African countries pay 500% higher costs on global market debt – AfDB

African nations are grappling with a staggering 500 per cent increase in debt servicing costs when borrowing from global markets.

The African Development Bank’s Vice President and Chief Economist, Prof Kevin Urama, said this at the 5th African Union Extraordinary Session of the Specialised Technical Committee on Finance, Monetary Affairs, Economic Planning, and Integration in Abuja, Nigeria, on Saturday.

He highlighted the severe financial strain Africa faces as a result of soaring borrowing costs in international markets.

He explained that the shift towards private creditors has exacerbated Africa’s debt burden, with about 49 per cent of Africa’s debt being privately owned by the end of 2023.

This figure is expected to rise to 54 per cent by 2024. The significant change in debt structure has led to African countries now paying five times more in interest on loans compared to borrowing from multilateral institutions such as the AfDB or the World Bank.

He said, “The structure of debt has changed significantly with about 49 per cent of Africa’s debt privately owned at the end of 2023, and this is expected to reach about 54 per cent in 2024.

“The changing structure of debt toward private creditors comes with opportunities and challenges. For example, African countries are paying 500 percent more in interest costs when borrowing in international capital markets than when borrowing from multilateral development banks such as the African Development Bank, the World Bank.

“Using short term, high-cost debt to finance long term development projects, therefore, has implications for debt sustainability in the medium to long terms.”

The AfDB VP noted that this sharp rise in borrowing costs is particularly concerning given the continent’s growing debt crisis.

He outlined that since 2010, Africa’s public debt has increased by 170 per cent, largely due to structural issues within the global debt system, recent global shocks, and weaknesses within Africa’s own macroeconomic frameworks.

He added that between 2015 and 2022, the average debt servicing costs for 49 African countries surged from 8.4 per cent of GDP to 12.7 per cent.

According to the 2024 African Economic Outlook Report, African nations are projected to spend around $74bn on debt service in 2024, up from just $17bn in 2010.

Of this amount, $40bn is owed to private creditors, accounting for 54 per cent of the total debt service.

Urama also pointed out that twenty African countries are currently in debt distress or at high risk of it, a sharp increase from just 13 in 2010.

In response to these mounting challenges, Urama outlined the AfDB’s proposal for the establishment of an African Financial Stability Mechanism.

The initiative, which has been in the works for three years, aims to provide sustainable debt refinancing solutions for African countries at more favourable terms, reducing their reliance on high-cost private creditors.

Urama also called for urgent reforms in the global financial system, stating that Africa is the only continent without a regional financing stability mechanism.

He noted that in light of geopolitical tensions, climate risks, and unpredictable global economic trends, Africa’s over-reliance on external markets is becoming increasingly precarious.

Also speaking at the event, the Governor of the Central Bank of Nigeria, Mr. Olayemi Cardoso, emphasised the need for a more robust and resilient African financial system, calling for concerted efforts to realise the continent’s long-term economic integration goals.

Cardoso highlighted the ongoing efforts to establish institutions like the African Monetary Institute and the African Financing Stability Mechanism, which he described as essential for achieving macroeconomic convergence and financial resilience across Africa.

He also took the opportunity to highlight Nigeria’s own strides in strengthening its financial system.

The CBN governor pointed to several reforms, including the adoption of a unified exchange rate framework, which has enhanced transparency and bolstered investor confidence.

He also mentioned the ongoing recapitalisation of Nigerian banks, designed to ensure the sector’s stability and support sustainable credit growth.

The CBN Governor further noted that the removal of fuel subsidies in Nigeria has created fiscal space for strategic investments, while policies aimed at improving diaspora remittances have positively impacted the country’s external reserves.

Nigeria’s Minister of Finance and Coordinating Minister of the Economy, Mr. Wale Edun, called on African nations to unite in advancing the continent’s economic independence and self-reliance, emphasising the need for collaborative action to overcome the continent’s long-standing challenges

Edun was represented by Mrs Aisha Omar, Director of Special Projects at the Federal Ministry of Finance.