The level of external public debt owed by African governments reached $1.2 trillion last year (P16.3 trillion), driven by the impact of the global financial crisis of 2008, the COVID-19 disaster, slowing growth, rising interest rates and the urgent need for development finance. Across Africa, high external debt is rocking large and small countries, with much of this denominated in hard currencies such as the US dollar, meaning further vulnerabilities for economies. The debt burden is also steeper because of the “African premium” or higher level of interest most African countries pay for debt due to their weaker credit profiles or lenders’ inherent biases and perceptions of risk on the African continent. The riots seen in Kenya in the last days are the direct result of this debt crisis. Unable to secure more lending, saddled with costly debt and an underperforming economy, Kenyan President William Ruto did what the rule book says you should do.
He resorted to the harmless sounding, but devastating alternative known as “domestic resource mobilisation,” where governments attempt to increase the amount of revenue they can raise on home soil to finance their needs. According to the BBC, the Kenyan Parliament and Ruto wanted to introduce a 16% sales tax on bread, a 25% duty on cooking oil, a new tax on financial transactions, a new 2.5 percent annual tax on vehicle ownership as well as another tax on “on products that contribute to waste and harm the environment”. This latter description would have included charges on women’s sanitary products and babies’ diapers. Ruto also wanted to impose taxes on hospital services and increase import duties, in an economy where many support themselves through cross-border trading. Domestic resource mobilisation is a term many in Botswana should be aware of. In the aftermath of the COVID-19 pandemic’s impact on the budget and economic growth, the Finance ministry ramped up debates and plans around increasing government revenue from the local economy. In April 2021, Value Added Tax rose to 14% from 12%, while a new sugar tax was introduced. Various public service fees also rose, while administered prices such as Botswana Housing Corporation rentals, electricity and water tariffs, as well as public transport fares, all rose at the same time. And yet for all the pain Batswana went through as a result of these “domestic resource mobilisation” initiatives, the country is a clear outlier in the troubles facing Africa.
According to a study released this week by the Mo Ibrahim Foundation, Africa has the world’s highest external public debt servicing cost, relative to total revenue. Simply put, there is no other region in the world that pays a higher percentage of its total revenues as external debt. “In 2024, Africa’s yearly external public debt servicing costs amounted to 18.6% of the continent’s total revenue, almost twice that of Europe and more than double that of Oceania,” reads the report. “Africa finds itself in a tough position because of the substantial external public debt service payments due to be paid in the coming years. “More than half of African countries have an external public debt servicing cost that is equivalent to between five and 20% of their total expenditure. “Only three countries are under five percent, namely, Algeria, Botswana, and Zimbabwe.”
For Botswana, the extent of domestic resource mobilisation required was moderated by drawdowns from the government’s reserves. The savings, managed by the Bank of Botswana, were built through decades of budget surpluses and diamond export receipts beyond what was required in the economy, essentially a ‘rainy day’ fund. Through the reserves and a traditionally stable public finance management, as well as sub-Saharan Africa’s highest credit rating, Botswana was also able to not only minimise the amount of external debt it sought but also kept its borrowing costs low when compared to rates charged to other African sovereigns. The wave of tax and levy increases in April 2021 were far below what other African countries meted out on their citizens and as figures from both the Mo Ibrahim Foundation’s Report and a recent Afreximbank study show, the debt crisis on the continent has only grown worse. “The cost of borrowing has increased markedly for African countries in recent years,” the Afreximbank report reads. “For most countries, the spread widened in 2023 and continues to expand in early 2024. “With the COVID-19 pandemic, the conflict in Ukraine, and the surge in global interest rates having severely dented African economies, most of them lost access to international capital markets in 2022 and 2023, as borrowing in foreign-currency-denominated debt became more expensive.”
African states began to look at their citizens to not only finance development but also repay the expensive loans taken over the years. In Botswana, the rebound in the diamond sector in 2022 when Debswana sales reached an all-time high at P57 billion, helped government rebuild its reserves, avoid more foreign loans, and forego the need for further tax increases. In fact, in February 2023, government zero-rated or exempted VAT on a wide range of basic commodities and items, such as salt, sanitary pads, vegetables, cooking oil, infant formula, condoms, baby diapers and Liquefied Petroleum Gas. The list also included white bread as well as ginger and leguminous vegetables. This was in response to inflation trending at 14-year highs due largely to the April 2021 tax and levy increases. “We look at the revenue that we will be forgoing and also the greater good for society”, Finance Minister Peggy Serame told Mmegi at the time. “For fruit and vegetable zero rating, we zero rated them because we are trying to promote healthy living. “The greater good for society should be the guide.” The “greater good,” however, is only possible when the country has the ability to forego certain revenues or defer the time when it will need them. Even with the external borrowing during and after COVID-19, Serame has been able to keep the country’s debt-to-GDP relationship well below the statutory limit of 40%. Most of this debt is pula-denominated and raised from the local capital market, which means it has also helped develop the financial sector, including the setting of a benchmark yield. For Ruto, meanwhile, the time for considering the “greater good” had passed.
Kenya at the last count had a debt-to-GDP ratio of 67.5%. The external debt to GDP ratio was 35%, and when the economy sputtered along, not producing enough activity and budget revenues, Ruto started focussing on “domestic resource mobilisation”. “We have made the right choices, sometimes taking very difficult and painful decisions, to steer Kenya back from the edge of the catastrophic cliff of debt distress,” the BBC quoted the Kenyan President as saying, in an interview about his tax policies. The Kenyan riots show that a debt-stressed continent is reaching a boiling point
