A Chance to Confront the Debt Crisis
South Africa’s presidency of the G20 in 2025 arrives amid a backdrop of global instability. With financial market volatility, rising geopolitical tensions, and challenges to multilateral cooperation, the importance of international collaboration has never been more critical. For South Africa, the first African country to assume the G20 leadership, the challenges are significant, but so are the potential rewards.
President Cyril Ramaphosa has committed to leveraging the G20 platform to highlight the developmental needs of Africa and all lower middle-income nations. A key focus of these priorities is the critical issue of the excessively high costs associated with capital.
This situation transcends technicalities; it presents a structural hurdle that hampers governments and businesses from investing in human capital, enhancing resilience against climate change, and competing in the global marketplace. By confronting this challenge directly, South Africa has the opportunity to reshape the global financial architecture, benefitting not just Africa, but the entire developing world.
The cost of capital: a crisis founded in inequality
In the decade prior to 2022, Africa’s total debt more than doubled, soaring from $283 billion to $655 billion. Private creditors and multilateral institutions were largely responsible for the substantial increases in 2023, representing 38% and 35% of Africa’s debt respectively. Additionally, China comprised 12.4% of this debt.
This accumulation of debt was a rational response to historically low interest rates and the continent’s significant infrastructure requirements. For numerous African nations, borrowing was not a reckless action but a necessary one.
However, the landscape shifted dramatically due to the Covid-19 pandemic. As revenues from tourism and remittances plummeted, and government spending surged to address the health crisis, the sustainability of debt became precarious.
Simultaneously, inflation, spurred by excessive stimulus measures and global disruptions like the conflict in Ukraine, has further strained public finances. The rapid increase in interest rates by central banks – a measure intended to stabilize inflation – has escalated the costs of dollar-denominated debt, pushing several nations to the verge of default.
Currently, 23 out of 40 African nations evaluated by the World Bank are at a high risk of debt distress or are already experiencing distress.
In 2024, half of the $102 billion in debt service disbursed by African countries was directed to private creditors, and this debt has become costly. African nations, on average, face a 500% premium on private loans compared to the rates provided by entities like the World Bank. In 2021, for every $1 billion in loans, Africa’s lower middle-income countries paid an average interest rate of 5.79% to private creditors and 1.16% to the World Bank, while upper middle-income countries paid 5.92% to private creditors and 0.5% to the World Bank. This disparity has dire implications. Between 2016 and 2021, the additional interest costs resulting from these premiums totaled $56 billion – resources that could have strengthened health systems, improved infrastructure, or expanded educational opportunities.
Global ramifications
The elevated cost of capital in Africa is not solely an African issue. It highlights structural challenges within global finance that hinder developing countries from fully engaging in the global economy.
African leaders have long asserted that African nations receive unjust credit ratings from agencies like Moody’s, S&P Global, and Fitch – ratings that fail to accurately capture the region’s economic potential or the resilience of its governments. While these rating agencies are working to make their methodologies more transparent, further action is necessary.
Moreover, prudential regulations enacted to safeguard the banking system following the 2008 financial crisis – exemplified by the Basel III framework – play a role in discouraging private investment in emerging markets by raising requirements for investors’ capital liquidity ratios, despite the fact that these investments pose no systemic risk to the banking sector.
Finally, a lack of data and domestic regulations can compound these expenses. By uniting these various agendas, the G20 can establish a roadmap to tackle these obstacles across the multiple regulatory and market-based frameworks that require reform.
The significance of South Africa’s G20 leadership
As the premier forum for international economic collaboration, the G20 is uniquely equipped to address the structural elements contributing to the high cost of capital. Representing 85% of global GDP, 75% of global trade, and 64% of the world’s population, the G20 holds substantial sway over global financial standards and practices.
President Ramaphosa has already laid out an ambitious agenda, including the proposal for a “Cost of Capital Commission”. This commission would convene experts from the public and private sectors to investigate the root causes of high borrowing expenses for developing nations. It would assess credit rating methodologies, prudential regulations, and the data deficiencies that exacerbate risk perceptions. This initiative builds on successful G20 financial measures, such as the Debt Service Suspension Initiative (DSSI) initiated during the pandemic and an Independent Expert Group (IEG) established during the Indian G20 presidency to tackle multilateral development bank reforms. The Cost of Capital Commission could offer the technical knowledge and political will necessary to promote these solutions.
Forming coalitions for change
South Africa is not alone in its recognition of the need for reform. Key G20 countries, including Brazil, India, and Indonesia, have voiced similar priorities during their leadership roles. The African Union, now holding a permanent seat at the G20, also offers a vital platform for advancing African interests.
Furthermore, informal coalitions like the Bridgetown Initiative and the Paris Pact for People and Planet have already set the stage for multilateral collaboration on financial reform. By aligning its G20 agenda with these initiatives, South Africa can foster a broad-based coalition of support, bridging divides between established powers like the G7 and emerging blocs like BRICS.
This collaborative strategy is crucial for navigating the geopolitical tensions that often complicate G20 discussions. At the same time, the legitimacy of the G20 framework – rooted in its diverse membership and economic power – provides a strong mandate for action.
A global necessity
Tackling the high cost of capital is not merely an African objective; it is a global necessity. Emerging economies face an estimated $2.3 trillion to $2.5 trillion in annual financing requirements to meet climate objectives and achieve sustainable development by 2030. Without access to affordable capital, these aspirations will remain unattainable, further deepening inequalities and endangering global stability.
For advanced economies, the implications are equally significant. The economic health of emerging markets is directly interlinked with global trade, investment, and financial stability. By addressing the cost of capital, the G20 can unleash new avenues for growth and innovation, benefiting both developed and developing nations.
Capitalizing on the moment
South Africa’s G20 presidency presents a pivotal opportunity to address one of the most pressing challenges of our era. By advocating for the creation of a Cost of Capital Commission and forging coalitions for reform, South Africa can contribute to the establishment of a more just and inclusive global financial system.
This is not just a chance for Africa; it is a chance for the world. By addressing the structural inequalities within global finance, the G20 can lay the groundwork for a more resilient, equitable, and sustainable global economy.
As the first African nation to lead the G20, South Africa possesses the moral authority and political leverage to drive this agenda forward. The stakes are high, yet the potential for transformative change is equally great. Now is the time for decisive action.