Soaring Debt Payments in African Nations

A UN economist has indicated that African countries are increasingly dedicating a larger share of their revenues to cover interest payments on debt.

During the African Economic Conference in Botswana, Raymond Gilpin, chief economist and head of the strategy, analysis, and research team at the United Nations Development Programme’s regional office for Africa, told African Business that over the past twenty years, Africa’s debt landscape has shifted noticeably from concessional to commercial borrowing. This change has led to a significant rise in the interest payments associated with the loans taken by these countries. He stresses that this trend of prioritizing creditors takes away crucial funding needed for essential sectors such as education and healthcare.

“This year, it’s projected that African nations will spend around $163 billion on debt servicing, up from $61 billion in 2010. Moreover, over half of the countries on the continent are spending more on debt servicing than on health and education, which is unsustainable,” he observes.

Gilpin insists that reforming the global financial system is vital for providing Africa with greater access to concessional financing and ensuring that commercial debt is fairly priced. He claims that Africa currently bears an excessive cost for the debt it incurs in international markets.

“Institutions that determine risk pricing do not have a comprehensive understanding of the continent and fail to pinpoint the critical data points that reflect an economy’s repayment capacity,” he adds.

Taxes should replace external borrowing

Mavis Owusu-Gyamfi, the president and CEO of the African Centre for Economic Transformation, argues that enhancing domestic resource mobilization is essential due to decreasing concessional finance and escalating debt costs. Nevertheless, she highlights the necessity for governments to implement innovative approaches to increase tax revenues.

“In our efforts to boost tax revenue, we often end up overburdening the same taxpayers constantly. It’s akin to perpetually cutting the same cake, which is not sustainable,” she cautions.

Governments often hesitate to raise the tax burden on citizens, fearing political backlash. In June, a wave of violent anti-government protests broke out in Kenya following President William Ruto’s administration’s proposal of a finance bill that included substantial tax hikes (as illustrated in the image above).

It is crucial to engage the informal sector, but she warns against placing excessive burdens on small businesses, which already contribute through taxation.

“We must acknowledge that the informal sector does indeed pay taxes. While we often claim they do not, they contribute through local government levies. This constitutes a form of tax. If they are paying local government levies, it is the responsibility of local governments to utilize these funds appropriately and reduce dependence on central budgets,” she clarifies.

Anthony Simpasa, director of macroeconomic policy, forecasting, and research at the AfDB, states that there is ample opportunity to improve the existing system and elevate Africa’s tax-to-GDP ratio from the current 15% to between 20% and 23%. For example, tax authorities could leverage technology to enhance compliance and close loopholes.

“On average, Africa generates roughly $500 billion in tax revenue during a good year; however, there are considerable leakages. We estimate about $90 billion in illicit financial flows and over $200 billion tied to corruption-related activities,” he notes.

He asserts that to foster voluntary tax compliance, governments must demonstrate consistent accountability in managing public funds and ensure that citizens have access to reliable social services.

“In many cases, we find ourselves drilling our own boreholes to access water, constructing our own roads because national authorities have neglected our neighborhoods, and in some instances, even providing our own lighting,” he remarks.

“It is crucial to enhance the social contract between the government and taxpayers. This contract must bind the government to provide essential social services to encourage voluntary compliance,” he concludes.

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