Is Africa’s fiscal effort sufficient to restore debt sustainability?

More than half of the African countries that we cover grapple with various degrees of debt
distress, face unsustainable debt burdens, or actively seek to reprofile or restructure their public balance sheets. The threat of surging amortisations and debt interest costs sent countries including Egypt, Ethiopia, Ghana, and Kenya to the IMF, albeit with mixed success. However, the political repercussions of creditor-required fiscal consolidation cannot be readily dismissed, as illustrated by Kenya in H1 2023.

What you will learn:

• We draw from our Debt Sustainability Analyses and scenario modelling outcomes to assess the burden on the public debt-to-GDP ratio in the context of the non-interest fiscal account, FX devaluation pressures, inflation passthrough effects, and the monetary policy bias. That said, data limitations with regard to availability, reliability, and applicability play a significant role: official data has limited use in countries with large informal trade, an active parallel FX market, weak monetary policy transmission mechanism, and significant balance of payments gaps. We augment our estimations for debt-stabilising primary fiscal balances with political considerations to gauge which countries may face a greater challenge in deploying much-needed fiscal consolidation measures. Political considerations may hamstrung fiscal efforts in Egypt and Nigeria, while the high political costs of policy reform may discourage Ethiopia from committing to a consolidation agenda, despite strong creditor pressures.
• Three overlapping political-economic risk pillars highlight the political implications of fiscal consolidation in Africa. Socio-political risks stem from society’s response to fiscal reforms and their power to reverse changes. Governance risks relate to the credibility of institutions and the government’s mandate to implement reforms. Economic risks relate to the various market spill over effects, the ‘winners and losers’ of the policies, and the overall economic impacts of the fiscal consolidatory reforms.