Increasing Debt Burdens in Africa: The role of Transparency in the Matrix

Public debt is a double edged-sword, if used for productive purpose and responsibly it supports sustainable development. African countries have been accumulating increased amounts of debt while the quality of public institutions and debt management policies have deteriorated. For the majority of countries that are at high risk and already in debt distress in Africa, debt transparency has been a major factor. For instance, in Mozambique the discovery of secret loans resulted loss of credibility to the government, IMF stopped further disbursements and rating agencies downgraded the country. Similarly, in Zimbabwe, the government failed to account for disbursed loans during the early 2000 which resulted in International Financial Institutions stopping further disbursement. Citizens in most highly indebted countries have little trust for their governments because they do not seem to participate in debt contraction and benefit from such resources which further affects voluntary payment of taxes making it difficult to service the public debt. Transparency in debt management will also be essential for countries to recover from COVID-19 induced depression where most countries borrowed further pushing public debt to 100% of GDP in 2020 from 83% in 2019. About 90% of Africa’s population live under very corrupt governments which increases the probability of secret debt deals. Oversight institutions such as parliament play a very important role in safeguarding transparency and accountability in the allocation and utilisation of public resources. In Africa most parliaments lack access to key information and often have inadequate technical expertise on debt management.

A closer look at the debt profiles for most African countries shows an increase in the commercial and private lenders. Unlike the official creditors the private lenders have no conditionalities on debt transparency. Some of them have non-disclosure clauses in their agreement which make it difficult for citizens to get information about such loan agreements. Empirical evidence shows that in Africa most of the debt acquired has gone towards physical infrastructure and agriculture financing (Musindarwezo and Jones, 2019). Most of these infrastructure projects are funded by Chinese lenders of which much of it is not officially tracked. These hidden debts from China and other private lenders complicate efforts to mitigate debt crises; it makes it difficult for international financial institutions (IFIs) to accurately estimate countries’ debt burdens. If there is a lot of uncertainty surrounding a country’s debt it increases the sovereign risk and by extension the cost of borrowing. Investors tend to lose confidence which will consequently result in lower production and employment. Citizens will be burdened by more taxes and public service delivery will be poor as resources service debt. At country level, a lot of awareness has been done by civil society organisations capacitating citizens to demand transparency and accountability on borrowed funds. Most constitutions on the continent have provisions for debt transparency and parliamentarians are continuously being capacitated by organisations such as AFRODAD, UNDP etc to effectively play their oversight role. At Global level, the Institute of International Finance has developed principles and guidelines on debt transparency. Civil society organisations like AFRODAD have developed The African Borrowing Charter which have guidelines on transparency and accountability, disclosure and publication, and avoiding incidences of overborrowing. The Charter has been launched in a number of countries across Africa to encourage responsible borrowing and responsible lending that supports sustainable development AFRODAD has also done a lot of research that highlight areas that need to be improved to enhance debt transparency. For instance, in Zimbabwe the Annual Debt Management Report and policy briefs unearthed debt transparency issues that the Government of Zimbabwe have acknowledged and partly addressed. This has often been accompanied by capacity building especially of regional parliaments such as SADC PF, EALA.

Debt transparency is critical for effective debt management, avoiding debt distress and limiting effects of debt crises. Many countries still face significant problems in debt transparency including in coverage and data quality. Building capacity of oversight institutions such as auditor general, citizens and parliaments remain a major priority which enable effective demanding of transparency and accountability from the executive. At global level responsible borrowing and lending need to be pushed so as to discourage reckless and secretive lending especially by private lenders.

Public debt is a double edged-sword, if used for productive purpose and responsibly it supports sustainable development. African countries have been accumulating increased amounts of debt while the quality of public institutions and debt management policies have deteriorated. For the majority of countries that are at high risk and already in debt distress in Africa, debt transparency has been a major factor. For instance, in Mozambique the discovery of secret loans resulted loss of credibility to the government, IMF stopped further disbursements and rating agencies downgraded the country. Similarly, in Zimbabwe, the government failed to account for disbursed loans during the early 2000 which resulted in International Financial Institutions stopping further disbursement. Citizens in most highly indebted countries have little trust for their governments because they do not seem to participate in debt contraction and benefit from such resources which further affects voluntary payment of taxes making it difficult to service the public debt. Transparency in debt management will also be essential for countries to recover from COVID-19 induced depression where most countries borrowed further pushing public debt to 100% of GDP in 2020 from 83% in 2019. About 90% of Africa’s population live under very corrupt governments which increases the probability of secret debt deals. Oversight institutions such as parliament play a very important role in safeguarding transparency and accountability in the allocation and utilisation of public resources. In Africa most parliaments lack access to key information and often have inadequate technical expertise on debt management.

A closer look at the debt profiles for most African countries shows an increase in the commercial and private lenders. Unlike the official creditors the private lenders have no conditionalities on debt transparency. Some of them have non-disclosure clauses in their agreement which make it difficult for citizens to get information about such loan agreements. Empirical evidence shows that in Africa most of the debt acquired has gone towards physical infrastructure and agriculture financing (Musindarwezo and Jones, 2019). Most of these infrastructure projects are funded by Chinese lenders of which much of it is not officially tracked. These hidden debts from China and other private lenders complicate efforts to mitigate debt crises; it makes it difficult for international financial institutions (IFIs) to accurately estimate countries’ debt burdens. If there is a lot of uncertainty surrounding a country’s debt it increases the sovereign risk and by extension the cost of borrowing. Investors tend to lose confidence which will consequently result in lower production and employment. Citizens will be burdened by more taxes and public service delivery will be poor as resources service debt. At country level, a lot of awareness has been done by civil society organisations capacitating citizens to demand transparency and accountability on borrowed funds. Most constitutions on the continent have provisions for debt transparency and parliamentarians are continuously being capacitated by organisations such as AFRODAD, UNDP etc to effectively play their oversight role. At Global level, the Institute of International Finance has developed principles and guidelines on debt transparency. Civil society organisations like AFRODAD have developed The African Borrowing Charter which have guidelines on transparency and accountability, disclosure and publication, and avoiding incidences of overborrowing. The Charter has been launched in a number of countries across Africa to encourage responsible borrowing and responsible lending that supports sustainable development AFRODAD has also done a lot of research that highlight areas that need to be improved to enhance debt transparency. For instance, in Zimbabwe the Annual Debt Management Report and policy briefs unearthed debt transparency issues that the Government of Zimbabwe have acknowledged and partly addressed. This has often been accompanied by capacity building especially of regional parliaments such as SADC PF, EALA.

Debt transparency is critical for effective debt management, avoiding debt distress and limiting effects of debt crises. Many countries still face significant problems in debt transparency including in coverage and data quality. Building capacity of oversight institutions such as auditor general, citizens and parliaments remain a major priority which enable effective demanding of transparency and accountability from the executive. At global level responsible borrowing and lending need to be pushed so as to discourage reckless and secretive lending especially by private lenders.

Author: Reginald Chaoneka, AFRODAD’s Policy Consultant, Debt Management. For feedback write to him via [email protected]

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Image from https://sezils.net/transparency/