As an African businessperson deeply invested in the future of our continent, I am increasingly concerned about the persistent reliance on borrowing to address economic challenges. This pattern, prevalent in countries like Kenya and Nigeria, exacerbates financial woes and hinders sustainable development.
The Kenyan Dilemma
Kenya’s situation exemplifies this troubling trend. In the wake of economic fallout from widespread protests, the Kenyan government plans to seek new financing from the International Monetary Fund (IMF). These protests were sparked by proposed tax hikes intended to raise over $2 billion. When public backlash forced the government to reconsider these taxes, they turned to international lenders for support instead.
Discussions are currently underway between Kenyan officials and both the IMF and the World Bank for new development policy financing. Kenya’s ongoing three-year IMF program, valued at $3.6 billion, is set to conclude soon, prompting the nation to seek an extension to manage its financial challenges.
Critics argue that Kenya’s debt accumulation is unsustainable, especially since about three-quarters of tax income is spent on loan repayments. To address its fiscal deficit, which has widened to 4.2% of GDP, the government plans to rely on both external and domestic borrowing.
Government representatives have emphasized that Kenya’s commercial loans are the most burdensome, as opposed to concessional debt from institutions like the IMF and World Bank. There is a strong belief that continued engagement with the IMF is essential to address the debt crisis effectively.
Nigeria’s Taxation Strategy
Nigeria, on the other hand, has focused on targeting domestic revenue sources. The government plans to impose a one-time 50% tax on windfall profits made by banks from currency gains following the naira’s devaluation. This measure aims to bolster public finances amidst a cost-of-living crisis, reflecting similar efforts seen in Europe.
The naira’s significant devaluation has impacted Nigerian banks, with the currency trading around 70% lower against the dollar compared to its pre-devaluation level. The proposed tax has already affected the NGX Banking Index, causing declines in major banks’ stocks.
Additionally, the Nigerian government is looking to increase spending by $3.8 billion, an initiative likely to gain support from lawmakers. This move is part of broader efforts to address public finance challenges through domestic revenue generation rather than relying solely on external borrowing.
The Broader African Context
The debt challenges faced by Kenya and Nigeria reflect a broader issue across the continent. According to the African Development Bank Group, Africa’s total external debt rose to $1.152 trillion by the end of 2023, with debt servicing costs projected to reach $163 billion in 2024. These rising costs pose a significant threat to achieving Sustainable Development Goals (SDGs) in critical areas such as health, education, and infrastructure.
The so-called “Africa premium” compounds this problem, leading to higher borrowing costs for African countries despite their lower default rates compared to other regions. This unjustified increase in borrowing costs is largely driven by the perceived risks associated with African economies, as assessed by global rating agencies.
The IMF’s Role and Future Prospects
The International Monetary Fund (IMF) is leading efforts to help countries in Africa reduce their debt burdens and stabilize their economies. This initiative includes re-profiling existing loans, debt swaps, and credit guarantees aimed at lowering borrowing costs. The IMF’s strategy is designed to provide a range of options tailored to the specific needs of individual countries, moving beyond the current G-20 mechanism known as the Common Framework, which only deals with the aftermath of defaults.
The IMF’s new initiative, alongside efforts to raise domestic revenues and increased support from multilateral lenders like the World Bank and the African Development Bank, aims to help countries like Kenya avoid defaults and manage their debt more effectively.
Conclusion
As an African businessperson, it is disheartening to see our governments’ persistent reliance on borrowing to manage economic crises and fiscal deficits. While external financing or new taxes may offer short-term relief, the broader issue of unsustainable spending remains unaddressed. The IMF’s new initiative offers hope for a more comprehensive approach to debt management, but without significant reforms in spending practices, African nations may find themselves trapped in an endless cycle of borrowing and debt repayment. We must advocate for prudent fiscal management to ensure a stable and prosperous future for our continent.
Edith is the Founder and CEO of Arielle for Africa Ltd. and Arielle Advisory. A serial entrepreneur, she is on a mission to empower African youth through job creation, promoting entrepreneurship, scaling African businesses, advancing STEM education, and championing sustainability in business. Outside of her profession she is an avid reader, podcast show host, writer and public speaker.
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