The Sustainability of African Debt

Posted: 20 Apr 2016  

Daniel Cohen

Ecole Normale Superieure (ENS) - Department and Laboratory of Applied and Theoretical Economics (DELTA); Centre for Economic Policy Research (CEPR)

Date Written: July 1996

Abstract

The role of debt forgiveness is to alleviate what is known as "debt overhang." This concept is the core idea of the Brady deals, and it now comes to the African debt crisis. How can one gauge the hypothesis of the debt overhang? To what extent can one attribute the growth slowdown of the 1990s to the debt crisis of the 1980s? Using data from the past decade, the author finds that debt variables play a significant role in that slowdown. In one exercise, he finds that more than half the growth slowdown of the large debtor countries in the 1980s could be attributed to the debt crisis. To what reasonable debt ratio should African debt be written down? Most exercises set the threshold of sustainability of debt at about 200 percent. The easiest way to rationalize such a threshold is first to measure the average value of debt-to-export ratios reached at the time of the first rescheduling of debt in a given country. Using Latin America as a benchmark, one finds an average threshold of 248 percent. However short-sighted such a ratio might be, it goes a long way toward rationalizing the view that a debt-to-export ratio between 200 and 300 percent is a strong signal of a forthcoming crisis. This naive approach takes no account of the changing environment (growth and interest rates) a country must confront. A more subtle approach should allow for the prospect of a country's growth to assess the sustainability of the debt it inherits. With the author's formula for so doing, Africa's debt-to-export ratio should be brought to 198 percent. Another way to assess the sustainability of debt is to look at the secondary market, which allows one to estimate the prospect of repayment expected by market participants. Few African debts are actually quoted on secondary markets, but the author presents a formula for reconstructing estimates of repayment prospects econometrically. By that method, Africa's debt-to-export ratio should be 210 percent, suggesting that a threshold between 200 and 250 percent is about right.

Suggested Citation

Cohen, Daniel, The Sustainability of African Debt (July 1996). World Bank Policy Research Working Paper No. 1621. Available at SSRN: https://ssrn.com/abstract=636118

Daniel Cohen (Contact Author)

Ecole Normale Superieure (ENS) - Department and Laboratory of Applied and Theoretical Economics (DELTA) ( email )

48 boulevard Jourdan
75014 Paris
France
+33 1 4313 6208 (Phone)
+33 1 4424 3857 (Fax)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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