Effective approaches to tackle debt burdens and build economic resilience – thoughts from a panel discussion

Evaluation Week, session on “Debt burdens and the economic resilience of African countries: Effective approaches for international financial institutions”, 30 September: At the very moment when Africa needs to build back better after the COVID-19 pandemic, its public finances are heavily constrained. The fact that 23 African countries are currently suffering from, or are at risk of, debt distress strongly indicates the severity of the economic challenges countries on the continent face. 
On the third day of Evaluation Week 2022, a panel of experts and evaluators shared their perspectives on debt management and economic resilience initiatives. It also looked at evidence drawn from evaluations that can inform future debt relief strategies. The 160+ participants learned from interventions and discussions by key policy-and decision makers and analysts in the field. 
Eric Ogunleye, Acting Division Manager, Policy Management at the AfDB, moderated and opened the session, informing participants that many African countries today face the challenge of debt distress. Looking at how the Bank will support countries in debt distress, Mr. Ogunleye noted: “As the Bank is preparing its next Ten-Year Strategy, this session will form a critical part of that process. What evaluation will do is look at the evidence to design the most effective response to the challenges that the African countries are facing.”
A different and more challenging composition of Africa’s debt
Abdoulaye Coulibaly, Acting Director of Macro-Economic Policy, Forecasting and Research at the AfDB, provided a comprehensive overview of the nature and levels at which countries are facing debt distress. He told participants that Africa’s gross public debt rose from 36% to 71.4% of GDP between 2010 and 2020. According to Mr. Coulibaly, overlapping challenges brought about by the COVID-19 pandemic and global market volatilities are adding vulnerabilities to African economies, with the debt to GDP ratio likely to increase by 15% in short to medium term.
Mr. Coulibaly highlighted that debt restructuring initiatives by multilateral and bilateral partners like the Paris Club faced several challenges, as the composition of debt in African countries has changed significantly. While multilateral debt has remained relatively stable at 32%, the proportion of Africa’s debt owed to private creditors more than doubled from 17% in 2000 to 39% in 2019. Meanwhile, bilateral debt has halved to about 27%.

Figure 1: Proportion of Africa’s debt per creditor

Source: Presentation by Abdoulaye Coulibaly, Acting Division Manager, Policy Management at the AfDB, during Evaluation Week 2022

Several African countries assessed by the World Bank’s Debt Management Performance Assessment (DeMPA) performed below average, which Mr. Coulibaly said indicated that their public debt management and governance systems are not (fully) effective. The opacity of debt is a critical issue in Africa, despite the attempts by International Financial Institutions (IFIs), particularly, the World Bank, to track debt at the country level. Therefore, building capacity to manage debt sustainably is seen as imperative. 

“Going forward, economic diversification is important,” noted Mr. Coulibaly, as countries with a diversified economy are less at risk of a debt crisis. The AfDB views debt from a holistic perspective that considers countries’ specificities. There is a particular concern for countries in a fragile context where security challenges weigh heavily on expenditures. The AfDB supports debt management through capacity building at the country level and through technical assistance to implement a national risk assessment framework and Debt Management Strategy. A holistic and collaborative assessment is necessary to tackle intertwined issues relating to governance, political and economic policies of a country. 

As the floor opened to the panel discussion, Jason Rosario Braganza, Executive Director of the African Forum and Network on Debt and Development, expressed a growing concern for the human dimension of the debt crisis, adding that he believes it is yet to be felt. “Are we undermining the benefits of exploiting Africa’s growing young population (often termed the “youth bulge,”) by saddling them with a significant debt burden?” asked Mr. Braganza. He also noted that from a civil society perspective, “we are seeing the lack of a holistic framework for all the creditors to sit around the table to discuss how best to restructure debt and allow for the fiscal space to grow.” 
Mr. Ogunleye asked what roles the AfDB and other IFIs should take to assist countries to remain resilient in the face of these heavy debt burdens. Victoria Chisala, Acting Director, Corporate Strategy and Policy at the AfDB, told the panel that there is a lot that multilateral development banks are doing. “We, in particular, are strengthening our ability to provide additional financing, as well as analytical work and other support, and we use our good standing with governments to improve governance practices.” In addition, Ms. Chisala argued, the AfDB supports key sector reforms with policy dialogue and technical assistance. “In our next Ten-Year Strategy, there will be a strong focus on helping African countries manage their debt sustainably,” she added. The AfDB has committed to promoting debt sustainability, which effectively means that there is a limit to the amount it can lend to a country in debt distress. It also helps countries obtain cheap finance and manage their debt productively. However, Ms. Chisala argued that African countries must have the necessary knowledge to do this. She noted that evaluations could identify policies and strategies that have succeeded in relieving countries, adding that the AfDB needs to produce effective knowledge products for countries to draw on. 

