The African Debt Crisis

Assessing both the macro- and micro-economic levels of the contemporary African Debt Crisis, this book, first published in 1989, begins by looking at the origins of the world debt crisis, and then looks closely at the problem as it affects Sub-Saharan Africa. The effects of debt on Africa’s position in international relations are considered, and the roles played by organisations such as the International Monetary Fund and the World Bank are assessed. The authors also examine the local effects in a series of case studies of various states including Nigeria, Ghana and Sierra Leone, the Francophone States and Zaire.

Borrowing is a crucial source of financing for governments all over the world. If they get it wrong, then debt crises can bring progress to a halt. But if it's done right, investment happens and conditions improve. African countries are seeking calmer capital, to raise living standards and give their economies a competitive edge. The African debt landscape has changed radically in the first two decades of the twenty-first century. Since the clean slate of extensive debt relief, states have sought new borrowing opportunities from international capital markets and emerging global powers like China. The new debt composition has increased risk, exacerbated by the 2020 coronavirus pandemic: richer countries borrowed at rock-bottom interest rates, while Africa faced an expensive jump in indebtedness. The escalating debt burden has provoked calls by the G20 for suspension of debt payments. But Africa's debt today is highly complex, and owed to a wider range of lenders. A new approach is needed, and could turn crisis into opportunity. Urgent action by both lenders and borrowers can reduce risk, while carefully preserving market access; and smart deployment of private finance can provide the scale of investment needed to achieve development goals and tackle the climate emergency.

Since the 1970s, African nations have faced chronic economic stagnation, increased poverty, debt and growing inequality among the classes. This book examines attempts to alleviate these problems by such bodies as the World Bank and the International Monetary Fund (IMF), to name a few.

July 1996 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.