Africa pays $2.5 billion a year as risk premium on borrowing

Professor of Finance at the University of Ghana, Godfred Bokpin

In addition to paying the normal interest rates that other countries pay when borrowing on the international capital market, Ghana and other countries on the continent pay an additional $2.5 billion each year to wealthy lenders in as the “African risk premium,” professor of finance at the University of Ghana, Godfred Bokpin, said.

According to the professor, the African risk premium is only an additional cost for the economies of the continent simply because they are perceived as risky and not because of their macroeconomic fundamentals – a practice which he considers very unfair.

“The fact is that every country is going to borrow. Countries like the United States, Japan and others borrow at a very low rate; but when African countries go to the market, on top of what is normal – the equilibrium price, we have to pay something more simply because of what is called the African risk premium,” he said. -he declares.

Professor Bokpin spoke at an event organized by the African Center for Energy Policy (ACEP) on “The Drivers of Ghana’s Recent Debt and its Implications for the Economy”, where he cited the predatory lending as one of the many reasons for Ghana’s rising debt.

He lamented that these additional payments are only demanded when African countries borrow, which reflects the excessive opportunism shown by wealthy lenders towards the continent.

He said it also shows that the global financial architecture is anti-Africa/anti-developing countries, since these overpayments affect the ability of countries to repay their loans; thus increasing their level of indebtedness and must therefore be stopped.

In 2022 alone, Ghana faces external debt service of $2.75 billion according to Fitch, including amortization and interest – and another $2.8 billion in 2023.

Of Ghana’s total public debt of $55.1 billion – equivalent to 78% of GDP as of March 2022 – 40.2%, or $28.3 billion, is owed to external parties. And of the external debt, about 57% is owed to commercial creditors, mainly in Eurobonds.

All of these payments rob the government of much-needed fiscal space to invest in productive sectors of the economy such as infrastructure, education and health.

Other Drivers of Ghana’s Recent Debt

The country’s debt is set to end 2022 above 80%, with Professor Bokpin identifying the unproductive use of borrowed funds, fiscal indiscipline, election-related excesses, COVID-19 and the Russia-Ukraine conflict as other drivers of public debt.

He also cited the false hope of endowed fiscal space due to the rebasing of the economy and the conferment of middle-income country status, as well as the failure to transform the economy from reliance on commodity exports as major problematic factors for the country.

The AU must intervene to correct the anti-African posture

To ensure that African economies are treated the same as others, Professor Bokpin urged the African Union (AU) to use its collective bargaining power under the African Continental Free Trade Area to renegotiate better loan conditions for the continent.

He said: “Maybe we should try to renegotiate this global financial order in a way that creates a level playing field; and I expect the African Union to use its strong position under the AfCFTA to negotiate some of these structural bottlenecks that are impeding Africa’s progress, including the terms of the unfavorable exchange, ”he pleaded.

A balanced international capital market, he added, will help countries borrow at a lower rate and in a way that does not increase the burden on their debt sustainability.