433
United States

Indermit S. Gill

World Bank - Poverty Reduction and Economic Management Network (PRMVP) ( email )

Washington, DC 20433
United States

Kenan Karakulah

World Bank - Macroeconomics, Trade and Investment Global Practice ( email )

NW, DC 20006
United States

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