After close to 24 months without African economies being able to go to the global financial markets to raise debt due to high interest rates, Côte d’Ivoire, Benin and Kenya have made a return in early 2024 raising $4.85 billion. But the World Bank now warns that escalating tensions in the Middle East risk reversing this new access and dampening investor appetite for frontier market debt. The World Bank Chief Economist for Africa Andrew Dabalen spoke to Julians Amboko.
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The April 2024 Africa Pulse Report talks about a rebound in Africa’s economic growth momentum with 2024 expected to register 3.4 percent expansion. The same report talks about the rebound being fragile. It sounds like a mixed bag. From a risk standpoint, is the Bank largely skewed to the downside seeing more headwinds in 2024 or is it skewed on the upside seeing more tailwinds to proper growth?
The recovery that you have picked up on is primarily driven by private consumption because of declining inflation boosting household consumption. The other two drivers are investment and government consumption, and we see but they are largely subdued. Investments are subdued because of high interest rates while government consumption is subdued because of fiscal consolidation.
Risks, unfortunately, are mostly tilted towards the downside and for two reasons – one is external, being slower than expected global economic growth especially if activity in Europe and China gets subdued, and the other is domestic, being unresolved conflicts and violence in the region which are compounded by climate risks.
The World Bank has expressed concern about the growing proportion of revenues that African economies are spending in debt service and cites this as a “liquidity challenge”.
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Some have argued that the present debt crisis in Africa is fundamentally a solvency and not liquidity issue. How do you assess the situation?
For some countries it was definitely a solvency problem, they simply could not pay the debts and it was pretty clear. For many countries, it is a liquidity issue.
These countries could pay their debts but it is just that they did not have the cashflow at the time when the bills fell due and, in particular, when bills are due in the form of very large bullet payments, billions of dollars due all at once. Typically, what happens is that, if a country that is facing liquidity problems gets hit by a major global shock it is not then inconceivable to see liquidity challenges turning into solvency problems and that is the main worry.
That is why we always call for these countries in need to access funding that is cheap which provides liquidity and does not add too much to their debt burden.
Is the funding squeeze behind us? In 2024, we have seen Côte d’Ivoire, Benin and Kenya return to the global financial markets with Eurobond issuances after close to a 24-month hiatus. Can African economies, especially those with large maturities this year such as Egypt, heave a sigh of relief and say that the markets have finally reopened?
I wish we could say that but I doubt it, the funding squeeze is definitely not behind us. In 2023, African countries spent 47 percent of their revenues on debt service, that is money that is not available at all for core development like education, health and infrastructure expansion. Unfortunately, other sources of financing have also dried up.
Foreign Direct Investment, which ideally if you could get a lot of it would not be adding to debt, has been declining and there is no end in sight that indeed it could turn the corner.
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Loan disbursements from China, which has been a major source of financing, has also slowed down substantially and then private creditors have basically locked these countries out of financial markets. You mention Côte d’Ivoire, Benin and Kenya going back to market, but they are coming at a very high cost and it is very expensive.
For a lot countries that are not a Côte d’Ivoire, or a Benin or a Kenya, the premium is at 12 percent and they are not able to access the markets.
Would the developments around escalating tensions in the Middle East impact this newfound access by African economies?
Yes, it would. The thing that we are watching the most is what’s going on in the Middle East, there has been a significant escalation of conflict there. What we worry most about that is the possibility that the price of oil will rise and if the oil prices go up this could really fuel inflation and keep interest rates very high in the US and Europe, which will then lead to currency depreciation and devaluation and ultimately lower growth.
Speaking within the context of the prevailing debt crisis and the 2024 Spring Meeting in Washington DC, are you optimistic that these meetings will yield something tangible by way of the sticky issue of comparability of treatment among creditors and accelerated debt distress resolution for countries in default?
The recent Zambia debt-restructuring deal is indeed a hopeful development, but it has taken a very long time. It demonstrates what happens when there is no international mechanism to deal with sovereign debt problems. For individuals and corporates, we have bankruptcy laws. We unfortunately do not have anything recognizable for sovereign debt.
The G20 Common Framework was supposed to provide such a mechanism but it has so far failed to meet expectations. We have called for the G20 Common Framework to work better and this can be done through a few principles one of which is to bring official and commercial creditors into the room all at once to negotiate instead of having sequential negotiations that drag the process.
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You could also just have a formula upfront that is very transparent which all creditors can use for comparability of treatment to ensure some form of equal burden sharing. This too can really speed up the process. Meanwhile, when countries come to the Common Framework for resolution, it will be important during that period to suspend debt service payments.
The World Bank is calling for “transformative policy action to build fiscal buffers”. In a year where we have 18 elections across the continent, does the Bank expect robust fiscal consolidation to be undertaken across Africa, considering the political sensitivities of expenditure rationalisation and raising taxes?
It is really important to have better and transparent budgeting processes so that you know what you are spending the money on and how efficient it is. There is no escaping the important of domestic resource mobilisation and this can be designed around strengthening tax administration, broadening the tax base and improving efficiency without necessarily burdening the most vulnerable.
Dabalen bio
Andrew Dabalen is the World Bank’s Africa Region Chief Economist since July 1, 2022, responsible for providing guidance on strategic priorities and the technical quality of economic analysis in the region, as well as for developing major regional economic studies, among other roles.
He has held various positions including Senior Economist in the World Bank’s Europe and Central Asia Region, Lead Economist and Practice Manager for Poverty and Equity in Africa and most recently, Practice Manager for Poverty and Equity in the South Asia Region.
His research and scholarly publications focused on poverty and social impact analysis, inequality of opportunity, program evaluation, risk and vulnerability, labour markets, and conflict and welfare outcomes. He has co-authored regional reports on equality of opportunity for children in Africa, vulnerability and resilience in the Sahel, and poverty in a rising Africa.
A Kenyan national, Dabalen holds a master’s degree in international development from University of California – Davis, and a PhD in Agricultural and Resource Economics from University of California – Berkeley.
