A UN economist reports that African countries are increasingly dedicating a larger share of their revenues to servicing debt interest payments.

During the African Economic Conference in Botswana, Raymond Gilpin, chief economist and leader of the strategy, analysis, and research division at the United Nations Development Programme’s regional office for Africa, told African Business that the last twenty years have witnessed a significant change in Africa’s debt landscape, shifting from concessional to commercial lending. This evolution has led to a steep rise in the interest payments that nations face on their loans. He stresses that prioritizing creditors over essential sectors like education and healthcare is detrimental.

“This year, African nations are projected to spend around $163 billion on debt servicing, a sharp rise from $61 billion in 2010. Moreover, over half of the countries on the continent are directing more resources toward debt service than to health and education, which is not sustainable,” he notes.

Gilpin contends that reforming the global financial system is crucial for enabling Africa to secure more concessional financing and ensuring that commercial debt is more fairly priced. He believes that Africa is currently overpaying for debt in international markets.

“The institutions that determine risk pricing do not fully comprehend the continent and overlook important data points that accurately indicate an economy’s repayment capacity,” he adds.

Tax increases must take precedence over external borrowing

Mavis Owusu-Gyamfi, president and CEO of the African Centre for Economic Transformation, argues that in light of dwindling concessional finance and rising debt costs, the focus should shift to mobilizing domestic resources. However, she emphasizes the necessity for governments to implement innovative approaches to enhance tax revenues.

“As we strive to boost tax revenue, we often find ourselves repeatedly taxing the same individuals. It’s akin to perpetually slicing the same cake, which is simply unsustainable,” she cautions.

Governments often hesitate to raise tax burdens on their citizens for fear of political backlash. In June, violent anti-government protests erupted in Kenya after President William Ruto’s government proposed a finance bill with significant tax hikes (as illustrated in the image above).

Engaging the informal sector is critical, but she warns that small businesses should not bear excessive burdens as they already contribute through taxation.

“It’s important to acknowledge that the informal sector does pay taxes. While we often claim they don’t, they contribute through local government levies, which constitute a form of taxation. If they are paying these levies, local governments must utilize these funds responsibly and reduce dependence on central budgets,” she explains.

Anthony Simpasa, director of macroeconomic policy, forecasting, and research at the African Development Bank, asserts that significant improvements are needed to elevate Africa’s tax-to-GDP ratio from the current 15% to between 20% and 23%. For instance, tax authorities should leverage technology to increase compliance and close loopholes.