Due to multiple external shocks since the outbreak of the COVID-19 pandemic, sub-Saharan Africa (SSA) is facing acute debt distress and new highs in the cost of foreign capital. Concomitantly, the region needs to mobilize a stepwise level of financing to meet shared climate and development goals, under the Paris Agreement climate targets and the UN 2030 Sustainable Development Goals (SDGs).
Do SSA countries have the fiscal space necessary to achieve the Paris Agreement commitments and SDGs while also servicing their external debt?
A new working paper by Kevin P. Gallagher, Luma Ramos, Anzetse Were and Marina Zucker-Marques outlines the levels of sovereign external debt and service payments between 2023-2030 for SSA countries, finding the region urgently needs new forms of liquidity, concessional and grant finance, as well as comprehensive debt relief to meet shared climate and development goals.
Main findings:
- External debt in SSA has more than tripled since 2008, with the region experiencing the largest deterioration in debt sustainability indicators across the Global South.
- By 2021, total SSA debt stock amounted to $539.1 billion, of which a combined 40 percent is owed to bondholders and other private creditors, 28 percent to multilateral development banks (MDBs) and 11 percent to China.
- Debt service will take a significant share of government spending in SSA, with the average SSA country spending 12 percent of government revenue on external debt service. Angola, Zambia, Benin and Ghana will all spend 25 percent or more of government revenue to service external debts.
- SSA countries will face debt servicing costs in US dollars that are roughly the same (93 percent) as their climate finance needs on an annual basis. Only ten countries in the region have the borrowing space to finance those needs.
- MDBs will need to participate in comprehensive debt relief in a manner that maintains their preferred creditor status and AAA credit ratings. Given the low cost of borrowing from MDBs, we estimate that under a fair burden sharing among SSA creditors, MDBs should provide debt relief from $13.4 to $34.5 billion, of which the World Bank International Development Association would account for $2.4 to $11.1 billion, depending on the overall debt relief efforts necessary.
The bottom line: Debt relief is not a panacea, and SSA will need substantial additional resources in the forms of liquidity, concessional and grant finance to complement and bend down the cost of capital.