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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is director of the African Department at the IMF
For much of the past 30 years, I’ve worked with countries as they’ve dealt with grave economic challenges. More recently, this has been the case for many countries across sub-Saharan Africa, as they have drifted into what I call the “grey zone”: not an outright crisis but burdened by imbalances that leave them dangerously exposed. Now, as I prepare to hang up my boots as director of the IMF’s African Department, I can’t help but reflect on these decades — and a set of abiding lessons recurs.
First, public debt problems emerge gradually — and then all at once. Governments make spending and borrowing decisions with the expectation that a certain level of economic growth will continue forever. Deficits widen slowly, debt ratios creep higher. Favourable financing conditions can supercharge that feeling of immortality. But even reasonable fiscal plans tend to fall victim to external shocks that throw growth off course and push a country towards the edge. This was true for the likes of Greece and Portugal when the global financial crisis hit — and for many sub-Saharan African countries after the pandemic.
Second, countries can remain in the “grey zone” far longer than we think feasible. Successive shocks have eroded fiscal buffers. In country after country, interest payments on debt have drifted upwards, and are very high relative to revenues. In general, though, debt tolerance seems to have become somewhat higher — partly because of greater access to domestic markets, partly because some external creditors are prepared to take the risk, at a price. But for others, the problem becomes one of solvency rather than just liquidity. And some countries prefer to delay debt workouts, resulting in austerity and depressed growth.
Third, for those countries pushed over the edge, post-default recovery is often faster than feared. Default can lead to significant economic, political and social costs. It can disrupt market access and impose considerable losses on creditors. But these costs tend to be less than the damage wrought by delayed restructurings. And once debt is restructured and uncertainty resolved, recovery tends to take hold more quickly than expected. Just look at the impressive recoveries of Ethiopia, Ghana and Zambia, where growth and investment bounced back markedly due to efforts to restructure their debts.
Fourth, it is, of course, best to avoid getting too close to the edge in the first place. Over my career at the IMF, I have seen fewer countries falling victim to acute balance of payments crises and more able to pull back from the edge. Many countries owe this resilience to improved policy frameworks — notably, keeping fiscal deficits manageable at levels that can largely be financed domestically — and exchange rates flexible for when shocks hit. This has helped reduce their sensitivity to global shocks and tightening financial conditions.
Many African countries have made progress in this direction in recent years. The region’s budget balance — excluding interest payments — has steadily improved. Sub-Saharan Africa achieved this consolidation thanks to bold reforms, despite a bigger hit to output from the pandemic, costly and intermittent capital market access, and much reduced concessional financing. In short, strong fundamentals and avoiding unforced policy errors are the best insurance against systemic stress.
I remain optimistic about the region’s prospects. This will be the African century. Progress in the past 30 years has shifted opportunities for an entire generation. Demographics will ensure that sub-Saharan African countries are among the few with a rising working-age population. Much investment and consumption demand will follow, fostering innovation and new opportunities amid the ongoing digital transformation.
Still, one cannot take economic progress or prosperity for granted. The global “rules of the game” are shifting radically and the levers countries have relied on for decades — aid flows to bridge funding gaps for vital development needs and unfettered trade to fuel export-led growth — are unlikely to produce the gains they once did. And, as the Iran war reminds us, the shocks will keep coming.
More volatility and more intrusive geopolitics mean that countries in the “grey zone” will find it even harder to step back from the edge. In this environment, insurance against shocks is not pessimism; it is a rational investment. The region’s ability to face this latest shock from a better position tells us two things: policy progress can be African-led, and we can look to the future with confidence.
