An address by Lesetja Kganyago, Governor of the South African Reserve
Bank, at the African Economic Research Consortium
Cape Town 02 June 2019
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Growing with Debt in African Economies Options, Challenges and Pitfalls
Good morning ladies and gentlemen. I would like to thank the African Economic
Research Consortium for inviting me to introduce this important topic. I hope you will
indulge me while I reflect the opportunities, challenges and pitfalls presented by debt
to developing economies in sub-Saharan Africa.
Economic growth in sub-Saharan Africa (SSA) has been improving from the low base
in the early 1990s and is set to continue. Real GDP is projected to pick up to 3.5% in
2019 and 3.7% in 2020. However, this remains well below the averages of the 2000s.
There are also growing questions about macroeconomic stability given the weakening
of fiscal positions in a number of low income developing countries (LIDCs) in recent
years. According to the IMF, debt burdens and vulnerabilities of LIDCs have risen
significantly since 2013, reflecting a mix of factors, including exogenous shocks and
loose fiscal policies.
This calls for a reflection on the role played by public debt in economic development.
It is broadly accepted that governments resort to borrowing because taxation alone
cannot provide sufficient funds for economic development. The challenge is to ensure
that debt financing is done in a sustainable way.
century, billions of dollars' worth of debt was wiped clean
At the turn of the 21st across
sub-Saharan Africa. South Africa was instrumental in pushing for debt relief and we
succeeded in late 1990s when the HIPIC programme was agreed through the
Development Committee of the World Bank and International Monetary Fund. At the
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time, the solution appeared simple wipe off the debt and allow countries space to
get their affairs in order and growth and stability will follow.
For a time, we saw significant improvements in the continent, with many countries
strengthening their macroeconomic frameworks and institutions. A number of
countries also gained market access. In 2018, international bond issuances in the
region reached a new high, totalling more than USD17 billion, with the average
issuance rising to nearly USD3 billion1. As the IMF has observed, SSA has been the
region with the fastest debt growth in recent years across a group of low income and
developing countries.
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In 2018, about 16 SSA countries were at high risk of debt distress more than double
the 2013 levels. Average public debt across the region rose close to 56% of GDP at
the end of 2018, with wide disparities in debt dynamics across countries. For example,
in 2018, public debt-to-GDP stood at 72% in Zambia and 100% in Mozambique. Debt
servicing costs have also risen sharply, with the median interest payment burden
doubling to about 10% of revenue between 2011 and 2018.
While debt levels is not as high as they were in 1990s, there is growing concern that
Africa is at risk of landing in debt traps once again.
"Growth in a Time of Debt", Reinhart and Rogoff argue that
In their 2010 paper, titled
high debt could create uncertainty, deter investment and innovation, and the literature
shows that it could have a negative impact on growth. I am inclined to agree with them.
In addition, unsustainable debt burdens and rising debt service costs crowd out
spending in key development areas such as education, health and infrastructure.
These were exactly the lessons learned during the African debt crisis of the 1980s and
1990s, and which justified debt relief. Consequently, badly managed debt could now
reverse some of the developmental progress made over the past twenty years.
The financial landscape has also been changing, not only because of easier global
financial conditions but also the increasing share of borrowing from non-traditional
lenders and the types of debt instruments in the market. The share of borrowing from
non-traditional lenders has risen to about 15% of global GDP. Financing instruments
such as collateralised sovereign loans are also gaining prominence. The terms of
these loans are often complex and typically only revealed after countries experience
debt distress as was seen in Chad and the Republic of Congo recently2.
borrowers' exposure to
This increased reliance on non-traditional creditors has raised
market risk, while at the same time posing additional challenges to the sustainability
of external debt in the region. For instance, in the case where countries find
themselves in debt distress, it may be harder to come to a rescheduling agreement
with a large number of private creditors than when you had, in the past, a relatively
small number of public creditors (Paris Club) or commercial bank lenders (London
Club). In Chad, for example, collateralisation also made debt restructuring more
complex since it reduced the room for manoeuvre for sovereign borrowers3. We can
also think of the problems recently faced in Argentina, where bondholders refused to
accept restructuring terms.
Data from the World Bank shows that the region's
foreign currency-denominated debt
as a share of total debt reached approximately 60% in 2017. Most of the increase in
foreign-currency debt can be attributed to the increasing issuance of Eurobonds. A
large amount of these Eurobonds are set to mature in 2019-2020 and in 2024-2025,
which may pose substantial refinancing risks in the foreseeable future, especially if
countries' fiscal positions remain weak4. Nearly 90% of the region's Eurobonds are
denominated in US dollars, which further raise currency and interest rate risks and the
potential for tighter global financial conditions in global settings clouded by significant
downside risks.
It is also important to consider fiscal risks posed by state-owned enterprises (SOEs).
In some instances, SOE liabilities have reached worrisome levels of 10% of GDP or
more in countries such as Cameroon, Ghana and South Africa, threatening
government's debt sustainability and potentially crowding out social spending
(Botswana, Cabo Verde, Madagascar)5. The dominance of SOE debt in the banking
system is a considerable financial stability risk in countries that don't have deep
financial markets.
These challenges also highlight the need for countries to strengthen debt management
practices and improve transparency, which is fundamental to sustainable financing.
Addressing these challenges would require countries to make tough fiscal choices to
prevent debt burdens from becoming unsustainable. Fast-growing countries that face
elevated debt vulnerabilities would also need to prioritise rebuilding buffers, including
through structural reforms and improvement in fiscal frameworks.
There is wide consensus that countries need to raise more domestic revenue to make
debt financing more sustainable. There also needs to be a greater focus on improving
the efficiency of public spending in such a way that it helps to improve economic
growth. While the primary responsibility for avoiding the build-up of unsustainable debt
lies with the borrower, creditors also have a role to play in encouraging greater
transparency. Irresponsible borrowing ultimately contributes to unsustainable debt
burdens.
In closing, I wish to reiterate that public debt has an important role to play in financing
development, particularly in augmenting government budgets. However, it should be
clear that debt is not a replacement for domestic revenue mobilisation. Meanwhile,
debt levels have to remain sustainable so as to not undermine market confidence. To
ensure that debt plays a meaningful role, it must be utilised for revenue generating
activities that increase the productive capacity of the economy.
Countries in the region could benefit from the slower-than-expected monetary policy
normalisation in major economies to build additional buffers, preferably aimed at
increasing fiscal space and setting development priorities on course. The international
community is eager to help. Early in May, the G20 called a high-level conference on
Sustainable debt for sustainable growth (the Paris Forum). The key objective is to
assist countries with debt management capacity and improve debt transparency.
The key conclusion of the Paris Forum was not to say that countries should borrow
less but that they should be assisted to "borrow smarter", by ensuring that borrowers
are equipped with expertise to understand their real needs, to secure good terms and
to effectively manage their debt, while holding creditors to higher standards on
transparency and sustainability.
I also want to take this opportunity to congratulate the AERC for continuing to have a
research programme that remains relevant for policy makers. Today's
policy-oriented
programme is filled with the right mix of policy practitioners and academics to give us
for food for thought.
Thank you