Rapid Increase in Debt Payments in African Nations
According to a UN economist, African nations are allocating an ever-growing portion of their revenues to meet interest payments on debt.
Raymond Gilpin, the chief economist and head of the strategy, analysis, and research team at the United Nations Development Programme’s regional office for Africa, stated to African Business during the African Economic Conference in Botswana that over the last two decades, there has been a noticeable shift in Africa’s debt profile from concessional to commercial lending. This transition has resulted in a sharp increase in the interest payments that countries incur on their loans. He emphasizes that this movement towards prioritizing creditors detracts from vital investments in areas like education and healthcare.
“This year, it’s estimated that African nations will expend approximately $163 billion in debt servicing, compared to $61 billion in 2010. Furthermore, more than half of the countries on the continent are allocating more funds to debt service than to health and education, which is not sustainable,” he points out.
Gilpin argues that reforming the global financial system is essential for ensuring that Africa can access more concessional financing and that commercial debt is priced more equitably. He asserts that Africa currently pays excessively for the debt it incurs in international markets.
“The institutions responsible for pricing risk do not fully understand the continent and fail to identify the key data points that accurately reflect an economy’s ability to repay,” he adds.
Raising taxes must replace external lending
Mavis Owusu-Gyamfi, president and CEO of the African Centre for Economic Transformation, contends that focusing on domestic resource mobilization is crucial in light of decreasing concessional finance and the rising cost of debt. However, she emphasizes the need for governments to adopt innovative strategies to boost tax revenues.
“When we seek to increase tax revenue, we often end up squeezing the same taxpayers repeatedly. It’s like continually cutting the same cake, which is simply not sustainable,” she warns.
Governments frequently hesitate to increase the tax burden on citizens, concerned about potential political repercussions. In June, a series of deadly anti-government protests erupted in Kenya after President William Ruto’s administration proposed a finance bill that included significant tax increases (as seen in the image above).
Engaging the informal sector is essential, but she cautions that small businesses should not face excessive burdens as they already contribute through taxes.
“We must recognize that the informal sector does indeed pay taxes. While we often claim they do not, they contribute through local government levies. This represents a form of tax. If they are paying local government levies, it is incumbent upon local governments to use these funds appropriately and minimize reliance on central budgets,” she explains.
Anthony Simpasa, director of macroeconomics policy, forecasting, and research at the AfDB, argues that there is much to be done to enhance the current system and elevate Africa’s tax-to-GDP ratio from the current 15% to between 20% and 23%. For instance, tax authorities should utilize technology to boost compliance and close loopholes.
“On average, Africa generates about $500 billion in tax revenue during a good year, but there are significant leakages. We estimate around $90 billion in illicit financial flows and over $200 billion linked to corruption-related activities,” he adds.
He contends that to promote voluntary tax compliance, governments must show unwavering accountability in their management of public funds and ensure that reliable social services are available to citizens.
“In many instances, we find ourselves drilling our own boreholes due to a lack of water, building our own roads because national authorities have not provided access to our neighborhoods, and in some cases, even providing our own lighting,” he states.
“It is vital to strengthen the social contract between the government and taxpayers. This contract must obligate the government to supply these social services to foster voluntary compliance,” he concludes.