IMF African Department Director Abebe Selassie said that African countries have experienced a rise in the sovereign debt. Speaking at the 42nd annual meeting of the Association of African Central Banks (AACB) held in Kigali, Rwanda on July 31st he said,” the average debt has increased by almost 20 percentage points of the GDP between 2013 and 2018.”
Mr. Abebe said that large primary deficits and valuation effects associated with exchange rate depreciation were the main drivers of accumulating sovereign debt.
High public debt can increase the risk of ‘soft fiscal dominance such as pressures to contain domestic borrowing costs and the fear of floating is magnified when foreign currency debt is high. Moreover, high public debt weakens the transmission of monetary policy by crowding out private debt resulting in shallow credit markets and fiscally induced pressures on interest rates.
Furthermore, high public debt creates financial stability risks as government arrears to suppliers prevent the private sector from repaying bank loans leading to a significant rise in non-performing loans.
AACB works under the auspices of the African Union with the objective of promoting cooperation in the monetary, banking, and financial spheres in the African region. The symposium focused on strategies for sovereign debt management, challenges faced by African countries with a view to keep debt at sustainable levels, and financing the development agenda.
Rwandan Central bank governor John Rwangombwa said,” it is advisable to borrow from the internal to reduce foreign exchange risk, but Africa faces the financing gap. African countries have to improve debt management capacity, borrowing for the right purpose, and manage to build their capital markets.”
Mr. Abebe asked central banks to strengthen the monetary policy framework, improve debt data collection, and address the bank-sovereign nexus in a bid to manage the spillovers of high public debt.
