INSIDE AFRICA | MARKETS | GLOBAL ECONOMY
African economies are facing growing pressure from the rising cost of servicing debt, even as debt levels across many low-income countries have stabilized, the International Monetary Fund said Thursday, pointing to higher global borrowing costs and weaker access to financing as a growing concern.
The IMF said the pressure is increasingly a liquidity problem rather than a broad deterioration in debt ratios, with higher yields in advanced economies pushing up borrowing costs for emerging and developing countries.
“Where we see the pressures is more what we would call on the liquidity side,” Julie Kozack, the IMF’s Director of Communications, said during a press briefing, pointing to higher debt-servicing costs and reduced availability of financing, including the decline in official development assistance.
That shift has become increasingly important for African governments that are trying to finance infrastructure and public services while dealing with tighter fiscal conditions.
Senegal is one of the clearest examples.
The country is preparing to enter a new three-year IMF program worth about $2.2 billion as it works to restore the sustainability of its public finances. The government has also announced plans for debt treatment covering its external debt and said it intends to use the G20 Common Framework.
The IMF said the program can move to its Executive Board even while Senegal is still negotiating with creditors. That means IMF financing could begin helping the government meet immediate financing needs while discussions over the country’s debt treatment continue. But the IMF stressed that the G20 Common Framework does not prescribe a particular form of restructuring. Its purpose is to help creditors coordinate with debtors and ensure that any debt treatment is carried out in an orderly and timely way.
The current higher oil prices due to the ongoing Middle East conflict also complicate things for Senegal, which is already under a lot of fiscal pressure.
Kozack said rising oil prices are currently adding to the country’s fiscal pressures because Senegal still has untargeted energy subsidies. As oil prices rise, the cost of those subsidies increases, putting additional pressure on the budget.
The proposed IMF program is expected to focus on strengthening domestic revenue, controlling expenditure, improving debt management and creating more room for targeted social protection and private-sector growth.
The IMF’s comments come as global borrowing costs remain elevated. Global public debt is now close to 100% of GDP, its highest level since World War II, according to Kozack. Debt is expected to rise further, while 10-year government bond yields in major advanced economies, including the U.S, France and Japan, are at their highest levels in years.
Those benchmark yields matter well beyond the countries issuing the debt.
Many emerging and developing economies have spent years strengthening their policy frameworks and reducing the spreads investors demand to hold their bonds. But the IMF said those gains are now being partly offset by higher benchmark yields in advanced economies.
That often translate into higher financing costs for African borrowers, even when domestic debt levels themselves have not changed significantly.
Angola is taking steps to broaden its domestic investor base as it navigates that environment
The IMF said it supports Angola’s efforts to develop its domestic debt market and diversify the investors participating in it. The country is seeking greater foreign participation in its local bond market as it works to deepen domestic capital markets.
Kozack said continued credible debt management will remain important for Angola as it manages potential risks and seeks to maintain macroeconomic stability.
Angola’s stronger external position has been helped by higher energy prices, while growth has held around 3.1% and inflation has eased to about 10.9%, according to the IMF. That gives the country more room to develop its domestic market, but it does not remove the need for careful debt management.
The Democratic Republic of Congo presents a different picture.
The country’s public debt remains relatively low at about 20% of GDP, with external debt at around 13% of GDP. But the IMF said DRC has a low debt-carrying capacity, meaning the Fund continues to monitor its debt position closely.
The IMF recently completed reviews under DRC’s Extended Credit Facility and Resilience and Sustainability Facility, unlocking about $350 million in new financing.
DRC’s economy continues to grow at a relatively strong pace, supported largely by mining, but the government is also dealing with the Ebola outbreak, security pressures and significant financing needs.
These contrast between Senegal, Angola and DRC present three different important pictures for investors looking for potential investments on the continent. While the countries do not face the same debt burden or financing conditions, all three are operating in an environment where the cost and availability of capital are becoming more important to economic policy.
This pressure extends far beyond Africa.
The IMF, which will release a its newest forecasts for the world economic outlook and regional outlooks next month at its annual meetings, said the global economy has remained resilient despite the war in the Middle East and the resulting energy shock, with world growth still expected to be around 3%. But uncertainty remains high, while oil, gas, fertilizer and food prices continue to create pressure on economies.
At the same time, Kozack said the disinflation process that followed the 2022 cost-of-living shock has stalled, creating a difficult balance for central banks and governments around the world.
Central banks are urged to remain focused on price stability, while governments need to develop credible medium-term plans to bring down deficits and debt.
The IMF does not expect fiscal consolidation to happen overnight. But Kozack said governments need to show investors how they intend to reduce deficits and stabilize debt over time.
This matters for the U.S. as well as for emerging markets. Higher U.S. Treasury yields have raised the benchmark cost of borrowing globally because U.S. government debt remains central to the global financial markets. As those yields rise, countries that have already benefited from narrower credit spreads can still find themselves paying more to access international capital.
The result is a narrower margin of error for African economies.
African governments still need to invest, support vulnerable households and build infrastructure, but rising debt-service costs can absorb resources that would otherwise go toward those priorities, creating a financing squeeze.
A broader concern of the IMF as its assess the global economy environment is that as global borrowing costs continue to remain high, African governments will have to do more with less fiscal space.
