The Debt Challenge to African Growth
For this to happen, four key areas will need special attention, depending on country circumstances. First, in resource-intensive countries, especially the region’s eight oil exporters, fiscal consolidation plans must be enacted without delay. This should be coupled with economic diversification, for which the recent recovery in commodity prices provides wider scope.
In much of the rest of the region, the required fiscal adjustment is more modest and can be achieved through steady increases in tax revenues. In most cases, there is potential to raise revenue by 3-5 percentage points of GDP over the next few years. Reaching this level will require broadening the tax base, streamlining exemptions, and strengthening the administration of value-added tax.
Third, efforts should be made to account for off-balance-sheet risks, improve debt-management capacity, and enhance data coverage of debt and debt exposure.
And, fourth, governments must improve prospects for private investment. For decades, public expenditures offset low levels of private investment. But, faced with growing public-debt vulnerabilities, it is unclear how long this trend can continue. Sub-Saharan Africa’s economies should orchestrate a transition from public to private investment by strengthening regulatory and insolvency frameworks, increasing intra-African trade, and deepening access to credit.
Sub-Saharan Africa’s public-debt burden has not yet hindered investment demand. On the contrary, as a measure of GDP, foreign financial flows to Africa are higher than those to emerging markets, and they come from a broader range of sources. So-called frontier economies have issued record levels of sovereign bonds, while bilateral creditors, like China, continue to invest heavily.
But, as we have seen recently, capital flows are fickle, and if Sub-Saharan Africa is to take full advantage of the current global economic upswing, policymakers must tackle public-debt vulnerabilities head-on while they can. Doing nothing will only constrain the region’s tremendous potential to achieve sustainable and inclusive growth.
Copyright: Project Syndicate, 2016.