Africa
Can the African continent get out of the foreign debt trap? This frequently asked question in the economic community and its discussions have become rich material on the desks of analysts, especially as the capacity outlook for African countries remains unclear, according to a recent statement by the World Bank’s Chief Specialist for the Africa Region, Andrew Dabarin.
About half of countries in sub-Saharan Africa are failing to meet their obligations or face a high risk of default this year, the World Bank said, while inflation is expected to hit double digits across much of the continent and grow by 2023. The rate is 3.1%.
The debt of brown continent countries is estimated to be about US$1 trillion in 2022, a five-fold increase since 2000. 66% of the debt is concentrated in 9 countries led by South Africa, while 22 countries have suffered greatly. The IMF said it was unable to meet its fiscal obligations to creditors, noting that annual debt installments of about $100 billion put pressure on many countries’ budgets and cut more than 15 percent of gross domestic product.
local resource gap
Dr Abdullah Al-Shennawy, an economist from Egypt, explained in an interview with Sky News Arab Economics that the main reason for resorting to external debt and borrowing is the domestic resource gap, the gap between the required investment rate and the investment rate . Achieve target growth rate and domestic savings rate. He pointed to the expansion of public debt in Africa as middle-income countries’ debt levels reached unprecedented levels in contemporary history and global debt rose to 28% of GDP in 2020 due to increased government spending in response to the coronavirus pandemic and economic recession resulting loss of income.
Depressing investment and undermining growth
Dr Al-Shennawy added: “Increasing debt burdens depress investment and undermine growth. For example, South Africa accounts for 15 percent of the continent’s total external debt, Egypt 13 percent, Angola 7 percent, Morocco and Sudan 6 percent. %, while Tunisia, Kenya and Zambia each accounted for 4%. About 15 to 20 governments in Africa will spend 20% or more of their annual Public finances in highly indebted countries such as Sudan, Tunisia and Zambia are under pressure to service external debt, as are Cameroon, Chad, Djibouti, Ghana, Mauritania, Mozambique and Senegal.
The heavy debt burden of public finances will continue to undermine the ability to invest in economic and social development projects and the ability to withstand external shocks.
But what is the level of external debt that negatively affects economic growth?
Economist Dr Al-Shennawy answers this question: “External debt can be beneficial if it reduces liquidity constraints, provides an additional source of financing for Capital accumulation affects growth, causing investors to lower their return expectations in anticipation of higher tax rates, and also constrains economic growth in Africa by reducing the productivity of factors of production as African countries are less willing to adopt higher tax rates. Cost policies, ultimately Economic growth has been indirectly negatively affected by affecting public spending on social services, education and health, in addition to weak exports, weak savings mobilization and high inflation as African countries begin to service their external debt.
External Debt Safety Limit
Due to the expectation that the government may increase taxes in the future to service the debt, high external debt balances may negatively affect economic growth through negative effects on private investment, so foreign and local investors will avoid investing in debtor countries, which leads to lower economic growth, according to According to Dr. Al-Shennawy, he explained that the safe limit of foreign debt is 150% of GDP, that is, the balance of foreign debt should not exceed 1.5 times of GDP. If the country wants to take more precautions, it can consider putting the debt The safety limit is controlled within 100%.
Economist Dr. El-Shennawy proposes a scenario for Africa’s escape from the foreign debt trap along four axes:
• Consider public debt inevitable
It is inconceivable that any country or government can do business without debt, and while recognizing this inevitability, the question that must be asked in seeking to dismantle this structure is, where does the debt come from? is it used?, and what are the related terms? The origin and justification of religious use are therefore crucial considerations.
capital controls
The stated ultimate goal of the Bretton Woods institutions was – and still is – to protect the interests of international corporations by ensuring that African economies provide an investor-friendly environment and that African economies are characterized by persistently low wages and labor costs, and African economies have not maintained capital controls, so capital inflows and outflows remain easy.
It also does this by underpinning an export-led growth strategy, even in economies that are unable to produce and export adequately, leading to a deterioration in the balance of payments of those economies.
• Debt crisis cannot be avoided without focus on growth
As long as policymakers set aside the importance of growth, we must forget about Africa’s ability to emerge from its debt crisis. Yet despite this, “neoliberalism” (an ideological idea based on economic liberalism) systematically created a framework that prevented African governments from focusing on growth.
• Repeal the neoliberal model
The focus of neoliberal policy reform is not suitable for Africa, because African governments have used the same initial argument in pursuing a mixed economy – the government plays a leading role in the economy, not only as an arbiter, but also in promoting and even promoting the expansion of productive capacity.
Desperate steps to restore broader economy
In turn, economist Ali Hamoudi said in an interview with Sky Arab News, “African countries have been facing financial difficulties for many years, due to unexpected domestic expenditures leading to increased borrowing, debts in some African economies have accumulated, and African countries have had to sue. Like defaulting on or threatening to default on external debt, this is a desperate move to restore overall economic and debt sustainability.
For example, six countries, Chad, Eritrea, Mozambique, the Republic of Congo, South Sudan and Zimbabwe, will be classified as bad debts in 2021 as African governments issued a record $7.5 billion in sovereign bonds, 10 times more than in 2016 in international currencies The IMF downgraded Zambia and Ethiopia from junk to junk.
High global inflation and high borrowing rates, combined with a stronger dollar, have made debt repayments and financing more difficult this year, leaving Ghana, Malawi, Zambia, Tunisia and Egypt, according to Hammoudi.
Economist Hammoudi added: “I am not surprised to see some African countries defaulting on their external debt. Most of these African countries have high debt-to-GDP ratios and they spend a greater proportion of their income on repayments Debt, that’s not sustainable, and they’re expected to reach a point of disequilibrium where they can’t service their debt.”