How to Avoid a Debt Crisis in Sub-Saharan Africa

IMF News, September 26, 2023

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Public debt in the region has risen to levels not seen in decades.
The average debt ratio in sub-Saharan Africa has almost doubled in just a decade—from 30 percent of GDP at the end of 2013 to almost 60 percent of GDP by end-2022.
Repaying this debt has become much costlier: the region’s ratio of interest payments to revenue has more than doubled since the early 2010s and is now close to four times the ratio in advanced economies.
As of 2022, more than half of the low-income countries in sub-Saharan Africa were assessed by the IMF to be at high risk or already in debt distress.
The IMF paper identifies five policy actions to preserve fiscal sustainability while advancing development objectives.

Problem: Fiscal policy in most countries focuses excessively on short-term goals and lacks a clear medium-term strategy, leading to frequent breaches of fiscal rules and rising public debt.
Recommendation:
- Set explicit debt targets that integrate trade-offs between debt sustainability and development objectives rather than focusing narrowly on short-term fiscal deficits.
- Use the paper’s novel approach to estimate country-specific medium-term debt anchors to keep debt service costs manageable.
Key statistic: According to this methodology, the median debt anchor for the region is about 55 percent of GDP; slightly more than half of the countries were above their anchor at end-2022.

Finding: Most countries in the region will need to reduce their fiscal deficits in the coming years.
Quantified adjustment needed: For the average country, the amount of adjustment is about 2 to 3 percent of GDP.
Feasibility: Historically, countries in sub-Saharan African countries improved their primary balance by 1 percent of GDP a year over two to three years.
Heterogeneity:
- About a quarter of the region’s economies still have some fiscal space and can maintain or increase vital investments in human and physical capital.
- A few countries have very large adjustment needs; for them, fiscal consolidation alone may be insufficient and may need to be complemented by debt reprofiling or restructuring.

Observation: Countries tend to rely excessively on expenditure cuts to reduce deficits.
Recommendation:
- Give greater weight to revenue measures such as eliminating tax exemptions and digitalizing filing and payment systems.
- Mobilizing domestic revenue is less detrimental to growth in countries where initial tax levels are low.
- Expenditure cuts are particularly costly given the region’s large development needs.
Examples of success: Large and rapid increases in revenue have been observed in The Gambia, Rwanda, Senegal, and Uganda, which relied on a mix of revenue administration and tax policy measures.

Problem: Well-designed expenditure plans often underdeliver because of budgetary slippages and unforeseen fiscal risks.
Recommendations:
- Adopt a medium-term fiscal framework.
- Put in place tools to better assess and manage fiscal risks.
- Enhance controls over government expenditure during the budget implementation phase.
- Strengthen the legal budgeting framework, improve fiscal reporting, and empower audit and control institutions to reduce slippages and extra-budgetary commitments.

Premise: Sustainability of fiscal strategy depends on securing public support by linking measures to longer-term benefits.
Recommendations:
- Make public acceptance central to policy design through careful sequencing and compensatory measures.
- Implement communication campaigns that transparently and credibly outline long-term benefits, distributional consequences, and the costs of inaction.
- Convince the population that public funds will be used efficiently, fairly, and transparently.

By Fabio Comelli, Antonio David, Luc Eyraud, Peter Kovacs, Jimena Montoya, and Arthur Sode — September 26, 2023