Sub-Saharan Africa has gone through 5 years of shocks that have weakened its public finances between 2020 and 2024. Over this period, public debt has risen rapidly, fuelling concerns across the region.
In today’s discussion, we delve into the public finances of emerging economies in 2025, based on an exclusive analysis of our most recent EcoPerspectives issue focused on these economies. With robust but slowing growth, rising public debt and limited fiscal flexibility, what challenges and opportunities lie ahead for these countries?
Since the beginning of the year, the resumption of the trade war between the United States and China has led the latter to redirect its exports in record time. On average over April to July, while Chinese exports to the US contracted by 23% year-on-year (yoy) in value terms, those to Africa increased by 34%, far more than those to ASEAN countries (17%) and Europe (7%).
In South Africa, the coalition government formed in June 2024 is overcoming its strong internal divisions one way or another. After three months of stormy negotiations, the final version of the 2025/2026 Budget, presented to Parliament at the end of May, was recently approved by all coalition parties. This is a necessary condition for regaining investor confidence, but it is not enough. The government will also have to ease diplomatic tensions with the United States. Without a significant rebound in investment, economic growth is likely to remain weak over the next three years, contributing to the fragility of public finances.
In Kenya, further fiscal consolidation is proving increasingly difficult. The efforts required of the population were strongly protested over the summer of 2024, forcing the government to withdraw the finance bill it had drafted with the IMF. Now, for the current fiscal year, the deficit is to be reduced mainly through spending cuts, which are adversely affecting economic growth. While this alternative offers a brief respite, a sustained increase in public revenues remains essential to ensure debt sustainability and safeguard the IMF’s financial support in the medium term. This could prove all the more necessary as Donald Trump's return to the White House could pose new risks for Kenya's public and external accounts.
Despite negative net long-term public debt flows over the period 2021-2023 (see chart), China remains the top lending country to Sub-Saharan African states, ahead of France, the UK and the US. However, long-term public debt owed to China contracted by 4.5% in current dollars between 2019 and 2023, while debt owed to all creditors increased by 15.6%.
In 2024, Angola’s economic growth struggles to bounce back significantly. The non-oil economy is facing multiple headwinds, while the hydrocarbon sector is seeing a moderate return to growth. Despite large current account surpluses, pressure on external accounts has remained strong since resumption, in 2023, of the servicing of the external debt owed to China. The kwanza continues to depreciate against the dollar, which is severely deteriorating the State’s solvency. The noose tightens on the government. It is facing ever-higher external debt repayments at a time when the risk of depletion of Chinese capital inflows is higher.
The macroeconomic outlook for South Africa is gloomy. After a year of unprecedented electricity shortages in 2023, economic growth is only expected to rebound very slightly in 2024. However, investor confidence has been boosted with new political forces entering into government in June 2024, following the general election in May. The new coalition government, with populist parties largely absent, offers the prospect of a degree of political continuity, continued fiscal consolidation and the implementation of reforms designed to increase the medium-term economic-growth potential. However, this government of national unity is built on uneasy alliances
Since the beginning of 2024, the Nigerian authorities have accelerated the implementation of reforms aimed at curbing the deterioration in external accounts and restoring macroeconomic stability. By relaxing the exchange rate regime and raising interest rates, the central bank has sent a strong signal to foreign investors. However, it will take time and the implementation of major structural reforms for capital inflows to take off significantly and durably. At the same time, fiscal consolidation is being complicated by an unprecedented inflationary shock and its impact on economic growth. The high cost of implementing reforms could force the government to backtrack.
Since 2022, South Africa’s external accounts have deteriorated. After two years of exceptional surpluses in 2020 and 2021, the current account has returned into deficit again since Q2 2022, due to the normalisation of trade terms and strong growth in imports (32% of GDP in 2022-23). At the same time, the financial account has not regained its pre-pandemic momentum so far. Net portfolio investment flows, which were close to 3% of GDP on average over 2010-19, have become negative since 2020, while net foreign direct investment (FDI) inflows have remained modest (1.5% of GDP on average over 2020-23).
The South African economy narrowly avoided recession at the end of 2023. The poor quality of the country’s infrastructure is significantly slowing down activity. In addition, the government lacks fiscal leeway and disinflation is slow and uneven, forcing the central bank to maintain its restrictive monetary policy. Faced with numerous macroeconomic challenges, the African National Congress (ANC) has initiated long-awaited reforms, but at a pace that is deemed insufficient. It is likely to pay the price at the general elections in May and lose its absolute majority in Parliament for the first time in its history. The choice of the party with which to form a coalition could disrupt the momentum of reforms and the trajectory of public debt.
At a time when Senegal is preparing to launch its gas and oil production, the reconfiguration of the political landscape is generating immense hope among the population. The opposition candidate, Bassirou Diomaye Faye, won the presidential elections in the first round on the back of a breakthrough project. But the challenges ahead are huge, especially on the employment front. Despite a decade of robust growth, the economy has undergone little transformation and suffers from low productivity gains, which it will be difficult for the sustained investment effort to continue to mask, given the now high level of debt.
