Instability and high debt weigh on Africa’s growth

In a wide-ranging feature, Byron Shoulton, Senior Global Economist, FCIA Trade Credit & Political Risk Division at Great American Insurance Company, discusses Africa’s growth prospects.

In past decades many African countries sought loans from international financial institutions such as the World Bank and the International Monetary Fund (IMF). As a condition for these loans, the lenders required African governments to institute painful market reforms. Those reforms were controversial. But after 2000, some began to yield dividends. On average, African countries’ real GDP grew by 2.5% throughout the 1990s, but between 2000 and 2010, that growth surged to 5%. Political stability deepened, too. Elections became routine in many countries.

However, behind the scenes vulnerabilities persisted. Many African countries continued to suffer a major deficit of democratic governance. The first decade of this century was a period in which western influence strengthened in Africa. Some countries made serious strides toward democratic consolidation. But in others, ‘strongmen’ pretended to favour multiparty politics to appeal to western capitals. In some countries, voting came to be seen as a meaningless ritual. Meanwhile, some governments did not share the dividends of economic growth in the boom years. Some presidents made bargains with powerful elites, extending them access to state largesse in exchange for not challenging their hold on power. Providing services to the wider public was treated as a low priority.

Shaking faith in democracy

Last year was a challenging one for much of Africa. A catastrophic civil war in Sudan, has displaced some seven million civilians and killed over 14,000. Attempts at mediation by Saudi Arabia have failed to stop the violence. Coups and civilian misrule across the Sahel have shaken faith in democracy as groups inspired by religious differences continue their terror campaign unchecked. They currently control territory in Mali, Burkina Faso and Niger, and threaten the densely populated and economically crucial coastal states in the Gulf of Guinea. The generals have sought to legitimise their power grabs in part by scapegoating France, West Africa’s former colonial power, which maintained troops in the region to fight militant religion-inspired groups. Over the last two decades 13 successful coups took place in Africa. Between August 2020 to November 2023, seven African leaders were toppled by their militaries. While these military takeovers have so far primarily occurred in a belt of instability that stretches from Niger to Sudan, the risk of broader contagion is real. In already fragile states, coups tend to reverse economic and political progress, so stemming their rise may be the most urgent task for Africa in the coming decade.

To do so, policymakers and analysts must better understand the shared dynamics that underpin these coups. In one sense, each coup has been different, driven by local problems. Some have emerged in response to government failures to control militancy inspired by religious differences. In Mali, for instance, before the ousting of President Ibrahim Boubacar Keita, in 2020, years of violence by groups inspired by religious differences, and a failed French-led military intervention to tackle the fighting, sapped public trust in the government, providing an opening for the military. Unchecked violence inspired by religious difference also paved the way for Burkina Faso's coup in 2022.

Yet in coups in Guinea and Gabon in 2021 and 2023, respectively, such religion-inspired militancy was not a factor. In Guinea, which suffered under erratic dictators for decades, an elected president’s attempts to cling to power prompted a military intervention. In Gabon, blatantly rigged elections by a weakened longtime ruler provided the impetus for change. In Chad in 2021, military leaders used the opportunity opened by the long-ruling president’s death to appoint his son the head of a military council, and then jettisoned the promise to limit the council’s time in power. In Sudan, military leaders sought to consolidate their power in the face of a growing popular protest movement. The 2023 coup in Niger appears to have been an internal power struggle between the president and a military chief.

Belief in democracy remains

An annual survey by Afrobarometer found that citizens of almost every African state, including inhabitants of relatively stable East African and southern African countries, believed that their country was headed in the wrong direction.

The African Union (AU) has suspended the membership of countries that undergo coups, West African nations have imposed harsh sanctions, and European donors are cutting support. However, comprehensive surveys show that African citizens, even those who live in countries that have recently experienced coups, still have faith in democracy.

A recent UNDP study surveyed 8,000 African citizens, 5,000 of whom live in countries that have endured recent coups and 3,000 living in countries headed toward democratic consolidation. A full 67% living in solidifying democracies said that democracy was their preferred form of governance. But 55% of people in the countries now ruled by juntas also said they preferred democracy, nearly triple the amount who preferred nondemocratic rule. The finding that African citizens still have faith in democracy was also supported by a recent Open Society Foundation survey. Aggregating the views of 36,000 respondents worldwide, it found particularly strong support for democracy as a mode of governance among African respondents. Hence, African citizens’ apparent support for military juntas signals public fatigue with failed elites, not a distaste for democracy.

In 2023, Liberia bucked the trend towards both conflict and democratic decay. Twenty years following a brutal civil war that killed thousands, it held peaceful elections, its first without UN peacekeepers’ supervision, since the war. Despite a razor-thin lead by the challenger the incumbent president, George Weah, conceded.

Ivory Coast registered 6% GDP growth last year, fuelled by a construction boom that has transformed the capital Abidjan. Benin and Rwanda also experienced brisk growth.

On average, inflation on the continent stood at 16% in 2023, far higher than the global 7% average. In Nigeria and Ethiopia, Africa’s two most populous countries, inflation has topped 25%. Nigeria saw 10 months of consecutive inflation increases. Government debt levels have reached their highest, while economic growth across the continent barely exceeded population growth in 2023. Sub-Saharan Africa’s share of global GDP fell to just 1.9%, compared with its share of 18% of global population.

