High debt levels creating funding challenges across Africa 

The IMF says that many countries across sub Saharan African are spending much of mobilised tax revenue on debt repayment. Photo / File 

What you need to know:

  • The high debt levels, the IMF says have crated a funding squeeze that is unlikely to end soon

Sub Saharan Africa is expected to continue struggling with a funding squeeze due to rising debt levels, according to the International Monetary Fund (IMF). 

In its Regional Economic Outlook, the IMF noted that the funding squeeze is far from over, worsened by high external borrowing costs, indicating that African governments must now rely more on domestic resources for development. 

However, IMF said that this creates a new challenge given that many African countries have very low ratios of tax revenue to gross domestic product.   

Mr Abebe Aemro Selassie, the IMF director African department, said that whereas governments in many African countries have been addressing macroeconomic imbalances to stabilise public debt, “it is too early to celebrate as many challenges lie ahead”. 

“The funding squeeze is not over, and while debt levels have stabilised, the cost of repayments has increased and high debt service ratios to revenue risk crowding out vital development spending,” he said. 

The IMF report noted that while median revenues (excluding grants) are projected to remain steady at 17 percent of gross domestic product, they are significantly below 40 percent in advanced markets, which suggests need for stronger efforts to increase revenues, including by expanding the tax base through reduced tax expenditures and improved tax design.

Debt remains a challenge in many African economies. In Uganda estimates from Ministry of Finance indicate that the stock of debt rose from Shs78.8 trillion ($21b) in June 2022 to Shs86.7 trillion ($23.6b) as of June 2023.

The growth in debt has created service repayment challenges with debt servicing now taking up at least 23 percent of tax revenues. 

The IMF further points out that Africa continues to rely on value added taxes, supported by increased formalisation of the continent’s economies. 

However, the IMF noted that a critical precondition for tax policy reforms needs to be considered to support effective tax administration, especially in areas where there is increased use of digitalisation to improve efficiency in collection.