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Rethinking Debt Sustainability in Africa

To develop a proper understanding of the risks facing indebted African countries, international financial institutions must overhaul their own methods for assessing debt sustainability. Rather than setting arbitrary limits on a country’s debt-to-GDP ratio, the focus must shift to how debt is being used.

CAMBRIDGE – Across Africa, macroeconomic management has improved substantially in recent years. Studies by the International Monetary Fund, the African Development Bank (AfDB), and the World Bank, as well as surveys from Worldwide Governance Indicators and Transparency International, all attest to this trend. Yet concerns about debt sustainability on the continent have been mounting, especially since the onset of the COVID-19 pandemic.

Such worries are nothing new. By the 1980s and 1990s, African countries had amassed debt largely by borrowing from official creditors such as development banks, OECD export credit agencies, and Paris Club lenders (major creditor countries). This set them apart from Latin American countries, which had borrowed heavily from private lenders. Still, rising debt-sustainability concerns led to a wave of debt-relief programs from the late 1990s through the 2000s.

In 1996, the IMF and the World Bank launched the Heavily Indebted Poor Countries (HIPC) Initiative, which was followed three years later by the Enhanced HIPC Initiative. Both were major innovations in development finance that allowed for debts to multilateral creditors to be canceled. Then came the 2006 Multilateral Debt Relief Initiative and the rescheduling of sovereign debts through the Paris Club, which created a sense of optimism about the future of Africa’s debt burdens. Official creditors had extended more than $100 billion in relief to more than 40 countries – some 85% of them in Africa.