Why do we not recognize, celebrate, and draw inspiration from Africa’s many successful entrepreneurs and their accomplishments? Why, instead, do endless narratives of African governmental debt default and its financial woes dominate our public discourse?
A key explanation is that we persist in viewing our nations’ hard currency debts crisis solely in terms of excess and fail to connect them with a narrative of inadequate products, successful investments and projects that have socio-economic benefits.
The macroeconomic environment influences microeconomic factors and without solving debt sustainability issues and narrative, we will stay stuck in a cycle of financial fragility.
The economic prosperity or adversity of states inevitably affects businesses and individuals in one way or another.
When the Ghanaian cedi lost three-quarters of its value against the US dollar in less than a dozen years, I personally faced the impact of currency depreciation on my daily budget and mortgage payments.
Although this experience was discomforting, it did not appear to be detrimental to the wider society outside of Ghana — at least not at first. Then I considered the millions of people who were facing the same situation across the continent, including, African entrepreneurs, traders, and families. These, perhaps, best comprehend the harsh effects of financial hardship that can arise from currency devaluation.
I hold the view that the causes and consequences of debt crises are determined by numerous factors, and not just excess of debt itself.
Among these are:
- type of debt, such as unsustainable circumstances (e.g., interest rates, functional currency , tenors);
- external shocks (e.g. war, climate change, COVID-19, US monetary policy);
- lack of transparency, and
- the manner in which debt is used.
Data at the macro-economic level corroborate that these factors give rise to some of our most severe debt issues.
In its African Economic Outlook report, the African Development Bank (AfDB) shows that currency depreciation is one of the main drivers of public debt dynamics (see graph below). In this case, the crux of the problem is the common practice of lending and trading in hard currencies, thus placing the exchange rate risk on borrowers, who generate their income in local currency.
This form of lending is particularly problematic for low-income countries, where official multilateral and bilateral donors (more than 80 per cent of external public debt) hold most of the debt.
Drivers of public debt dynamics (as a share of GDP), 2013-2023