East Africa’s Finance ministers read from the same old script but have refused to accept the lessons of history. Spurred on by years of cheap money and an ambitious wish list, governments have, over the past decade, piled up debt and taken borrowing to its limits. When the Covid-19 pandemic hit last year, governments went on a borrowing spree, accumulating more debt in a single year than at any other time in the past.
This year the region is projected to borrow $16 billion more to shore up flagging growth. Most of the new debt is being contracted in the name of post-Covid recovery. A question that has been glossed over is what happened to the money borrowed last year. If the deficits in the health system exposed by the current third wave of the pandemic show anything, it is how resources have been mismanaged.
Health system capacity has easily been overrun by surging patient numbers, basic inputs are in short supply and health workers are succumbing to the coronavirus out of fatigue and a lack of personal protective gear. With such a lackadaisical attitude to public resources, the public’s concern about new debt is justifiable.
Borrowing is necessary but debt has to be productive. Debt is premised on the assumption that the loans would facilitate internal and external linkages, putting economies on the path to sustainable growth. In reality, economies are fragile and are drifting towards debt unsustainability because money borrowed is not generating sufficient yield. With debt limits exhausted and widening fiscal and current account deficits, countries are increasingly taking on riskier debt through finance bonds. Currently, 10 percent and 30 percent of annual spending in some countries is going to debt service. Metrics such as debt-to-GDP ratio that are used to measure sustainability are unreliable in the current environment because growth is uncertain.
Lockdown measures are stifling private consumption while a global recession triggered by the pandemic is limiting export earnings. In the circumstances, a shift in policy stance is imperative.
Historically, cheap money and a large syndicated loan market have encouraged borrowing in developing countries, eventually building up to a financial crisis when recession hits. Covid-19 is sending the global economy into recession and a crisis is inevitable.
Governments can mitigate fallout if they change character. Money must go where it brings a return. Debt has largely been opaque and mismanaged. To ensure discipline, regulators need to become more vigilant and transparent. Money needs to be spent wisely, the cost of borrowing must to be brought into focus and public procurement watched over with an eagle’s eye.
Amid a rising appetite for debt, it is necessary to ensure that the private sector is not crowded out of debt markets by heavy domestic borrowing by governments. If firms are starved of capital and affordable credit, economic recovery will be all the more difficult.
It will be foolhardy for African governments to bank on another round of debt relief. With the global economy in recession, resources will be scarce and internal discipline is the only sure path to emerging out of the crisis with minimal damage.