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The Debt Threat?


Debt on the up. Although generally still well below the levels seen in the early 2000s, the recent pickup in government debt across many African nations has raised concerns about underlying solvency and development prospects. Sensitivities were also heightened at last week's Risk Frontiers conference in London where it was mooted that several governments, especially those with a debt/GDP ratio above 70%, may have to embark on some serious fiscal austerity over the next year or so to avoid a Greece-style meltdown and jump in poverty rates.

Debt and growth. It's complicated. Underlying these worries is the broadly negative empirical relationship between high rates of public sector debt and GDP growth. This is often interpreted as the result of unwarranted government commitments, which drive up interest rates, rather than spending on ultimately productive investments in infrastructure, healthcare and education. But other factors may also be at play. For example, debt rates can rise and growth rates fall because of a collapse in commodity prices.

And so is the appropriate response. These issues mean that the relationship is unlikely to be stable across different countries and time periods. Moreover, even when debt is bearing down on growth the appropriate policy response depends on other factors such as monetary policy and exchange rate flexibility. Consequently, the IMF has changed its standard "austerity first" stance to a more finely calibrated and adaptive approach.

So, is the current concern warranted? Data for the last ten years suggests that for the continent as a whole public debt shares have been unrelated to growth rates.

But our work shows that there are some pockets of anxiety. As an illustration, the table considers the medium-term debt outlook and the historical relationship between debt and growth rates for the countries with the highest debt/GDP rates last year.

The key takeaway is that debt burdens are set to recede somewhat in all the countries, except for Eritrea and Zimbabwe, over the next few years. Indeed, the IMF forecast this outcome for the continent. As well as a recovery in growth, these declines also reflect current and anticipated actions by governments who are increasingly attuned to the potential problems of excessive liabilities.

With the notable exceptions of Ghana and Angola, which have both seen public sector austerity measures take centre stage in recent policy debates, there is not a negative relationship between the debt load and the pace of economic activity. The upshot is that, although the current burdens of both countries, at around 70% of GDP, are not at face value unduly excessive, they doe pose a material downside risk to their growth outlooks.