African countries need ‘fiscal discipline’ to stop falling into debt

8 Nov 18

African countries can avoid debt distress if they ensure there is an ideal balance between revenues and expenditure, a former president of the African Development Bank has told a conference.

Donald Kaberuka said that “African can get it right” by countries achieving ‘fiscal discipline’, at a conference hosted by the Overseas Development Institute on Tuesday.

The delegates at the two-day conference discussed Africa’s rising debt as the World Bank figures suggest that 40% of countries on the continent are at risk of falling into debt distress.   

Kaberuka, who led the AfDB between 2005 and 2015 and is now the high representative of the African Union Peace Fund, said: “There is nothing new that we have not dealt with before,” referring to the continent’s debt crises in the 1980s and 90s.

“It’s not about our debt – it’s about fiscal discipline,” he added. He explained that during the last crisis, it was not loans that brought the continent into distress but the poor growth.

The continent is facing another debt crisis, as eight countries in sub-Saharan Africa are in debt distress and a further 18 are at ‘high risk’ of joining them, according to the ODI.

Kaberuka also said that most countries in Africa will face big “challenges” in the next 20 years, as they have to invest more in human development and infrastructure to meet the needs of the growing population.

He said that countries need strong ‘fiscal discipline’, such as strong public financial management and the ability to raise taxes.

“We need to make a big effort to raise domestic revenue,” he said. “Every country should be able to raise around 2-3% of GDP extra [in taxes].”

Baba Musa, director of the debt management department of the West African Institute for Financial and Economic Management, also said that in some cases, increasing tax intake could remove the need for borrowing completely.

Many countries in the region look to borrowing to address their investment financing gap. Shakira Mustapha, ODI research fellow, said that many countries “fail to capture the return of their investment through tax”, which means they lose out on revenue.

Kaberuka also called for more capacity – such as knowledge and skills – within ministries to “get good deals” from lenders.

“If we can find a way to build the capacity of governments’ to manage their debts and plan their investments, I think we have come a long way,” the former president said.

Other panellist at the conference, including Baba Musa, the director of debt management at the West African Institute for Financial and Economic Management, and Carolina Renteria, the division chief of the IMF’s Public Financial Management Division, also called for the tax base on the continent to be widened.

According to an ODI report, a country is seen as in debt distress when it is struggling to ‘service its debt’, for example to restructure its debts.

But Shanta Devarajan, acting chief economist of the World Bank, warned: “Let’s not think of taxation as a panacea. 

"I know people say that instead of borrowing, countries should raise taxes, but taxes have cost too.”

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