The International Monetary Fund (IMF) has urged African governments to re-anchor fiscal policy through a credible medium-term strategy to avoid a debt crisis.
According to the Fund in its report ‘How to Avoid a Debt Crisis in Sub-Saharan Africa’, it stated that to avoid a debt crisis, African countries seek to achieve key debt targets.
The Bretton Woods Institute said the average debt ratio in the region has almost doubled in 10 years adding that the average debt ratio to gross domestic product (GDP) has increased to 60 percent as of 2022, which is a 30 percent rise compared to the figures of 2013.
According to the Fund, this is what makes debt repayment costlier.
“In most sub-Saharan African countries, fiscal policy focuses excessively on short-term goals and is not guided by a clear medium-term strategy. This lack of anchoring has resulted in frequent breaches of fiscal rules and ever-increasing public debt levels.
“A more strategic approach to fiscal policy would be preferable by setting explicit debt targets that integrate key policy trade-offs between debt sustainability and development objectives, rather than focusing narrowly on short-term fiscal deficits.
“The paper suggests a novel approach to estimating country-specific medium-term debt anchors, which ensures that debt service costs remain manageable.
“The region’s ratio of interest payments to revenue, a key metric to assess debt servicing capacity and predict the risk of a fiscal crisis, has more than doubled since the early 2010s and is now close to four times the ratio in advanced economies,” the IMF said.
In the report, the IMF said more than half of the low-income countries on the continent are at high risk or already in debt distress as at the end of last year.
The multilateral also said mobilising more domestic revenue through the elimination of tax exemptions or digitalising filing and payment systems is key to avoiding a debt crisis as well.
“Sub-Saharan African countries tend to rely excessively on expenditure cuts to reduce their fiscal deficits.
“Although this may be warranted in some circumstances, revenue measures, like eliminating tax exemptions or digitalizing filing and payment systems, should play a greater role.”
The IMF noted that mobilising domestic revenue is less detrimental to growth in countries where initial tax levels are low, whereas the cost associated with reducing expenditures is particularly high given Africa’s large development needs.
