Strike the right balance between sustainable development and sustainable debt

Sub-Saharan Africa has made considerable economic progress in the past two decades: extreme poverty levels have decreased by a third; life expectancy has increased by a fifth; and real per capita income has grown, on average, by about 50%. Still, sub-Saharan Africa is still halfway to meeting the Sustainable Development Goals.

To achieve these goals, sub-Saharan Africa will need financing; And one of the ways to access it is through obtaining loans. If done properly, taking on debt makes sense to governments. Debt is worth it if the debt is used to finance projects that boost productivity and living standards, such as investment in roads, schools and hospitals, and if governments can recover sufficient benefits from these investments to repay the debt incurred.


Debt margin

Debt margin

However, the debt margin in this region has been reduced due to the rapid increase in public debt levels between 2011 and 2016; Since then, these levels have stabilized at around 55% of GDP, on average. The countries of the region also depend heavily on commercial loans obtained in the national and international financial markets; This indebtedness represents more than 70% of the increase in the volume of debt in this decade. This shift towards non-concessional financing implies higher spending on debt service and lower spending on social investment and infrastructure.

It is clear that sub-Saharan African countries will not be able to achieve the SDGs simply through the “path of debt”.

So what does it take? This was the subject of a conference organized on December 2 by the IMF together with the Government of Senegal, in collaboration with the United Nations and the Cercle des économistes. Dakar was the right venue, at a time when Senegal has launched its Sénégal Émergent Plan, which aims to transform its economy, create jobs and raise living standards. It was also appropriate because, as I told conference participants, authorities can draw inspiration from the Lions of Teranga, Senegal’s national soccer team, who impressed everyone at last year’s African Cup of Nations.


A balanced approach

debt loans

The success of the Teranga Lions is based on a balanced approach between the desire to attack and the need to defend, between individual efforts and team performance. Similarly, Africa tries to strike the right balance between financing for development and supporting debt sustainability, between investing in people and upgrading infrastructure, between long-term development goals and urgent immediate needs. In summary, a balanced approach is necessary; and to achieve this, all stakeholders will have to redouble their efforts.

There are five important tactics that we can all carry out to find the right balance between development and debt; three of them addressed to the sub-Saharan authorities and two to the international community and the private sector.

The first tactic is to generate higher public revenue. This is an area in which sub-Saharan Africa lags behind other regions. We estimate that revenue collection is between 3 and 5 percentage points of GDP below the revenue potential. This gap can be closed, as evidenced by the good example of Uganda, where, with the technical support of the IMF, reforms have contributed to increasing the income to GDP ratio, from 11% in 2012 to almost 15% in the past. year.

The second tactic is to increase the efficiency of investment spending. The reality is that only approximately 60% of the region’s infrastructure spending is translated into public capital. For every dollar invested, you only get about 60 cents in asset value.

The third tactic is to strengthen public debt management. A fundamental objective is to improve debt transparency by supplying accurate, complete and timely data. In turn, this can help strengthen investor confidence, support domestic capital markets, and reduce debt service costs.


The global team


Even if countries apply these three tactics, we all must do more. Increasing internal resources is essential, but not sufficient. Even with great internal efforts, it would only be possible to cover a quarter of the estimated needs to achieve the SDGs. Therefore, the global team must also do more.

And here comes the fourth tactic. Advanced economies can do more, especially when it comes to aid. The goal is to increase official development assistance to 0.7% of national donor income. Also, donors can focus more on infrastructure, through grant making and concessional financing for projects that are expected to have high rates of return.

And the fifth tactic. We must also incorporate more private sector actors, among other things, more foreign direct investment, to help close the important financing gap. Responsibility for achieving the SDGs must start with public sector efforts, but it does not end there. Above all, we need to ensure that both private and public actors end up on the winning side. A good example would be “combined financing,” which groups grants, concessional financing, and commercial financing.


How can we promote risk sharing?

debt loans

How can we expand development financing for the benefit of all? These are just some of the issues that Africa is trying to solve. But it is clear that we all benefit from acting together to advance the good of Africa. As a Senegalese proverb says, “What one person can do, two people can do even better.” This is the spirit of the Lions of Teranga. It is the same spirit that is at the heart of what we are trying to achieve in sub-Saharan Africa.