Why Africa must build strong fiscal buffers to tackle debt sustainability challenges

Africa must strengthen its fiscal buffers and develop home-grown solutions to address the continent's persistent debt sustainability challenges, according to Prof Kevin Chika Urama, Vice President and Chief Economist of the African Development Bank Group (AfDB).

Speaking at the launch of the Debt Management Forum for Africa (DeMFA) in Nigeria, Prof Urama emphasized that, while global debt markets pose significant hurdles, Africa should learn from both internal and external experiences to craft effective strategies for sustainable debt management.

Despite notable GDP growth in many African countries, per-capita income growth remains insufficient.

Prof Urama highlighted that Africa must refocus on fiscal discipline, enhance public finance management, and promote investments that foster both short- and long-term growth.

“Strategic policy reforms to attract domestic and foreign investments could help reduce borrowing costs and alleviate the debt burden,” he said.

He noted that a shift from viewing debt as a sustainability challenge to seeing it as a tool for productivity and development is essential.

He stressed that debt could drive economic transformation if invested in strategic sectors like manufacturing, where policies such as local content and franchising could stimulate job creation and growth.

The AfDB expert noted that while Africa’s public debt-to-GDP ratio has stabilised, the cost of servicing debt has surged, diverting resources from critical infrastructure projects and hindering future growth.

With over 70 percent of Africa’s debt denominated in US dollars, high borrowing costs and exchange rate fluctuations exacerbate the challenges faced by many countries.

He said the continent’s debt service burden has risen sharply, with African countries spending an estimated $74 billion on debt service in 2024—up from $17 billion in 2010.

Private creditors now hold a significant portion of Africa's debt, complicating efforts to manage and restructure it sustainably.

“Moreover, the changing debt structure, with increased reliance on short-term debt, poses additional risks to long-term economic stability,” he said.

Prof Urama also pointed to global financial disparities, with African countries receiving a disproportionately small share of global financial support.

For instance, despite a global pandemic response package, Africa received just 5.1 percent of the IMF's Special Drawing Rights (SDRs) issued in 2021.

He said the African Development Bank is working with partners to push for reforms in the global financial system, advocating for more affordable, long-term development financing for the continent.

Prof Urama called for more strategic reforms, including increased replenishment of concessional funds, to address Africa’s financing gaps.

Meanwhile, project manager at the Debt Management and Financial Analysis System (DMFAS), Ricardo Murillo said that in the 1980s, the world witnessed the end of the gold standard, a pivotal moment that marked the beginning of a new financial era: the financialisation of global markets.

“This shift, however, was not without its challenges, as countries across the globe, especially in the developing world, began grappling with mounting debt burdens,” he said.

He noted that the Latin American debt crisis of 1982, the Mexican default, and other similar occurrences turned development goals backwards, derailing decades of economic progress in many low-income countries (LICs).

He stressed that debt servicing challenges are most pronounced in LICs.

For these countries, the struggle to service external debt often becomes a barrier to development, stalling crucial investments in health, education, and infrastructure.

Debt transparency, Murillo argues, is a key factor in averting such crises and building resiliency in these nations.

However, he noted that debt transparency allows for informed decisions by governments, financial institutions, and investors.

“It also helps the international community understand the true extent of a country’s debt obligations. For example, rating agencies and the general public rely on debt data to make sound decisions about a country’s financial health,” he said.

Adding, “Without transparency, countries are at risk of default, as seen in the debt crises of the 1980s, where currency mismatches, balance of payment (BOP) deficits, speculative bubbles, and capital flight were common causes of financial turmoil.

According to him the need for accurate, timely debt data was recognized in the 1980s with the rise of international technical cooperation.

“Since then, institutions like the World Bank (WB), International Monetary Fund (IMF), and United Nations (UN) have played pivotal roles in assisting developing countries,” he said.

The International Budget Partnership (IBP), Austin Ndiokwlu, emphasizes that transparent and accountable debt systems help ensure citizens can see the tangible benefits of government borrowing.

“This transparency fosters trust in government decisions and can spur equitable growth,” he said.

However, oversight is essential for this process to work effectively. Legislatures, supreme audit institutions (SAIs), and civil society organizations (CSOs) must be actively involved in debt management processes to ensure that borrowing decisions align with national development goals.

He noted that a critical component of this oversight is the ability of legislatures to review and debate government borrowing plans.

“This should be done at the pre-budget stage, with specialized committees tasked with monitoring borrowing and ensuring that public debt management aligns with the country's economic and social priorities,” he said.

The International Monetary Fund (IMF) and World Bank have both highlighted the importance of incorporating social and environmental factors into debt sustainability analyses (DSA).

These factors include gender equity and climate financing, which should be considered alongside repayment risks when evaluating a country’s debt obligations.

On another note, Kenneth Rogoff from Harvard University said that the evolution of debt management in middle-income countries and the lessons that can be applied to Africa.

He noted that the path to stability for African countries lies in reducing dependence on foreign debt, particularly in foreign currency.

“As seen in emerging markets like Brazil, Indonesia, and Turkey, deepening local debt markets and shifting to local currency borrowing have proven to be effective strategies for reducing vulnerability to external shocks,” he said.

Rogoff stressed the need for a new debt relief initiative, particularly in the wake of the 1990s’ Heavily Indebted Poor Countries (HIPC) initiative.

However, he also pointed out that debt write-downs must include all lenders, including private creditors like China, who have become major players in Africa’s debt landscape.