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Public Debt and Government Finances in SADC

Public Debt and Government Finances in SADC

Countries in the Southern African Development Community (SADC) and other developing countries will often use public debt as a way to gain access to extra funds that are used to induce or maintain economic growth. However, states need to be careful with how they manage their debts because recurrent budget deficits and borrowing due to insufficient revenue can potentially lead to the accumulation of an unsustainable public debt, especially if a government must use an increasing amount of its revenue to pay interest on loans or service its debt. These payments will often compete with infrastructure and capital expenditure, and crucial developmental investments will be postponed to service debts. This, in turn, can force a government to borrow more money from external sources as an immediate solution to finance their budget deficit, which if poorly managed exacerbates the problem instead of solving it, and can lead to unmanageable spiralling debts.
In order to determine whether a country has a sustainable amount of debt, economists will look at a country’s debt-to-GDP ratio and compare it to its economic strength. This provides an indication of how likely a country can pay off its debt. Continuously rising of public debt leads to increased interest rates, lower credit rating, and increases the odds of a country defaulting on its debt[1]. In the SADC region, debt has become more expensive to service because interest rates are often very high. Therefore, a large amount of revenue is being channelled towards servicing the debt instead of investing in critical areas of the economy and this leads to poor long-term economic performance. SADC countries must use domestic and regional public debt management strategies in order to ensure that public debt does not become a fiscal burden. Nevertheless, governments should not fear public debt, because it is attractive to risk-averse investors as it usually comes with very secure guarantees by the government itself. Thus, if used correctly, a stable level of public debt has the capacity to improve the standard of living in a country.

SADC governments have recognised that macroeconomic stability is fundamental to economic growth and as such the regional bloc encourages member states to adopt policies aimed at fostering sustainable levels of debt. In 2002, SADC established guidelines for managing public debt in its Memorandum of Understanding on Macroeconomic Convergence[2]. The regional bloc has encouraged its member states to avoid large public debt-to-GDP ratios. In pursuit of this objective, SADC also encourages member states to monitor and measure this ratio as an indicator of macroeconomic convergence, especially considering the sustainability of the debt. In order to obtain these Macroeconomic Convergence targets, member states are advised to maintain a public debt-to-GDP ratio no greater than 60.0%[3].

Of the 16 SADC member-states five (Angola, Mauritius, Mozambique, the Seychelles, and Zambia) had public debt levels above the regional limit in 2018. Mozambique and Zimbabwe are the most indebted SADC countries with public debt valued at 110.1% and 75.2% of their GDP[4]. Another three countries (Malawi, South Africa, and Zambia) have public debt above 50.0% of their GDP, but below the regional limit. The rest of the countries have public debt levels below 50.0% of their GDP and the average debt level in the region (including the Comoros) is 49.6%. From 2011 to 2016, the average public debt in SADC countries amounted to 40.0% of GDP, but debt levels steadily increased over that period and in 2017 they constituted 49.5% of SADC countries’ GDPs (excluding the Comoros)[5].

But this does not necessarily mean that most of the SADC countries have sustainable public debt levels. High-income economies are considered at a high risk of debt distress if their public debt-to-GDP ratio exceeds 70.0%, while low- and middle-income countries are considered at the same level of risk if their public debt exceeds 30.0% or 55.0% of their GDP, respectively[6]. All SADC member states are low- to middle-income economies so the 60.0% limit is quite high. However, the 60.0% limit exists to avoid putting too much strain on overly indebted economies while they create realistic policy goals to help them ease their fiscal burden[7]. Nevertheless, the consensus is that the region is still at risk of continuing developing unsustainable levels of debt[8].

Table 1: Public Debt Context in SADC

Source: IMF 2018a. World Economic Outlook Database, October 2018, ibid.

In order to fully understand whether a country is at risk of defaulting on its debts one needs to understand the relationship between the analytical conditions of debt-servicing costs as a share of total government revenue and the effective interest rates compared to real GDP growth. If either of these conditions are too high, a government will develop unsustainable level of public debt even if its debt-to-GDP level is low. When debt-servicing costs are a significant share of total government revenue, interest payments compete with other government spending, slowing economic development and eventually the government will default on its debts. This process can be accelerated if effective interest rate on these debts are higher than a country’s GDP growth rate, because this means that debt is at a risk of spiralling out of control as interest payments increase faster than the government revenue-raising potential. Therefore, the government will effectively generate less revenue, spend more on servicing its debt and economic growth will continue slowing down.

Once one takes these secondary factors into account, a government needs to make sure that their real GDP growth rate is greater than the effective interest rate on public debt in order to ensure it can pay its creditors. Maintaining the balance between interest rates and economic growth is particularly difficult for commodity-exporting countries, because their economic growth is closely linked to the commodity price cycles which tend to be volatile.

Table 2: Public Debt Context in Mozambique

Source: IMF 2018c. Mozambique 2017 Article IV Consultation, International Monetary Fund: Washington, D.C. Accessed At: https://www.imf.org/ [Last Accessed: 4 March 2019]; IMF 2016. Mozambique 2015 Article IV Consultation, International Monetary Fund: Washington, D.C. Accessed At: https://www.imf.org/ [Last Accessed: 4 March 2019].

