Africa's Debt Is an Opportunity

Jun 28 , 2025
By Sufian Ahmed

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Almost every debate about African public finance centres on “Africa’s debt burden” as its primary topic. The numbers are stark: the median African country now carries debt worth 60pc of GDP, double the ratio of 15 years ago. It devotes twice as much of every tax dollar to interest payments as it did in the early 2010s.

Twenty governments are already in, or on the brink of, debt distress. Ethiopia is one of four countries that have sought to restructure their debt under the G20 Common Framework. Against such a bleak backdrop, it is tempting to conclude that borrowing itself is the problem. That would be a costly mistake.

During my two decades as Ethiopia’s Finance Minister, I learned that debt is neither a panacea nor a curse; it is a lever. Pull it carelessly, and it can trap a country in perpetual repair. Pull it wisely and it raises growth, jobs and future tax revenue. But only if we treat credit as productive capital, protect investment when shocks strike, and mobilise domestic revenue to pay the bill.

Half of the world’s 20 fastest-growing economies this year are from Africa. A trend that has held for over a decade, it has been fuelled by investment, much of it private, but enabled by public spending on roads, energy, health and education. None of it would be possible if governments could not borrow. The International Monetary Fund’s (IMF) rule of thumb is that every dollar a government spends on capital projects produces roughly twice the long-term economic boost of a dollar spent on day-to-day consumption.

That is why I am more concerned about those who cannot access credit, rather than those who do. This includes entrepreneurs who cannot invest in their businesses, farmers who cannot borrow to invest in their farms, and governments who cannot make the capital investments needed for growth.

The real danger lies at the other extreme of borrowing for the wrong reasons or on the wrong terms.

Africa’s creditor mix has widened far beyond the old Paris Club. Bilateral loans from new governments and private creditors on commercial terms now sit alongside traditional concessional loans. While governments generally welcome this diversity – it lowers dependency on any single lender – it also complicates restructuring when trouble hits, as some governments have lately discovered. The cure is not to shut the credit window; it is to understand risks better and keep the bulk of borrowing pointed at capital investment over consumption.

Even the best investment plans collide with crises. In my tenure, I had to walk this tightrope and cut Ethiopia’s capital investment budget – once after the 2008 global financial crash and again in response to droughts. Across the continent, climate-related disasters now threaten to repeat that pattern. We lose seven billion to 15  billion dollars every year due to climate change. Losses are projected to escalate to 50 billion dollars by 2040.

Relying on ex-post relief – shifting funds from long-term projects after every flood or drought – is the fiscal equivalent of eating seed corn. Yet, less than two percent of international crisis financing is pre-arranged  and government relief is typically no better, mostly mobilised only once a crisis is in full swing. Governments need pre-arranged financing: disaster funds, contingent credit lines from development banks, insurance for public assets and effective social protection systems.

When capital budgets are ring-fenced, the growth engine can continue to operate even while the country focuses on fighting the fire in front of it.

The Ethiopian parliament is currently operationalising a new Disaster Risk Management Financing Strategy. At its core sits a new Disaster Risk Response Fund, which aims to pay for disasters partly through domestic resource mobilisation. Ethiopia’s 10-year developmental plan vows to almost double the tax-to-GDP ratio, from 9.2pc today to 18.2pc by 2030. (The median African government collects 14pc of GDP in tax, seven points below the average in advanced economies and two points below other emerging economies.) Robust tax systems are not merely about money; they anchor accountability and reduce dependence on external creditors.

Too much of a good thing can be a bad thing, and there are risks associated with accumulating too much debt. But we should only borrow to invest in growth, and we should increase resource mobilisation. Credit is how countries – and companies and families – bring future earnings into the present to finance progress.

Africa’s challenge is not to avoid borrowing; it is to borrow for growth, protect that growth from shocks, and pay the bill with a stronger domestic tax effort. The task before policymakers, insurers and investors is to turn today’s debate on debt from a tale of woe into an opportunity.

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PUBLISHED ON Jun 28,2025 [ VOL 26 , NO 1313]

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