How Africa can escape the debt trap

By Hippolyte Fofack

The narrative that Africa faces a persistent debt crisis has become entrenched. In fact, despite representing nearly one-fifth of the world’s population, the continent accounts for less than 3% of global sovereign debt.

By contrast, the European Union and the United States account for a much larger share (nearly 16% and more than 34%, respectively). Moreover, Africa’s average debt-to-GDP ratio, at 67%, is markedly lower than those of Europe (88.5%), the US (122.6%), and Japan (236.7%).

Nonetheless, many countries on the least-indebted and most capital-starved continent remain stuck in a debt trap. On May 12–13, Senegal will host an international conference to address the country’s escalating debt crisis and, crucially, one of its main drivers: the structural asymmetries embedded in the global financial system.

This flawed architecture has obstructed Africa’s access to affordable, long-term capital and prevented the continent from diversifying its sources of economic growth and trade, transforming debt from a manageable development instrument into a self-perpetuating cycle of vulnerability.

In particular, the shift toward costly, short-term, market-based borrowing amid declining concessional lending has trapped African countries in cycles of indebtedness and external dependence. Constrained by fragmented monetary landscapes and underdeveloped domestic financial markets, African countries are forced to borrow in foreign currencies, mainly the US dollar. This leads to currency mismatches and exposes these countries to disorderly capital outflows and exchange-rate and interest-rate risks, especially monetary-policy shifts by the US Federal Reserve and other major central banks.

The balance-of-payments constraint associated with dollar funding creates a negative feedback loop. Exogenous economic shocks trigger capital flight to safe havens, sudden stops in financial inflows, and currency depreciation, all of which exacerbate the debt burden. Policymakers enact fiscal austerity, leading to a further slowdown in economic growth and revenues that make it even harder to service debt in the future.

Credit-ratings agencies such as S&P, Fitch, and Moody’s deepen the debt trap by assigning most African countries lower ratings, which substantially elevate their borrowing costs and limit their market access. Sovereign bonds issued by African countries typically yield 8–15%, in sharp contrast to yields of 1–5% in Europe and North America. These spreads impose high macroeconomic costs. According to the United Nations Development Programme, credit-ratings agencies’ subjective evaluations have cost African countries an estimated $74.5 billion.

These additional costs help create a debt overhang. Interest payments now account for more than 20% of government revenue in several African countries—including around 40% in Nigeria and over 70% in Egypt—thereby imposing significant opportunity costs on development. Resources that could be allocated to infrastructure, industrial policy, human-capital development, and technological upgrading are instead redirected to debt servicing.

In short, Africa is paying so much not because of the amount of debt it has accumulated, but because of how that debt is structured and perceived. For African countries, it costs more to borrow less, setting unrealistic return-on-investment expectations that further undermine debt sustainability. As a result, a growing number of African countries have pursued rollovers and refinancing options, such as issuing new eurobonds, to settle maturing obligations—falling deeper into the debt trap.

This has accelerated the shift in recent decades from long-term concessional loans to short-term commercial debt. Private creditors now hold more than 40% of Africa’s external public debt, up from 17% in 2000. Loans with shorter maturities compress repayment timelines, increase refinancing risks, and are misaligned with Africa’s long-term development objectives. They also raise the risk of maturity clustering. This year, for example, African countries face a record $90 billion debt wall driven by maturing eurobonds. Difficult tradeoffs will likely be necessary.

At the same time, Africa faces other economic constraints. The continent loses more than $50 billion annually in illicit financial outflows through trade misinvoicing, abusive transfer pricing, and tax avoidance. The global financial system enables these leakages with secrecy jurisdictions and limited multilateral cooperation on international taxation.

Moreover, the erosion of human capital and a chronic infrastructure deficit in an austerity-prone operating environment leave many African economies vulnerable to commodity shocks that drive external liabilities higher. When balance-of-payments crises invariably materialize, African governments are compelled to borrow in foreign currencies and implement adjustment programs that prioritize short-term fiscal consolidation over long-term development.

(These programs’ procyclical austerity measures can help stabilize public finances but often weaken state capacity and lower potential economic growth). Over time, this leads to repeated cycles of borrowing, crisis, and adjustment—the very definition of a debt trap.

To break the cycle of dependency and accelerate development, policymakers must redesign the global financial architecture. Aligning debt maturities with longer-term development objectives requires improving access to concessional financing, which can be achieved by strengthening development-finance institutions’ capital base.

At the regional level, policymakers must fast-track monetary integration and the development of deeper domestic capital markets to support long-term borrowing in local currencies and address structural mismatches between currency denomination and revenue generation.

It is also crucial to reform credit-ratings agencies’ methodologies to achieve parity in access to affordable development finance, and to reduce the incidence of procyclical policies. This will not only rebuild these institutions’ credibility but also foster economic growth and sustainable development. Lastly, the international community should regard fiscal consolidation and debt sustainability as being in service of a broader goal: to promote Africa’s economic development.

Africa is not heavily indebted; it is a victim of deep-seated inequalities, underpinned by an international financial architecture that prevents structural economic transformation and perpetuates debt crises. If the world is to harness Africa’s demographic dividends and unlock its growth potential, both of which are essential to maintaining financial stability worldwide, the institutions, rules, and norms of global governance must become more balanced and development-oriented.

Hippolyte Fofack, a former chief economist at the African Export-Import Bank, is Parker Fellow at the Sustainable Development Solutions Network at Columbia University, a research associate at Harvard University’s Center for African Studies, a distinguished fellow at the Global Federation of Competitiveness Councils, and a fellow at the African Academy of Sciences.

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