Before the year 2020, about 40 percent of sub-Saharan African countries were already in or at risk of a debt crisis. The region began to experience its worse economic crisis owing to variety of factors. Chief among these factors that has plunged the continent in a debt web is “overborrowing.” However a recent report further indicates that African countries face another debt crisis.
In the wake of the COVID-19 (coronavirus) pandemic, the region went on track for a record 3 percent economic contraction in 2020. According to the International Monetary Fund debt-to-GDP ratios have doubled over the last decade to 57 percent. Almost half of the developing countries in the world are in Africa and most developing countries in the world face a shortage of capital.
Ironically, there is a strong presumption that foreign savings can and should be utilized to augment the stock of capital over and above what could be provided by domestic saving, making the typical developing country a net foreign borrower. More so, a vast majority of African countries have not been able to generate a sufficient increase in output and in particular export earnings, to be able to meet their debt obligations.
However, policymakers, analysts and investors have said that Africa will need more long-term help than what the latest G20 debt plan offers them to ward off trouble and keep much-needed investments coming in. For countries like Zambia and Angola or Ghana, that are in a fragile spot right now. Roberto Sifon-Arevalo, Managing Director of S&P Global Ratings Sovereign Group beckons for “something much more profound and deeper and holistic than” the current debt approach of the G-20.
According to the report, Vera Songwe, executive secretary at the United Nations Economic Commission for Africa warned that “in 2021 a robust liquidity and structural response, recovery and reset toolbox must be developed in partnership between emerging markets, the private sector and the G20.”
However, Songwe is pushing for measures to unlock $500 billion (£378 billion) to help avoid leaving lasting scars due to prolonged funding gaps in the poorest economies.
What Africa can do differently.
There are a number of things sub-Saharan Africa can do to mitigate its debt crisis. The region needs to begin to involve policymakers to not only look inward to come up with fantastic economic solutions but also ensure the systematic execution of such plans. Many African countries affected are heavily endowed with natural resources that have been solely depended on for economic liberation. The over-dependence on one economic source of income has restricted the economic possibilities of these countries.
Therefore, economic diversification is critical for sub-Saharan Africa. Instead of seeking for more debt reliefs, African governments and policymakers should structure their economies with Small and Medium Enterprises (SMEs) at heart. SMEs are the actual drivers of the economy and employ over 65 percent of Africa’s workforce. Governments in the region need to provide adequate stimulus in the economy to encourage an enabling business environment for SMEs.