Does Africa face discrimination in financial markets?

The new ‘Financing for Sustainable Development’ report paints a bleak picture. Released on 12 April and devoted to overcoming the ‘Great Finance Divide’, the study highlights the devastating impact of the Covid-19 pandemic, which has been compounded by the crisis in Ukraine.

Under the UN’s auspices, the ‘task force’ led by China’s Liu Zhenmin (the UN’s deputy secretary-general) brings together some 60 institutions, including the World Bank, the WTO and the Basel Committee on Banking Supervision.

According to their estimates, in 2021, GDP per capita south of the Sahara was 5% lower than predicted before the pandemic. Similarly, 77 million more people – three times the population of Côte d’Ivoire – were living in extreme poverty in 2021, compared to 2019. This represents a setback of “almost a decade” in the fight against poverty.

How high should the debt-to-GDP ratio be maintained?

Faced with such a severe situation, the UN task force is alarmed by the deep financial handicap affecting developing countries – the vast majority of which are African. The gross public debt of African countries was estimated to be around 60% of GDP in 2021, compared to just over 40% of GDP in 2015: a sharp rise. However, this level is still lower than the average ratios found in developed countries (close to 120% of GDP) and East Asia (around 100%).

The financial gap exists. It is not new, nor is it specific to African countries, but it does apply to all developing countries,

“Although the debt service burden in developed countries remains low, even at high levels of indebtedness”, it represents at least a quarter of government revenue for more than one in two sub-Saharan countries, the new report says. On average, in the poorest developing countries as a whole, 14% of revenue is spent on debt interest, compared to 3.5% in developed countries, said the same source.

“The financial gap exists. It is not new, nor is it specific to African countries, but it does apply to all developing countries,” says economist Brahima Sangafowa Coulibaly, vice-president of the US think tank Brookings. “African countries have a more volatile GDP and less stable sources of income. Therefore, it makes sense that they keep their debt-to-GDP ratio lower. The question that remains is whether it should be below 60%; 50% or 40%. This is the key question that needs to be debated,” the global economy and development specialist tells us.

A premature disengagement

In any case, the UN experts note that “most developing countries have already withdrawn or are preparing to withdraw most of the fiscal stimulus measures put in place during the period under review”. This withdrawal is considered “premature” as it could hamper economic recovery, “ultimately leading to even higher debt-to-GDP ratios”.

The solutions recommended by the working group include accelerating debt relief and extending eligibility criteria to highly indebted middle-income countries. The report also advocates reallocating $100bn in special drawing rights to countries in need.

“As we reach the halfway point in financing the Sustainable Development Goals, the findings are alarming,” says UN deputy secretary-general Amina Mohammed. According to the Nigerian leader, “there is no excuse for inaction at this critical moment of collective responsibility; we must ensure that hundreds of millions of people are lifted out of hunger and poverty”.