Eradicate poverty by breaking the curse of Africa’s unsustainable debt

After the 2018 Beijing Summit of the Forum on China – Africa Cooperation (FOCAC), in which 53 African countries took part, two camps emerged: while some welcomed the opportunity to galvanize investment to drive growth and poverty reduction, others focused on a growing debt trap. The more balanced view however, is that the China – Africa Partnership could help the continent achieve its development goals if the focus remains on Africa’s priorities and the relationship is based on equality, mutual respect and reciprocal benefit.

What this implies is that debt must stimulate a high return on investment if Africa is to achieve prosperity ‘based on inclusive growth and sustainable development’ and ‘sustainable development in its three dimensions – economic, social and environmental – in a balanced and integrated manner’, as stated in the Agenda 20163, and the global 2030 Agenda for Sustainable Development respectively. Still, we don’t know enough about the real cost of rising debt for policy makers to tailor their actions towards sustainable debt financed investments.

That is why research that places people at the centre is imperative to revealing how debt interfaces with sustainable human development. This integrated approach identifies reduced investment flows, weak structural transformation and uneven development as ways in which debt unstainability slows Africa’s transformation. What’s more, rising debt increases investment risk, hampers economic diversification and undermines investment in human capital.

Large infrastructure investment is where most African countries accumulate debt. By 2018, Africa’s gross debt as a share of GDP has risen to 57% from 38% in 2011 (IMF) including much more short term debt and up to 68% under non-concessional terms. Yet, increased debt has not transformed economies. Higher debt burdens are associated with lower manufacturing value added – fewer lucrative jobs. Manufacturing contributes less than 10% to Africa’s GDP compared to the global average of 16% and 23% in East Asia and the Pacific (WDI, 2018).

Rising debt repayments also shrink a fiscal space which is already under threat from poor domestic resource mobilisation. This limits public expenditure on health and education to only 1.8% and 4.3% of GDP respectively, between 2010 and 2017 (WDI, 2018). In 2015, total health expenditures in sub-Saharan Africa were only 5.4% of GDP compared to the global average of 9.9% in Europe, 9.3% in Central Asia, and 7% in Both East Asia and Latin America (WDI, 2018).

Highly indebted countries seem to allocate less pubic resources to longer term transformative investments. According to WDI, between 2010 and 2017, eighteen African countries provided only 0.3% of GDP to Research and Development, compared to 1.7% for military expenses. Kenya, Morocco, South Africa and Tunisia allocated up to 0.7-0.8% of GDP to Research and Development, compared to 2.4% in East Asia and the Pacific, and the global average of 2%.

First, to turn the tide from rising debt to sustainable investments which will eradicate poverty and inequality, UNDP supports African countries in their quest to enhance debt management capacity, including the risk-informed management of diversifies resources. Second, UNDP seeks to go beyond traditional debt financing to encourage long term private investment, impact investment and harnessing of remittances. Finally, UNDP works continuously to strengthen public financial management and domestic resource mobilisation, while eliminating illicit financial flow.

Original article written by Angela Lusigi, Strategic advisor, UNDP Africa
Edited by NIAS