Debt dynamics and sustainability in Africa: why the continent is borrowing more from private creditors?

A new report published by AfreximBank examines recent debt dynamics and debt sustainability in African countries. The document notes that debt levels have grown significantly in the past 15 years, with the cost of borrowing that has progressively increased for African countries. African countries not only borrow more, but have also changed the composition of their debt.

All countries need to borrow to fund their development agenda, not only African ones. And the choice among the financial instruments that can be used for this purpose is today large. They include loans from multilateral institutions (e.g. the World Bank and the International Monetary Fund), regional development banks (the African Development Bank is one), private investors and commercial banks, among others.

If in the past Africa used to borrow more from  multilateral, regional and bilateral donors, in the last decade this trend has reversed, with a notable shift in the use of debt instruments. To date, in proportion, less money is borrowed from multilateral financial institutions and from regional development banks, as well as from bilateral donors that are members of the Paris Club. Conversely, borrowing from creditors that are not members of the Paris Club has escalated. This includes both bilateral creditors like China, and commercial creditors (e.g., commercial banks, bondholders, and other private creditors).

Differently from the first group of debtors, private creditors that are not Paris Club members lend at commercial rates, which are higher than those applied by the other group. So, why African governments prefer to borrow more from those creditors than from others offering lower rates? The answers are two. One more obvious and another less known.

The obvious answer is that private creditors offer a higher flexibility in terms of loan conditions, with highest speed of disbursements and lower requirements for accessing to these funds. On the other hand, regional banks usually set priorities in lending that may not align perfectly with interests of borrowing States, while multilateral creditors usually condition loans on structural adjustments that in most cases include austerity measures for the lower classes. When it happens, these measures spark resistance from this layer of the population, that in Africa is still particularly numerous. No wonder then, if politic classes prefer to turn to more expensive, but less unpopular, sources of credit. This is the less known cause of recourse to private credit.

As a consequence of the above described situation, in 2023 the private debt became more than half of Africa’s external debt, largely outpacing the contributions of bilateral and multilateral creditors, which instead accounted for 18.7 percent and 27.1 percent.

These conclusions are in line with a report published by UN Trade and Development (formerly UNCTAD) in July 2023, which after revealing that Africa borrows more from private creditors that from multilateral and bilateral ones, noted that when African States borrow from private creditors, the rates they apply are hugely disproportionated, compared with the same financial instruments when used in more developed countries. The report calculated for instance that, on average, rates applied to less developed and developing countries (a status in which the almost totality of Sub-Saharan African states are), can be 4 times higher than those of the United States and 8 times higher than those of Germany.