Pressed with a series of unprecedented shocks, Sub-Saharan Africa faces severe financing drought that poses a threat to economic growth and long-term development. Evidently, countries in the region face loss of external capital market access, capital outflows, decline in official development assistance, adverse effects of Russia-Ukraine war- particularly in food prices and for fuel importing countries, and lower inflows from China and other financing sources. More specifically, Eurobond issuances for the region declined from $14 billion in 2021 to $6 billion in the first quarter of 2022. Since the US Fed began its hiking cycle, African sovereign eurobond issuance have been quiet, especially in 2023 with no issuances during the second quarter of 2023. The domestic market is also experiencing higher financing costs mixed with lower investor confidence, making it an expensive alternative funding source. The outlook of the region therefore trends downwards, but how was this drought created and what could be the way out?

The tailwinds

The period between the early 90’s and mid 2000’s could be classified as the era of market opening for the region as the political space opened and high volumes of aid flooded into the region. This led to significant improvement in development indicators and economic growth. Debt relief schemes from official and multilateral creditors packaged in policies like the Heavily Indebted and Poor Countries (HIPC) and Multilateral Debt Relief, made significant contributions in creating fiscal space and opening the region up for growth. This increased confidence and investment opportunities in the region and directed quite a lot of financing flows from both official and private sources. Without any doubt, the availability of this increased financing made it possible for governments to start addressing long lasting development needs in areas such as health, education, and infrastructure developments.

However, the consequence, after a decade of the financing flood was an increased level of public debt in most countries, putting many SSA countries closer to the edge. As at 2022, the average government debt as a percentage of GDP for the region, as reported by IMF, was 56.3%. Apart from Botswana, Democratic Republic of Congo, Equatorial Guinea, and Guinea whose government debt to GDP were 19.9%, 14.6%, 27.1%, and 33.4%, respectively, majority of SSA countries recorded between 40 -100% debt ratios, with Cape Verde, Eritrea and Mozambique recording as high as 127.4%, 163.8%, and 104.5%, respectively.

The headwinds

The shockwaves that followed were unpredictable – starting with COVID-19 pandemic which impacted the region’s outlook immediately and drastically. Private portfolio inflows turned into outflows and the sovereign spreads widened more than twice that of the global financial crisis era in 2008-09. Clearly there was inadequate finance to respond to the urgent pandemic related needs. Thankfully interventions in the form of debt service payment postponement by G20 bilateral official creditors and concessional lending by the IMF and World bank proved beneficial. According to IMF data, between 2020-2021, Africa received over $70 billion to provide a safety net to be able to curtail the pandemic damage.

Adding to the pandemic was Russia’s invasion of Ukraine causing heightened inflation and tightened global monetary policy rates which led to major risk adjustments which disproportionately affected Sub-Saharan countries because of lower credit ratings. The tightened financing conditions signaled a significant increase in borrowing costs both in domestic and international capital markets. By 2022, SSA countries’ interest payments as a share of revenue (excluding grants) tripled that of the median of advanced economies to arrive at a median of 11%. Structurally, a shift begun emerging in the region’s financing sources with budget aids declining, and inflows from China, which for a while became a significant source of financing, also following suit.

The impact

Inflows drying up is not only an immediate concern, but it has long-lasting implications for long term development. Insufficient funds mean governments’ job of protecting the most vulnerable will thin and resources for critical development sectors like health, education and infrastructure are likely to reduce, thereby curtailing the region’s growth prospects.  

What is more critical is that this funding squeeze comes at a time when the region is faced with elevated economic imbalances such as volatile inflation, high public debt to GDP, and depreciating currency against the dollar. The median inflation rate in the region was about 10% in February 2023 with 80% of SSA countries experiencing double digit food inflation. Public debt to GDP ratio increased and was largely driven by widening fiscal deficits, slower growth and exchange rate depreciation. Consequently 19 of the region’s 35 low-income countries are already in debt distress or facing high risk of debt distress. Moreover, the high import driven activity of the region and external debt, which is usually invoiced in dollars, worsen the already high inflation and public debt by weakening the domestic currency relative to the dollar.

Reflecting on the challenging environment, economic activity in the region remains subdued, with growth projected by IMF, to further decline from 3.9% to 3.5% in 2023, before rebounding to 4.1% in 2024. This is connected to trends in global recovery, subsiding inflation, and the winding down of monetary policy tightening. 

How will the current squeeze evolve?

It is of course uncertain how the depleting financing flows will evolve – will the case be that borrowing costs will reduce for the financial market to become more favourable? Or is the current difficult environment likely to persist? As the global fight against inflation persists and becomes more complicated, financial conditions will likely tighten, and considering how volatile the world has become relating to shocks, risk premium and borrowing cost are likely to increase.

However, great possibilities for SSA countries lie in considering their funding mix – the type and composition of their financing and resource mobilisation. Addressing development needs depends on revenue mobilization supplemented by borrowing from domestic or external markets, as well as any aids in the form of grants and concessional borrowing. According to the IMF, 79% of SSA government spending is covered by revenue mobilisation, 19% by borrowing, and 2% through grants or concessional budget support. The choice for governments lies in considering whether spending should be driven through public or private financing, from domestic or foreign funds, and either concessional or non-concessional.

Considering the level of public debt and inflation and the need for fiscal adjustment, consolidating public financing by increasing domestic revenue mobilization remains a priority. Additionally, effective and proactive debt management system which ensures that debt levels remain sustainable, and a consideration for debt reprofiling or restructuring using a well-functioning debt-resolution framework in cases where debt is unsustainable, like in Ghana, is vital in order to create fiscal space. Public-Private Partnerships represents a promising approach which offers the potential to mobilise private-sector capital, improve efficiency and innovation in infrastructure development. Undoubtedly, international assistance from official development donors and international financial institutions remains critical in addressing government’s’ financing constraints.

Conclusion

In this era of limited financing options which has potential long-lasting impact on development and growth, Sub-Saharan Africa (SSA) countries may have to prioritise domestic revenue mobilization, effective debt management systems and incorporating alternative financing methods, while stabilizing inflation and other key macroeconomic variables in order to regain investor confidence from both domestic and external capital markets.