By Betty Guchu
Sub-Saharan Africa’s public debt has surged in the last decade, moving from concessional to commercial loans. Kenya’s increased Eurobond issuance exemplifies the challenges posed by private sector debt whose shorter maturities hinder long-term benefits, exacerbate inequality through tax revisions, impact human rights and women’s livelihoods, and crowd out local businesses.
Source: Medium – @goswami.piyush/polyp.org.uk
Over the course of the last ten years, sub-Saharan Africa’s public debt stock has grown due to increased borrowing. The loans have shifted from traditional concessional loans obtained from bilateral (official creditors of the Paris Club) and multilateral creditors to commercial loans taken out with private creditors.
The portfolio of creditors changed between 2006 and 2020, with the majority of African nations giving up concessional loans for lending from private creditors and non-Paris Club creditors, primarily China. The percentage of debt owed to bilateral creditors fell from 28% of GDP in 2006 to 10% in 2020 among the countries eligible for the Debt Service Suspension Initiative (DSSI), which are primarily African states. During the same period, the percentage of debt owed to multilateral creditors decreased from 55% to 48% of GDP.
Due mostly to increased borrowing from private creditors, the proportion of Eurobonds held by private creditors grew from 3% in 2006 to 11% in 2020. African nations issued US$179 billion worth of bonds in 2020, up from US$67 billion in 2012. A number of reasons contributed to the change in borrowing patterns, including the fact that some nations were not eligible for concessional loans, that the use of money borrowed from private creditors was not as closely monitored, and that the terms of these loans were less stringent than those of international and Paris Club creditors. Kenya, for instance, issued US$2 billion in Eurobonds in 2014, US$2 billion in 2018, US$ 2.1 billion in 2019 and US$ 1 billion in 2021. In 2020, Eurobonds and syndicated loans accounted for 70% and 27% of Kenya’s commercial debt, respectively, according to the IMF.
In 2020, Eurobonds and syndicated loans accounted for 70% and 27% of Kenya’s commercial debt, respectively, according to the IMF.
In contrast to loans from bilateral and multilateral creditors, those from private creditors have shorter maturities, leaving governments with shorter timeframes within which to spend the costly funds before beginning to pay interest on the loans. The shorter timeframes are often not sufficient for the investments made to have spurred economic growth and, therefore, African nations such as Kenya, which have been taking out short- to medium-term loans to fund long-term mega-infrastructure projects that take a long time to yield social and economic benefits – and contribute only to a marginal increase in the tax base and therefore to the potential for revenue collection – are particularly vulnerable to the short maturity periods.
Additionally, because Eurobonds are subject to market conditions (including variations in currency values), interest rates on these bonds, which constitute a significant portion of Kenya’s private sector debt, are higher than those on other external loans. Moreover, unlike debt from multilateral and Paris Club bilateral creditors, there is no elaborate framework that guides debt relief or, indeed, the restructuring of private sector debt.
Because Eurobonds are subject to market conditions (including variations in currency values), interest rates on these bonds, which constitute a significant portion of Kenya’s private sector debt, are higher than those on other external loans.
With regard to domestic private sector creditors, the interest rates for treasury bills are also high and, therefore, attractive to local financial and non-financial institutions. This implies that the government has to make repayments above the market rates when the treasury bills mature, resulting in higher debt servicing costs.
Tax injustice and neglect of pro-poor programmes
The growing trend by African states to prefer borrowing from private creditors has had various implications on these jurisdictions, including fuelling tax injustice. In a bid to finance debt repayment, governments have resorted to reforming tax policies as a means of raising more revenue. For example, Kenya has initiated various tax measures, such as the introduction of the Digital Service Tax (DST), the expansion of the residential income tax bracket, the introduction of new Value Added Tax (VAT) rates for certain commodities and the restructuring of income tax brackets.
These changes haven’t always been forward-thinking. On the contrary, they have exacerbated inequality by placing a greater strain on taxpayers and decreasing disposable income, particularly for the poor. Moreover, rather than being utilized to pay for essential public services, tax revenues are increasingly being used to service debt. And while information on the utilisation of the funds borrowed from private creditors is limited, available data points to the funds being preferably directed to economic sectors like infrastructure and energy development rather than to health, education and social protection.
As a result of the unequal funding, it becomes more challenging to fulfil international commitments. For instance, Kenya has yet to meet the Abuja Declaration requirement to spend 15% of its budget on the health sector, or the Global Partnership for Education pledge to set aside 6% of its GDP for education.
Private sector debt and human rights
It is impossible to overstate the effects of onerous public debt on the realization of citizens’ human rights as laid out in the International Covenant on Economic, Social, and Cultural Rights and other human rights treaties. In effect, the heavy external debt loads occasioned by the preference for expensive commercial loans have a detrimental effect on the development of debtor countries and the fulfilment of human rights because they divert funds away from Same essential social services, as mentioned above.