The debate on monetary sovereignty in emerging countries is resurfacing with, on the one hand, the plan of Argentinian President Javier Milei to dollarise his economy, and on the other, the temptation of several West African country leaders to abandon the CFA franc. The abandonment of the CFA franc with the aim of recovering the flexibility of an unpegged exchange rate regime and greater autonomy of monetary policy, is an argument that is either weak in theory or unconvincing in practice.
A breakthrough has recently been made in the process of restructuring the Ethiopian government's external debt. The peace agreement between the federal authorities and the Tigray rebel forces, signed in November 2022, ended two years of civil war and cleared the way for negotiations with international institutions to resume. Consequently, almost three years after requesting a debt restructuring under the G20 Common Framework, Ethiopia reached an agreement on an interim suspension of its bilateral debt service. However, this is only the first step on its journey, as the Ethiopian government must now reach agreements with all of its external creditors in order to fully restructure its debt
In 2024, 24 new countries will join the Guided Trade Initiative of the African Continental Free-Trade Area (AfCFTA). With the aim to boost intra-regional trade, the AfCFTA could increase Africa’s revenue and improve its resilience to external shocks. However, beyond tariff barriers, some structural challenges must first be addressed to see the full potential of the largest free-trade area in the world.
According to the World Bank’s report published last week, the external debt stock of all low- and middle-income countries (LMICs) contracted in 2022, for the first time since 2015. However, this observation does not apply to sub-Saharan Africa (consisting exclusively of LMICs with the exception of the Seychelles): the region’s external debt continued to rise in 2022, reaching USD 832.8 bn, a figure up 2.1% compared to 2021.
Nigeria’s economy is fragile. Despite the rise in oil prices in 2021 and 2022, macroeconomic stability has continued to deteriorate. This is due to the low level of oil production, an artificially overvalued exchange rate and the surge in energy subsidies. Without a change in economic policy, the situation was only going to get worse. The new President, Bola Tinubu, decided to act quickly and decisively. Shortly after taking office in May, he announced the flexibilization of the exchange rate system and the end of energy subsidies. Unsurprisingly, the first measure fuelled inflation, which is expected to come close to 30% by the end of the year. More problematic is the fact that we are once again seeing a gap between the official exchange rate and the parallel exchange rate
Since the beginning of 2023, Angola’s oil production has fallen short of the target set by the government and is declining compared to 2022, which is severely penalising economic growth. Combined with the fall in Brent prices, this underperformance is weakening the external accounts of the country, which is also dealing with particularly high external debt repayments. Dollar liquidity therefore fell in Q2 2023 and the Kwanza depreciated sharply. The government’s solvency also deteriorated. To counteract this, the authorities announced major budget cuts at the beginning of August. In the short term, the rise in Brent prices will stabilise foreign exchange reserves, which still stand at a satisfactory level
The Ghanaian economy is gradually recovering from the severe macroeconomic crisis of 2022. GDP growth is holding up better than expected and inflation has started to fall even though it remains too high. In terms of public finances, progress is also encouraging. In addition to satisfactory budget implementation during the first six months of the year, the authorities completed their domestic debt restructuration operation. However, the country remains in default on its external debt. Despite the support from the FMI, it also lacks a cushion to protect it from a possible new external shock.
In recent months, the African continent has been hit hard by inflationary pressures. In Eastern and Southern Africa, inflation peaked at 19.4% year-on-year in November 2022. It has since begun a slow and difficult deceleration: in July 2023, regional inflation fell to 15.5%, after peaking again at 20.6% in June. Nevertheless, this average masks major national disparities.
Last week, African heads of state and private sector representatives gathered in Nairobi, Kenya for the first-ever African climate summit. This meeting, organised ahead of COP 28, ended with the signing of the Nairobi Declaration, through which Africa has taken on continent-wide ambitions in the fight against climate change.
After years of financing through international markets and China, Kenya is facing a considerable increase in external debt servicing, which has led to strong pressure on external liquidity and on the shilling. Sustained economic growth in 2021-2022 was not enough to stabilise debt ratios. Renewed in late May 2023, support from multilateral creditors has helped to partially reconstitute official foreign exchange reserves and somewhat reassured investors. But the risk of social instability has increased significantly due to committed fiscal consolidation efforts and persistent high inflation.
The Ivorian economy seems to have weathered well the various external shocks since 2020. Growth has remained robust and inflation relatively under control. However, the measures put in place by the authorities to protect the population and the continuation of major public infrastructure projects have significantly widened the budget deficit, while financing conditions have deteriorated. In order to reduce pressure on public finances and external accounts, the authorities have called on the IMF. They have embarked on a fiscal consolidation programme that could prove difficult to complete.
Kenya's external solvency has been deteriorating for several months. After years of indebtedness to international markets and China, external public debt service rose significantly, accounting for 22% of export receipts in 2022. In addition, drought in the country has increased its dependence on imports, and the terms of trade have deteriorated significantly since the start of the war in Ukraine. On top of that are the dynamics of global monetary tightening.
The candidate of the outgoing majority, Bola Tinubu, won a close victory in the presidential elections of February 25. Coming challenges are significant: revive the first African economic power and consolidate macroeconomic stability, which has deteriorated dangerously despite high global oil prices.
