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Alarming Dependence: Africa’s Struggle with Inefficiency and Accountability in International Aid and Finance
As debt levels mount, Africa’s heavy dependence on international aid and finance is becoming a cause for concern. 13% of African economies have a high risk of debt distress as the region’s external borrowing climbs to $1.16trn in 2023. The borrowing itself does not cast the shade, but the persistent lack of efficiency and accountability over the years has hindered the anticipated improvement of African economies. Ghana (54.9%), Gambia (52%), and Zambia (160.6%) debt to GDP, for example, have exceeded the debt-sustainability threshold stipulated by the IMF, crippling growth levels.
Despite bilateral deals and financial aid from international donors, many African countries remain in poorer shape as fiscal authorities struggle to meet the preconditions for the funding. Many countries, including Nigeria and Kenya, that have undertaken painful reforms have seen a considerable decline in living standards. The general expectation in the near term is that SSA countries will place greater emphasis on the efficient use of borrowed money to achieve a higher level of productivity and output.
Fiscal Consolidation and Low Social Cost Debt Strategies
China is taking advantage of Africa’s desperate need for funding to grant conditional loans that are tied to the detriment of the African economies. Trade between Africa and China has seen remarkable growth, expanding from $11.67 billion in 2000 to a peak of $257.67 billion in total trade by 2022. Chinese investment, such as the Belt and Road Initiative (BRI), has significantly contributed to infrastructure development and economic growth across the continent. Though critics emerge on China’s motives for these strategic investments in resource-rich African countries, fiscal authorities see them as a safer bet.
With China recently successfully restructuring its debt with defaulting countries like Zambia and Ghana, more African economies are expected to keep returning to the bilateral creditor. This aligns with the renewed focus on fiscal consolidation, which involves rebuilding budgetary capacity to withstand future economic shocks and generating revenue for new spending priorities.
Managing Disinflation as Global Inflation Slows
Global headline inflation is projected to decline to 5.8% in 2024 and further to 4.4% in 2025. This trend of disinflation, coupled with steady economic growth, has reduced the likelihood of a hard landing, resulting in broadly balanced risks to global growth. For African economies, the challenge is twofold. Policymakers must deftly manage the final descent of inflation to target levels, adjusting monetary policy to respond to underlying inflation dynamics. Inflation in the region is expected to slow marginally to 18% in 2024 from 18.1% in 2023 before falling sharply to 12.7% in 2025.
In this edition of the FDC Afriscope, we analyze burning macroeconomic and political issues in Africa, offering insights and strategies for policymakers.
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