From a global perspective, Jeff Chelsky, Manager for Country Programs and Economic Management Unit at the World Bank’s Independent Evaluation Group, agreed that proper financial management was the key to tackling the debt crisis. He reminded participants that the resurgence in debt occurred well before the COVID-19 pandemic, adding that debt is a structural problem, and it would be wrong to tackle it from the perspective of the contextual global Covid crisis. Evaluations by the IEG showed that a lack of quality public investment management was one of the common elements in countries crippled by debt. “Public financial management and public debt management are generally discussed separately […], but when it comes to resources, it matters what you spend money on. While development partners stepped up strongly to support public debt management, there was a lack of coordination for capacity building for public financial management and most clearly public investment management”, said Mr. Chelsky. (See his article “Debt Déjà-Vu: Could Africa Have Seen This Coming? – What Evaluation Tells Us” in this edition).
A stitch in time saves nine. The key lesson on debt burden management from IEG evaluations, according to Mr. Chelsky, is that countries need upstream preparation. They need to identify weaknesses in public finance management and assess risk. This assessment should figure prominently in the country’s framework and strategies to enable priorities such as budget support. 

Mr. Coulibaly noted that the issue of debt in Africa is structural. Countries have lost 40% of their budget and need to increase public spending to deal with the post-COVID-19 challenges. In addition to the assessments and frameworks described by Mr. Chelsky, he felt that countries need to set aside resources to manage their public finances to deal with unexpected crises, particularly those rich in raw materials. 

Mr. Braganza highlighted that, at the continental level, there are some good initiatives like the African Central Bank, the African Monetary Fund, and the African Continental Free Trade Area, which can enable a Pan-African agenda that moves countries up the value chain and creates some sort of domestic market for resource mobilization, as well as domestic access to finance. “We should look at utilizing institutions like the Pan-African Parliament, together with, for example, the AfDB’s African Legal Support Facility, to create a robust framework that guides how public debt is negotiated, procured, managed, utilized, and serviced,” said Mr. Braganza. 

A better understanding of debt
Mr. Ogunleye highlighted  the importance of making debt work for the countries and ensuring  transparency in terms of the conditions, and “ensuring that we change the story presented to us where we see a move from concessional loans to commercial loans that are not sustainable for the countries.”
Responding to a question about what factors good debt management for Africa should have, Mr. Braganza noted that firstly, we should not only look at debt in terms of what is lost in the tradeoff between debt payments and spending on social programs, for example. “We need to better understand debt and its role in public expenditure by looking at debt as part of public financial management and how much of a budget is financed by debt. This includes current expenditure as well as development investments,” he said. Secondly, Mr. Braganza reiterated previous points about the structure of many African economies, characterized by low value and low supply chains, that struggle to compete and generate revenues commensurate to the type of debt being borrowed. Thirdly, Mr. Braganza argued, it is also a governance issue: “How do we integrate the role of parliament, the role of the auditor general, public accounts committees, or the judiciary in some cases in issues of public debt?”. He also noted that the legal frameworks governing how governments are borrowing haven’t really changed much in the last 30 years. The emergence of commercial creditors can make issues of debt relief complicated.

As Mr. Ogunleye wrapped up the session, he highlighted a crucial point about understanding the current debt crisis in Africa: “Debt itself is not a problem. It is the quality of the debt and its use that pose problems. So, we need to think about how we can make debt work. There are no countries that don’t borrow and that don’t owe a debt. So, the question is not whether you are borrowing but what the terms are of your loans and whether you are using these loans to invest for your current population and future generations”.