Heavily indebted African countries are cutting spending on health programmes to service their massive loan portfolios, signalling a shift in spending priorities. This is largely because these governments are increasingly weighed down by fears of potential default amid shrinking fiscal space.

 

Reducing expenditure on health programmes is a troubling policy shift, however, as it risks undermining the growth prospects of these nations. A healthier, more productive, and prosperous population fosters economic growth by building human capital and creating jobs.

Economists at the SOAS Centre for Sustainable Finance, say in a report titled, Africa’s Vicious Cycle of Debt and Climate Change, that the fiscal consequences of higher borrowing costs have quickly taken a toll on government budgets.

The average share of government expenditure devoted to interest payments doubled to 12.7 percent in 2023, up from around 6.3 percent in 2012.

In absolute terms, African governments are estimated to have spent $163 billion on debt servicing in 2024, up from $61 billion in 2010, according to the report released this week.

More than half of African countries now spend more on interest payments than on health, with Egypt, Zambia, Angola, and Malawi among the most extreme cases.“The strain on budgets means that resources are being diverted away from vital social spending such as education and health care,” the report states.

Precarious refinancingOn average, African countries allocated 2.2 percent of gross domestic product (GDP) to interest payments between 2021 and 2023, compared to just 1.9 percent for health, it adds.

Public external debt across Africa has more than tripled since 2008, reflecting a decade and a half of heavy borrowing in response to successive economic and environmental shocks.

The composition of this debt has also shifted dramatically. Debt owed to private bondholders rose from around $25 billion in 2008 to nearly $186 billion in 2023, while obligations to China and other bilateral lenders also expanded.

Similarly, debt owed to the World Bank increased from $68 billion in 2008 to $218 billion, and the use of International Monetary Fund (IMF) lending facilities rose to $56 billion.“This surge in borrowing has been accompanied by a sharp rise in the cost of servicing debt—from both a currency and borrowing cost perspective,” the report notes.

The prolonged depreciation of domestic currencies has placed considerable strain on fiscal finances. Governments with large external debt burdens are forced to either collect more domestic tax revenues, cut expenditure, or borrow more foreign-denominated debt to continue servicing their obligations.

This ongoing decline in exchange rates has been exacerbated by rising borrowing costs across many African economies.

After falling below nine percent prior to the Covid-19 pandemic, borrowing rates rose sharply in 2021 and 2022, locking many countries out of international markets or forcing them to borrow at punishing rates.

While regional bond yields have stabilised over the past 12 months, countries such as Angola, Cameroon, Gabon, Kenya, and Nigeria have issued dollar-denominated debt at elevated yields above 9.5 percent.“Issuance at these elevated yields is rare and rarely ends well. Since 2016, only 17 countries have issued debt at such rates across 30 separate bond issuances,” the report states.

Of those 17 nations, six have defaulted on their debt, and only four have managed to repay the principal. Refinancing has become both more expensive and precarious, with a growing number of African economies effectively shut out of capital markets.

Climate risksThe debt crisis is unfolding just as Africa faces unprecedented investment requirements to adapt to climate change and sustain growth. Thirty-one of the fifty countries most exposed to climate risks are in Africa.

Between 2021 and 2030, Sub-Saharan Africa will require over $1.4 trillion in climate finance—equivalent to $143 billion per year—to meet adaptation and resilience needs. Yet, actual flows fall far short of this benchmark.

The report highlights that the financing gap is not only large but widening, threatening to derail African countries’ ability to deliver on their Nationally Determined Contributions (NDCs) and the Sustainable Development Goals (SDGs).

A breakdown of Africa’s climate finance flows by instrument shows that more than half of the funds have come in the form of debt, adding directly to already unsustainable sovereign debt burdens.

By contrast, grants—financing that does not require repayment—make up just 36 percent of the total, with equity-related instruments accounting for the remainder.“This loan-heavy structure means that countries are borrowing to fund resilience measures against climate shocks, deepening their overall debt distress,” the report concludes.

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