African nations could struggle due to a dearth in cheap budget funding, given the skyrocketing inflation, devaluation of local currencies and the US Fed’s tightening policies, a leading economic research institution said.

“The ground has shifted and cheap budget funding in frontier markets is a thing of the past,” said a briefing released on Tuesday by Oxford Economics.

To the detriment of African debtors, the report shows that the global response to the ongoing Russian war on Ukraine has been different from that of the pandemic times.

“The pandemic shock elicited a coordinated global effort to boost system liquidity, address pandemic-induced systemic risk through comprehensive policy intervention, and accommodate fragile debtor nations,” noted the report.

By contrast, the ongoing war had sent the globe into a state of stagflation by mainly eliciting a commodity price shock.

“In the post-pandemic environment, most African countries are facing higher public debt burdens, a more challenging interest rate climate, and fiscal fatigue,” the report said.

Growth models are under threat

In this context, many African nations seem to be caught between a rock and a hard place. Although financial regulators have been raising interest rates on government bonds, real yields still fall short of attracting investors due to rising inflations. Yet, any efforts to adjust yields may increase the risk of sovereign default, Oxford Economics said.

This situation also threatens the growth model in many sub-Saharan African countries, such as Ghana, Kenya, Tanzania, and Zambia. In those countries, mega- infrastructure projects heralded by government capital spending (funded by debt) has been the driving force of economic growth, the briefing said.

This pressing situation has provoked mixed reactions from African governments.

Some countries have been trying to adapt to the narrowing funding pool by embarking on austerity measures aimed at reducing the primary deficit.

The report praised Ghana for showing commitment at the turn of the new year to increase fiscal revenues by introducing an e-levy and reducing personal emoluments by 30 percent.

“These actions were applauded by Eurobond investors, but the Fed-induced surge in global volatility may render the benefits too little in the face of substantial sacrifice. Ghana will remain locked out of markets as the retreat of global liquidity support weigh on risk assets,” the report noted.

Populist policies

On the other hand, some other African governments are embarking on populist policies by increasing public spending to contain social discontent and achieve political gains in the lead-up to anticipated elections.

The report named the Kenyan and Nigerian governments which have vocally opposed calls by the IMF and the World Bank to revisit fuel subsidy policies. On the contrary, they expanded their spending on this fuel subsidies during the current fiscal year, which is set to worsen those countries’ fiscal positions.

“High growth in public expenditure related to non-growth-supportive avenues, such as election-related spending in lieu of capex, has a pass through effect to inflation,” the report noted.

Oxford Economics concluded that concessional credit programs laid out by international financial institutions-namely the World Bank and the IMF, are Africa’s best resort amid this grinding crisis.

“Environmental, social & governance (ESG) bonds also offer competitive pricing, while supporting governance and accountability,” the report said.

(Reporting by Noha El Hennawy; editing by Seban Scaria