Is sub-Saharan Africa facing another systemic sovereign debt crisis?

Abstract

Concern is increasing about the prospect of a new sovereign debt crisis in countries across sub-Saharan Africa. The previous debt crisis of the 1990s is still fresh. It has only been 14 years since officials from major creditor countries (a group known as the Paris Club) and multilaterals adopted the ambitious Multilateral Debt Relief Initiative (MDRI) for outright forgiveness of debt owed by a group of 36 low-income poor countries. The majority of these countries, 29, in fact, were African. The massive debt relief was conditioned on sound economic management and poverty reduction strategies. The MDRI was the logical advancement of a variety of initiatives for debt relief, the most prominent of which was the Heavily Indebted Poor Countries (HIPC) initiative instituted by the International Monetary Fund (IMF) and World Bank in 1996 to address debt overhang in the poorest countries of the world. African countries had been borrowing into the 1980s, which led to an increasing accumulation of debt that became unsustainable. These debt relief initiatives, including MDRI, had good intentions and outcomes. Through unloading of the debt overhang, infusion of new loans, improved policies, along with enhanced investment incentives, the overall expectation was that there would be positive economic and social development outcomes. Indeed, for about a decade, most countries witnessed economic upturns and reduced debt burdens. The median public debt level (as a percent of GDP) for sub-Saharan Africa declined to about 31 percent in 2012, far below the levels leading up to the HIPC initiative. There were concerns associated with the debt relief program, notably the issue of moral hazard (Easterly, 2009). The worry was that, moving forward, this blanket debt forgiveness would distort incentives for weak governments to over-borrow and then over-invest, detracting from economic performance. These concerns are consistent with the belief that poor governance and fiscal indiscipline contributed to the debt overhang and that, unless there are genuine systemic reforms, history will repeat itself.