As stated earlier, commercially acquired debt is substantially more expensive since it attracts high interest rates and has a shorter repayment period. As a result, servicing commercially acquired debt significantly diverts scarce national resources from government programmes that deliver crucial public goods and services like education, health, and social protection. This in turn hinders the growth of developing nations and limits their ability to establish the conditions necessary for the realization of human rights. As a result, human rights, including the right to education, health, adequate housing, work, and development are threatened and violated, and in many developing countries, such as Kenya, millions face poorer living conditions. Furthermore, the requirements that borrowing nations must meet in order to be eligible for debt relief frequently force governments to further cut back on social services spending, which is essential to ensuring the protection of human rights.
Private sector debt and women’s livelihoods
Costly private sector debt and the related repayment obligations affect women more than men. For example, women bear the brunt of cuts in healthcare budgets as governments put in place austerity measures and fiscal adjustment policies because, together with children, they are frequent users of healthcare facilities. Moreover, as women are the primary caregivers, a shortage of basic healthcare or other social services often leaves carrying the extra burden of caring for the young, the sick, and the elderly.
Costly private sector debt and the related repayment obligations affect women more than men.
Moreover, because they are frequently marginalized, excluded from decision-making at all levels, or do not have independent control over resources and livelihoods, women are more likely to be negatively impacted by government initiatives to raise money for debt repayment, such as higher VAT that drives up the price of commodities.
In general, a country’s private sector debt obligations place limits to government spending on gender-responsive development programmes. This in turn restricts the development of women’s livelihoods, thus frustrating efforts towards the reduction of poverty and inequality, and hindering the advancement of human rights and the achievement of sustainable development for all.
Domestic private sector debt crowding out MSMEs.
Private investment is stifled as a result of a government’s increased borrowing from regional banks, insurance providers, pension funds, and treasury bills and bonds. Studies have indicated that a surge in government borrowing from local banks may be a factor in the reduction of credit accessible to micro, small, and medium-sized enterprises (MSMEs).
In the case of Kenya, for instance, due to the higher interest rates linked to the country’s public debt stock, local financial and non-financial organizations lend more money to the government than they do to MSMEs.
Moreover, since the government is viewed as a low-risk creditor, local banks tend to favour it, with the effect that economic output is stymied as entrepreneurs fail to obtain sufficient private sector investment to start or grow their businesses. Between 2013 and 2020, the private sector’s level of access to credit and private investment decreased from 12.4% to 7.3% while the country’s domestic debt stock increased within the same period.
In general, lending to MSMEs has been shown to be hindered by domestic private sector debt even though the COVID-19 pandemic, which impacted numerous enterprises, and the development in mobile lending platforms may also have contributed to the reduction in loan amounts.
Undermining sovereignty of national development strategies and assets
Loans from commercial creditors bring with them conditionalities that compromise sovereignty in developing strategies and building assets. Indeed, it is difficulty for a country that is highly aid-dependent to take ownership of its national initiatives, and even more so when the country is heavily indebted.
It is difficulty for a country that is highly aid-dependent to take ownership of its national initiatives, and even more so when the country is heavily indebted.
Chronic indebtedness brought on by a predilection for expensive, short-term commercial loans puts borrowing nations under the control of their creditors and undermines their ability to freely determine and pursue policies favourable to their development in line with the Declaration on the Right to Development.
Moreover, private sector players who contribute to a country’s public debt portfolio hold a lot of sway over the government as a result of the conditionalities that come with the financing they provide. In the case of Kenya, this is inferred from the country’s institutional and legal framework for public finance, which gives public debt precedence over other budgetary obligations. In other words, Kenya must pay down its debt before funding other government obligations, such as providing services.
Secrecy and lack of transparency
To guarantee responsible public debt management, data on public debt must be transparent. This draws investors, decreases the cost of borrowing from outside sources, encourages accountability, and attracts higher credit ratings (as investors prefer countries where they know the stock and composition of debt). However, debt instruments driven by the private sector, particularly Eurobonds, are distinguished by their broad discretion and lack of oversight in their application.
This leaves the door wide open to corruption and mismanagement of the borrowed funds, further burdening the citizens who must pay back the debt. For instance, there have been allegations of corruption involving Eurobonds issued by Kenya and questions have been raised regarding the use to which the loans thus obtained have been put.
The engagement and involvement of multiple stakeholders in debt decisions is necessary for prudent debt management. However, there is no structure in place to direct how citizens and other non-state actors can participate in choices about debt purchases from private sector creditors and how to invest the proceeds. As a result, private sector debt continues to promote opacity and to deprive citizens of their right to participate in the management of public debt. Moreover, by excluding the participation of citizens and other non-state actors from decisions concerning debt, private sector debt continues to limit citizens from exercising their sovereignty.
To mitigate the negative implications of private sector debt and improve its management, a number of measures can be taken that include the development of laws and policies that would guarantee transparency and access of information regarding public debt, more open and accountable debt agreements, and enhancing the role of citizens in the decision-making processes concerning the acquisition of private credit.
Private sector creditors should also be challenged to recognise their contribution to the problem of public debt and encouraged to consider offering debt relief in order to expand the fiscal space for government spending on essential public goods and services.
This article is part of the East African Tax and Governance Network (EATGN) Media Fellowship Initiative as part of the Scaling Up Tax Justice (SCUT) in collaboration with Tax Justice Network Africa (TJNA).
