“Debt servicing costs have risen, reducing the previously available space for priority spending for development; the increasing reliance on costly internal financing is deepening the ties between banks and sovereign entities, generating new risks,” the report on the Regional Economic Outlook for Sub-Saharan Africa states.
In the document, released today during the Annual Meetings of the IMF and the World Bank in Washington, the IMF points out that African banks hold more sovereign debt of the countries they operate in, “and are increasing more rapidly in Sub-Saharan Africa than in the rest of the world.”
The danger, they point out, is the creation of a vicious circle: “The deterioration of the state’s credit quality undermines the solidity of the banking sector, which may reduce the already limited availability of private credit, affect economic growth, and may also lead to potential bank bailouts, trigger capital outflows, and exert pressure on the foreign exchange market.”
All these factors, in turn, may exacerbate budgetary challenges, IMF economists argue.
Local financing was the solution found in recent years by African governments, who have been cut off from international capital markets following the pandemic due to rising interest rates, compounded by the reduction of international development aid.
The best solution, the international financial institution argues, is to resort to concessional financing, that is, with long repayment terms and low interest rates, and to ensure, in any case, the protection of essential services such as health, education, and humanitarian action.
In an interview with Lusa, the deputy head of the regional studies division of the IMF’s African department, António David, admitted that “the transition to a larger share of domestic market financing brings advantages,” including protecting against foreign exchange exposure, but considers that the dangers seem to outweigh the advantages.
“Domestic debt tends to be more expensive, with higher interest rates and it has some negative macroeconomic effects, such as reducing the availability of credit for the private sector, which impacts economic growth and development, and it brings foreign exchange risks, because when there is a currency depreciation, the debt automatically increases,” said António David, one of the main authors of the IMF report.
Asked why this happens, given the disadvantages, the economist explained that “many (African states) do not have access to the international Eurobond market.”
“There are less than 20 African countries that can access it; they can have direct loans, or syndicates [loans from several banks together], but they are in limited number, and therefore resort to domestic financing,” he mentioned.
