External financing, high debt levels force painful fiscal adjustments – Bartholomew Armah

31st March 2021 By: Thabi Madiba - Creamer Media Researcher and Writer

External financing, high debt levels force painful fiscal adjustments – Bartholomew Armah

Economic Commission for Africa Macroeconomics and Governance Division director Professor Bartholomew Armah on Wednesday warned that external financing and high debt levels pose major risks to Africa, adding that a debit crisis would not only cause further deterioration of current economic conditions, but can also force painful fiscal adjustments, worsening development prospects even further.

Armah was speaking during the virtual launch of the 2021 edition of the World Economic Situation and Prospects Report, saying after a contraction of 3.4% in 2020, Africa is projected to achieve a modest recovery, with regional gross domestic product (GDP) projected to expand by 3.4% in 2021.

Published yearly, the report stresses that despite the modest recovery expected in 2021, Africa is experiencing a severe downturn which undermines development prospects on the continent.

The 2021 recovery forecast is dependent on the relaxation of lockdown constraints and an improvement in trade and commodity markets.

Armah added that this recovery was also predicated on the rise of domestic demand and the pick-up of exports and commodity prices.

He went on to say the magnitude and unequal nature of the Covid-19 crisis were increasing unemployment, poverty and inequality.

The report highlighted that the pandemic’s remaining uncertainties required additional fiscal measures beyond stimulus measures implemented last year and called on governments to combat the Covid-19 pandemic and act to alleviate the pandemic’s socio-economic impact.

Armah said policy responses of countries had been in monetary and fiscal policy, adding that lower borrowing costs alone would not sufficiently stimulate demand.

Meanwhile, the United Nations warned that the devastating socio-economic impact of the Covid-19 pandemic would be felt for years to come unless smart investments in economic, societal and climate resilience ensured a robust and sustainable recovery of the global economy.

Rising Debt-service Costs

“The cost of debt-services was relatively higher in Africa compared to Western Asia. For countries to recover they need fiscal space, as high debt-service payments make it more difficult for them to get the resources to respond to the pandemic,” Armah explained.

He said all sub-regions were expected to rebound in 2021, but thought this view had to be put in the context of policy responses, the access to liquidity and the ability of countries to vaccinate their populations.

Africa needs a sustained revival of growth, he said, adding that while a focus on the short term is essential, African countries need to lay the groundwork for a strong and inclusive development path in the medium term, which entails the creation of decent jobs at a large scale.

Armah emphasised the need for forceful policy actions in technology adoption, climate resilience and domestic revenue mobilisation, to boost productivity.

He said promotion of the diffusion of digital technologies, supported by the expansion of universal digital infrastructure, would also build resilience.