- The IMF counsels that successful debt stabilization requires measures to strengthen public finances and institutions, alongside pro-growth structural reforms and a sound macroeconomic environment.
- Fiscal adjustment is likely to result in stronger, more durable reductions in debt when complemented by pro-growth structural reforms and by measures to strengthen institutional frameworks.
In the context of high global uncertainty, tighter global financial conditions, and rising borrowing costs, concerns about sub-Saharan Africa’s debt vulnerabilities are mounting. But the region is tackling this issue head-on and public debt ratios have stabilized on average.
Our analytical note in the International Monetary Funds (IMF)’s latest Regional Economic Outlook for sub-Saharan Africa uses a new data set to highlight when, how often, to what extent, and how debt stabilization was achieved.
Surprising frequency
Contrary to perception, countries in the region have often been able to stabilize or reduce their debt ratios without debt restructuring. With more than 60 debt reduction episodes (defined as periods of two or more years during which the public debt-to-GDP ratio fell), the probability that a country will experience such an episode in any given year is one in four. And these episodes have occurred even amid an unfavorable external environment, including in the aftermath of the commodity super cycle and in the wake of the COVID-19 pandemic.
The debt decline in many cases was economically significant and persistent: most episodes involved a decrease of more than 10 percentage points of GDP, and almost half of those episodes lasted four or more years. For example, the Democratic Republic of Congo’s debt ratio fell by 15 percentage points of GDP during 2010–23, and Cabo Verde’s debt ratio decreased by more than 30 percentage points over 2021–23.
Sustained debt reduction typically reflects both budgetary consolidation and real economic growth. Often these two drivers go together—budgetary consolidation (that is, an increase in primary balances) is itself more likely when growth is rapid. In fragile and conflict-affected states, however, as well as low-income countries, growth is the predominant driver of many successful reductions in debt.
Securing success
Debt reduction is more likely, more significant, and more persistent if three conditions hold: the country has a solid domestic institutional framework and enjoys a supportive domestic business environment; global growth is buoyant; and global borrowing costs are low. A debt decline is also more likely when an IMF-supported arrangement is present, pointing to the importance of international financial and policy support. Relatedly, budget consolidation must be sustained over time to translate into debt consolidation. While exchange rate stability can support successful debt stabilization, maintaining an overvalued exchange rate can prove counterproductive since it is likely to lower growth and hamper overall macroeconomic stability.
By way of example, in Mauritius, a favorable domestic and external environment, solid growth, and a stable currency saw a reduction in the debt ratio of almost 20 percentage points during 2003–08.
The road ahead–IMF counsel
The key message for policymakers is that fiscal adjustment is likely to result in stronger, more durable reductions in debt when complemented by pro-growth structural reforms and by measures to strengthen institutional frameworks. Such measures should include well-designed fiscal rules to ensure that off-budget fiscal operations do not undermine debt reduction. Efforts to cut debt are also more likely to prove successful in a context of macroeconomic stability, including low and stable inflation.
Countries aiming to sustainably reduce debt should seize the opportunity to tax and spend more efficiently. The focus should be on strengthening fiscal balances in a growth-friendly manner by broadening the tax base, removing inefficient tax exemptions, and ensuring that money is well spent.
Support from the international community, including through technical support but also through concessional financing, is critical to helping the region succeed. Most countries—especially fragile states and low-income countries—face difficult trade-offs between short-term macroeconomic stabilization, longer-term development needs, and making reforms socially acceptable. External support can make these difficult trade-offs less daunting.
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