Last month, ahead of his ill-fated African tour, then US secretary of State, Rex Tillerson, warned African governments about the amount of debt they were loading up from China. In reaction, there was collective eye-rolling around the world, and especially in Africa, as China’s largest debtor seemed to be lecturing African countries, without irony, about the perils of taking on too much Chinese debt.
That said, African debt, regardless of where it comes from, was a key topic when I spoke with IMF Africa director Abebe Selassie at a Quartz/Invest Africa Q&A event for investors in New York. The IMF has cautioned African countries over the last six months of the risks of mounting debt which has been exacerbated over the last few years by falling commodity prices in some countries and by over-spending in others.
“What we are pointing to is the need to push back against this increase in debt,” said Selassie. For him and his colleagues, borrowing to build capacity is all well and good if governments spend wisely. “What’s really needed now is to try and capture the return on investments by those governments that invested in roads, electricity, water supply etc,” he said.
Ultimately, the IMF think there still hasn’t been a broadening of the tax base to collect more revenue in most of those countries as they try to diversify their economies away from over-reliance on commodities.
Selassie said he doesn’t see Chinese debt as any more significant than private capital market raises and eurobonds. “What is really important is transparency, the framework and what use the money is put to and very importantly, that it’s generating capacity, building executions so as to be able to service this debt.”
Some analysts have described the African debt situation as a ticking time bomb. In fact, an upcoming paper from Brookings argues the IMF and World Bank haven’t rung the debt alarm bell loudly enough and claims they won’t do so till at least one of Africa’s big five economies Nigeria, South Africa, Angola, Ethiopia and Kenya becomes debt distressed.
Among other metrics, the paper assesses debt dynamics or the sustainability of debt by looking at the difference between the debt interest rate and economic growth (r-g). By that measure, it clearly shows the cost of borrowing for most African nations far exceeds economic growth.
— Yinka Adegoke, Quartz Africa editor