African democracy may not be dead, but it is ailing in important countries. Nigeria, Africa’s most populous country, elected a new president, Bola Tinubu, in March 2023. Power changed hands peacefully. Yet voting was marred by irregularities and only one in four Nigerians eligible to vote bothered to cast their ballots. President Tinubu has since introduced much needed reforms, notably ending exorbitant fuel subsidies.

South Africans who will head to the polls in 2024, are even more apathetic. Fully 72% of voters say they would surrender democracy to a leader who could deliver jobs and reduce crime. South Africa is enduring an economic crisis given the ruling African National Congress’s poor fiscal mismanagement, but it remains a democracy with robust institutions, including courts widely viewed as independent. These courts serve as a powerful guarantor of the country’s post-apartheid constitution, one of Africa’s most progressive.

Another hotspot, the Democratic Republic of Congo (DRC), experienced chaotic elections in December. While the sitting president claimed 76% of the vote, several opposition candidates are demanding a rerun. The electoral process was deemed flawed. Meanwhile, rising violence between the military and M23 mercenaries (backed by Rwanda) has displaced some 450,000 people. Some fear a full-blown war is brewing between both countries. The last time that happened, in 1998, it sparked a conflagration that caused three million deaths, mostly from disease and hunger touching eight states. The US and others are working to defuse tensions.

Spectre of debt distress

Amid rising violence and strains on democracy, a third worry haunts Africa, debt distress. Overall government debt in sub-Saharan Africa has risen to 58% of GDP, the highest ratio since 2001. The region’s external debt stock reached 44% of national income. It more than doubled in the decade to 2022, growing 72% faster than national income, according to the World Bank.

As central banks globally raised interest rates, the cost of servicing debt has ballooned. Debt servicing will require more than 20% of tax revenues in 19 African countries in 2024. This leaves less for spending on education, training, and healthcare.

Some countries made progress in 2023. Somalia received $4.5 billion in debt forgiveness. Zambia and Ghana, both of which are in default, struck restructuring deals on sovereign debts. Still, Zambia faced a setback in November when creditors led by China and France, rejected a proposal to restructure some $4 billion owed to private bondholders.

A big question looming over 2024 is how fast domestic debt, which has grown even faster than external debt in Africa over the past two decades, should be restructured. Large write downs would imperil the financial health of domestic banks which hold large amounts of government debt on their books.

Inflationary pressures persist

Inflationary pressures in Africa remain high, which coupled with high interest rates could continue to weigh on growth and investor confidence over 2024-25. This, alongside rising instability and militancy in the Sahel region, Sudan, and the DRC, is driving security risks in the region, heightening the prospects of instability. These conditions are disruptive to businesses, investments, and economic growth.

Africa’s debt-to-GDP ratio stands at 65%, 10 percent higher than the IMF’s maximum recommended limit. In 2017, the World Bank considered 15 sub-Saharan African countries to be in debt distress or at high risk of it; that number has since climbed to 23. The IMF and World Bank launched the HIPC initiative to cut the debt of poor highly indebted countries in 1996 and most of the 39 eligible countries received substantial debt write-off by the early 2000’s. Following the Somalia deal 20 years later, Eritrea and Sudan are the only eligible countries yet to complete the process.

In 2024, numerous African countries’ eurobond loans will come due, and governments will have to divert resources from essential services to debt repayments, a step that will inevitably anger citizens. For other countries, the risk of default is climbing. Wealthier countries have proposed steps to help alleviate these economic challenges. EU states, for example, pledged to recycle their allotment of IMF Special Drawing Rights to low-income countries to help them recover from the pandemic. According to African leaders, this help has been too slow in coming.

In a promising move, the US Treasury Secretary joined a June 2023 summit hosted by the French President to assess solutions to the debt crisis that plagues much of the developing world. Washington should urge the IMF to lengthen borrowers’ repayment periods and offer more concessional financing to poorer countries. Such moves may prompt China to seek goodwill by taking more concrete steps to help address African countries’ debt distress.

The IMF and the World Bank approved the debt write-off after Somalia reached so-called completion point following the implementation of 13 out of 14 requirements related to expenditure, tax collection, governance, statistics and poverty alleviation. As part of the deal, bilateral creditors have written off $3 billion in debt. The debt relief process, which has taken nearly a decade, marks a thawing of relations with the international community that has for 30 years viewed Somalia as a dangerous trouble spot. The UN Security Council recently lifted a 32-year embargo on arms shipments to the Somalian government.

For developed countries, investing in Africa is an act of enlightened self-interest. Working with African leaders to create opportunities for young people to thrive will carry benefits well beyond Africa. If population trends continue, by 2050, four in 19 people between the ages of 15 and 24 worldwide will be African. When the rest of the world is greying, young Africans will form a growing part of the workforce of the future. If the global economy is to remain dynamic, Africans require skills and resources necessary to help drive that dynamism.

“The fragility of the African governance agenda” by Nneka Okechukwu, October 2023. Produced by the Charter Project Africa