Commodity-dominated economic structure at the heart of troubles

President Cyril Ramaphosa with leaders from the continent attending the African Union summit. Picture: Elmond Jiyane/GCIS

President Cyril Ramaphosa with leaders from the continent attending the African Union summit. Picture: Elmond Jiyane/GCIS

Published Mar 10, 2024


Dr Sizo Nkala

The 56th Conference of African Ministers of Finance, Planning and Economic Development took place in the resort town of Victoria Falls, Zimbabwe, from February 28 to March 5, organised by the United Nations Economic Commission for Africa.

It was held under the theme: Financing the Transition to Inclusive Green Economies in Africa. This was an appropriate theme considering that Africa is struggling with mobilising the necessary financial resources to build resilient and green economies in the context of the deteriorating climate change.

The conference came at a time when Africa is facing a myriad of challenges including constrained economic growth, the rise in conflict and instability, geopolitical tensions, a crippling debt crisis, and worsening climate change among others. In 2023, Africa’s economic growth rate slowed down to 3.3% from 4.1% in 2022. This has been attributed to global economic underperformance, limited access to finance, and the debt crisis that is affecting a number of countries across Africa.

Most African countries underperformed in several key economic indicators such as the fiscal balance, current accounts, and the inflow of foreign direct investment. In 2022,

Africa’s average fiscal balance was a negative 4.7% while the current accounts posted a negative average of 3.7%. This may be linked to the low commodity prices in the global markets which has seen most African countries, the majority of whom have commodity-dependent economies, struggling raise sufficient revenues from trade. Structural issues that constrain sustainable development financing remain a factor in Africa. Domestic savings have remained low at 15% of GDP since 2000 because of low revenue collection, rampant profit shifting by multinationals, illicit financial flows, and weak natural resource governance all contribute to the debt crisis.

Efficient tax collection could mobilize up to $110 billion annually and addressing profit shifting could see developing countries prevent the loss of 1.3% of GDP annually.

Further, large infrastructure financing gaps, general governance failures, and exchange rate depreciation. The conference noted that Africa needs $1.6 trillion by 2030 to achieve the Sustainable Development Goals (SDGs). However, the lack of domestic resource mobilisational capacity and the current tight international financial conditions that have curtailed African countries’ access to the global capital market make it unlikely that such an amount of money will be raised.

Since 2010, Africa’s public debt has increased by 183% to over $1.8 trillion.

The median public debt-to-GDP ratio in Sub-Saharan Africa grew from 28.8% in 2012 to 59.1% in 2022 (UNCTAD, 2023). This means that half of African states have their debt-to-GDP ratio above 59%. While debt is not a problem in general with some developed countries like the US, Germany and Japan having debt-to-GDP ratios of over 200%, it becomes a problem when the debtor countries lack the capacity to service their debts. According to the International Monetary Fund’s (IMF) Debt Sustainability Analysis (DSA) 21 African countries where either in debt distress (eight) or facing a high risk of debt distress (13) which translates into 455 million African citizens living in debt trapped countries. In the last few years several countries namely Zambia, Chad, Ghana, and Malawi defaulted on their debt payments.

In 2023, countries in the region paid over $69 billion in debt service payments which is more than all the aid received in 2021. The size of Africa’s external debt is 29% of its GDP and 140% of its export revenue. Just six years before the lapsing of the Sustainable Development Goals (SDGs) deadline in 2030, 25 countries in Africa spent more money on interest payment than on health, while in seven countries interest expenditure exceeded spending on education. More than half of Africa’s population (751 million people) lives in countries where the government spend more on interest payment than on health and education which are key indicators of the SDGs.

Compounding the debt problem is the failure by the international community to come up with an effective debt resolution mechanism to rescue African countries from the debilitating debt debacle. The mechanisms that have been tried thus far namely the Debt Service Suspension Initiative (DSSI) and the Common Framework for Debt Treatment Beyond the DSSI have proved ineffective as they are non-binding, lack transparency and exclude private lenders who own over 40% of the African external public debt stock. It is not surprising that no country has as yet benefited from these initiatives in any meaningful way. Participants at the Conference rightly agreed that the reform of the global financial architecture which is dominated by the International Monetary Fund (IMF) and the World Bank is one of the remedies for the crisis affecting African countries. Internally, African countries need to strengthen their own institutions and improve their economic governance frameworks. More importantly, at the heart of Africa’s economic problems is the commodity-dominated economic structure. Without a sizeable manufacturing base Africa will remain on the fringes of the world economy vulnerable to the ever-fluctuating commodity prices.

*Dr Nkala is A Research Fellow at the University of Johannesburg’s Centre for Africa-China Studies

**The views expressed do not necessarily reflect the views of Independent Media or IOL