New Telegraph

FDC: Debt crisis looms in Africa

African economies are at risk of a debt crisis as their ability to service their already huge external debts remains largely constrained, Financial Derivatives Company Ltd (FDC) has said. The firm, which stated this in a report obtained by New Telegraph, noted that although the G20 group of nations last year helped to defer up to $5.4 billion of Africa’s external debt into 2021-24 under its Debt Service Suspension Initiative (DSSI) “external borrowings by African countries have maintained an upward trajectory highlighting the risk of a looming debt crisis in the continent.”

Noting that not less than six countries had visited the international debt market so far, this year, as low tax revenue and the need for sustained economic support measures raised the need for new lines of credit, the FDC said: “Africa’s external debt is projected to reach a record high of over $1 trilion in 2022, which could push the external debt to GDP ratio above 40 per cent, an 18-year high.” According to the firm, “in H2’21, the International Monetary Fund (IMF) listed six countries that were already in external debt distress (Congo- Brazzaville, Mozambique, Sao Tome and Principe, Somalia, Sudan and Zimbabwe).

“In the absence of new debt relief measures or an extension of the DSSI, there is a high risk that 15 more countries (including Cameroon, Ethiopia, Ghana and Kenya) will join the list of debt distressed nations, according to the IMF. This is due to the high risk of sovereign defaults upon the expiration of the debt moratoriums.

Zambia emerged the first African nation to record a sovereign default in November 2020 and Angola is teetering on the brink, with sovereign external debt above 100 per cent of GDP.” FDC further pointed out that, while prior to the outbreak of the Covid-19, many of African countries were already heavily indebted and running large fiscal and current account deficits, the huge revenue shortfalls that they recorded despite rising fiscal expenditures, coupled with pandemic-induced economic disruptions, pushed many of the countries to request for financial assistance from multilateral organizations such as the IMF and the World Bank.

In addition, the firm said: “Africa’s rising external debt is negative for investor confidence due to the attendant rise in the already huge debt service burdens in many countries. With many countries still severely constrained in their ability to meet up with debt repayments, there is the risk of exchange rate instability and credit rating downgrades.

“Many African countries already had their credit ratings downgraded in 2020 due to increased debt default risks. New external debt borrowings, in the absence of additional debt relief measures, will put these countries at risk of further credit rating downgrades. However, distressed countries are likely to start seeking debt restructuring, which will improve their fiscal outlook. Also, countries may be compelled to introduce fiscal consolidation measures, which could dampen the current nascent economic recovery.” New Telegraph reports that, in June, the African Development Bank (AfDB) warned that there is a heightened risk of defaults on the African continent as a result of the COVID-19 pandemic, which has led to heavier debt burdens while worsening poverty and widening inequality.

AfDB President, Akinwumi Adesina, said then that “if there is no debt relief and restructuring, many more countries will slide into debt distress.” According to experts, the continent’s biggest economy, Nigeria, could be one of such countries given its rising debt service to revenue ratio. In a recent presentation, Africa Tax and Legal Services Leader, at PwC Nigeria, Mr. Taiwo Oyedele, stated that if Nigeria’s soaring debt service to revenue ratio is not checked, the country could be heading into a debt trap as the time would come when the revenue it earns will not be enough to service its debts.

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