In order to effectively manage public debt, governments need to set a number of prudential thresholds or limits to public debt beyond just the nominal value or debt-to-GDP ratios. Once a country has projected their debt ceilings, they can then review the areas of their economy where they need to expand the optimal combination of debt instruments to hold before drafting accurate budgets that will help their economies grow.

Botswana has consistently maintained a stable level of public debt through measured and responsible government spending. Botswana’s public debt is projected at 13.2% of GDP for 2018/19, which is well below the national public debt threshold of 40.0% of GDP and the SADC regional limit[9]. Botswana’s public debt is projected to remain below the domestic and regional threshold even though it is to decrease to around 13.0% of GDP from 2019/20 to 2021/22[10]. Botswana has maintained sustainable public debt by producing a national public debt management strategy that is relevant to its national context and implementing fiscal policy that is consistent with the strategy.

Table 3: Public Debt Context in Botswana

Source: BMFED 2018. 2019 Budget Strategy Paper, ibid.; IMF 2018d. Botswana 2018 Article IV Consultation, International Monetary Fund: Washington, D.C. Accessed At: https://www.imf.org/ [Last Accessed: 4 March 2019]; IMF 2017a. Botswana 2017 Article IV Consultation, International Monetary Fund: Washington, D.C. Accessed At: https://www.imf.org/ [Last Accessed: 4 March 2019].

On the opposite end of the spectrum, Mozambique’s public debt has been increasing rapidly due to government corruption and poor fiscal policy decisions. While the country has set a modest debt threshold of 50.0% of GDP, its current debt-to-GDP ratio is projected to reach 118.7% in 2018/19 and will continue increasing to an average of 130.0% of GDP from 2019/20 to 2021/22[11]. The elevated public debt and poor fiscal policy will impact Mozambique’s economic growth in the medium term unless the government implements drastic reforms. Public debt management does not just affect public finances but it has a direct impact on whether a country is likely to grow its economy and become less reliant on debt; or face rising interest rates and debt-servicing costs which can lead to a potentially devastating decline in GDP growth.

Therefore, SADC member states need to make sure they have sound debt-management systems in place. Regional policies attempting to rein in member states who have built up an unsustainable level of public debt have realistic short-term goals, but more solid long-term strategies need to be created to guarantee sustainable public debt management and economic growth. In addition, governments need to complement regional policies with domestic public debt management strategies that are sensitive to their domestic context which should inform national budgeting. Commodity-based economies must be particularly careful with when and how they borrow money since shocks in the market can cause previously sustainable debts to spiral out of control. This does not mean countries should avoid taking on sovereign debt, as it provides a necessary inflow of capital into the economy. However, governments need to be held accountable to their debts and irresponsible borrowing or poor economic management needs to be curtailed to ensure that their national economies and the region grow to their fullest potential.

By Michael Andina


[1] CED 2018. What is the ‘National Debt’ and Why Does it Matter?, on the Committee for Economic Development Website, viewed on 3 February 2019, from https://www.ced.org/.
[2] SADC 2002. Memorandum of Understanding on Macroeconomic Convergence, Southern African Development Community: Gaborone. Accessed At: https://www.sadc.int/ [Last Accessed: 4 March 2019].
[3] SADC 2012a. Public Debt, on the Southern African Development Community Website, viewed on 3 February 2019, from https://www.sadc.int/.
[4] IMF 2018a. World Economic Outlook Database, October 2018, International Monetary Fund: Washington, D. C. Available At: https://www.imf.org/ [Last Accessed: 4 March 2019].
[5] IMF 2018a. World Economic Outlook Database, October 2018, ibid.
[6] IMF 2018b. Joint World Bank-IMF Debt Sustainability Frame Work for Low-Income Countries, International Monetary Fund: Washington, D.C. Available At: https://www.imf.org/ [Last Accessed: 4 March 2019].
[7] SADC 2012a. Public Debt, ibid.
[8] SADC 2012a. Public Debt, ibid.; PESA 2018. Political Economy Review: Looming SADC Public Debt Crises, on the Political Economy Southern Africa Website, viewed on 23 March 2019, from https://politicaleconomy.org.za/.
[9] MoFED 2018. 2019 Budget Strategy Paper, Ministry of Finance and Economic Development: Gaborone. Available At: https://www.finance.gov.bw/ [Last Accessed: 21 February 2019].
[10] IMF 2018a. World Economic Outlook Database, October 2018, ibid.
[11] IMF 2018c. Mozambique 2017 Article IV Consultation, International Monetary Fund: Washington, D.C. Accessed At: https://www.imf.org/ [Last Accessed: 4 March 2019].

Serge Basingene Hadisi

Serge is a Senior Analyst at PESA.

Tšepiso Augustinus Rantšo

Tsepiso is a Senior Analyst at PESA.

Thabo Thandokuhle Sacolo

Thabo is a Senior Analyst at PESA.

Ross Oliver Douglas

Ross is an Editor at PESA.

Charl Swart

Charl is an Editor at PESA.

Michael Andina

Xolisile Tsitsi Ntuli

Serge Basingene Hadisi

Tšepiso Augustinus Rantšo

Thabo Thandokuhle Sacolo

Ross Oliver Douglas

Charl Swart

Michael Andina

Xolisile Tsitsi Ntuli

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