Many African countries are facing growing public debts with severe consequences for public services and domestic economic performance. A new digital technology, Tokenization, has the potential to revolutionise the African debt market, writes Ebrima Faal.

African debt has increased significantly in recent years. In 2010, the total external debt of African countries was $365 billion. By 2022, this figure had more than doubled to $700 billion, representing an average annual increase of over 7 per cent.

Causes of current debt

Infrastructure development, Chinese, and Eurobond borrowing have played substantial roles in African debt. African nations often borrow heavily for large-scale projects like roads and power plants which are vital for economic growth, but expensive. During the 2000s and 2010s, China’s state-backed banks lent African governments billions for infrastructure initiatives, which may generate economic and social returns in the long run, but in the short term have helped push up the debt of

African countries borrow money using Eurobonds, which means they promise to pay back the money in euros, not their own currency. This can be risky because if the euro’s value drops compared to their currency, they might end up owing more money when it’s time to repay. Many African countries did this between 2010 and 2015, and they have to repay these bonds in euros between 2021 and 2025, regardless of the euro’s value at that time.

Another factor contributing to African debt is the drop in commodity prices. The decline in oil prices between 2014-2016 led to a severe economic downturn in oil-exporting countries like Angola and Nigeria. Similarly, the slump in copper prices affected Zambia where it is a major part of the economy. With less income coming in, the debt of these countries grew.

Lastly, debts denominated in foreign currencies such as US dollars exacerbate Africa’s debt challenges. When nations borrow in foreign currencies and their own currencies devalue, their debt burden can rise significantly. The Ghanaian cedi, Egyptian pound, and Zimbabwean dollar have lost a lot of their value, and are now among the worst-performing currencies in the world. Other currencies, such as the Kenyan shilling and South Africa’s rand, have also lost value because the US dollar is so strong. When this happens, more local currency is required to pay back the same dollar-denominated debt making it more expensive for African countries to pay back their foreign debt, which in turn makes the debt problem worse.

External factors, like the Russia-Ukraine conflict, which is pushing up prices for commodities such as food and gasoline, are likely to worsen the situation.

Impact of African debt

High levels of debt in Africa can lead to various problems. They can divert funds away from essential public services such as healthcare and education. Additionally, excessive debt can make a country more vulnerable to economic shocks, whether from natural disasters or fluctuations in commodity prices. This vulnerability arises because servicing the debt consumes a significant part of the budget, limiting resources available for resilience-building and responses to unforeseen challenges.

Zambia’s debt ratio was a mere 21.9 per cent in 2007 but shot up to 140.2 per cent in 2020, leading to a government default. In Ghana, it was 22.6 per cent in 2007, before rocketing to 88.8 per cent in 2022. This rise in debt ratios in Zambia and Ghana is also reflected in their increased government interest payments as a portion of GDP.

A default typically precipitates significant economic repercussions, with governments, companies, and households needing to enforce austerity measures. Governments often find themselves cutting expenditures, especially in the face of dwindling tax revenues. This often adversely impacts social spending, particularly on health and education.

In addition to these direct impacts, there are indirect repercussions of excessive debt. Elevated debt levels can deter foreign investment in African countries, with potential investors viewing such nations as riskier propositions. This investment drought can further impede economic growth and progress. In some instances, escalating debt levels can ignite social and political turmoil when citizens grow exasperated with the issue’s mishandling.

Tokenization: A potential solution

Apart from traditional solutions like debt relief measures, diversification, bolstered tax collection, curtailing illicit financial outflows, and enhancing borrowing transparency, tokenization is emerging as a potential panacea for African debt management.

Tokenization is the process of converting real assets into digital tokens. This can be particularly helpful for African countries, as it allows them to efficiently access funds, increase transparency and accountability, and attract global investment. For example, a government could tokenize a new road project and sell tokens to investors from around the world. Investors would then be entitled to a share of the tolls that are collected from the road. This would allow the government to raise the money it needs to build the road without having to borrow money from traditional lenders.

However, its adoption faces challenges such as lack of awareness, regulatory uncertainty, and cybersecurity risks. Despite these hurdles, with appropriate measures and regulations in place, tokenization could revolutionize African debt management.

Despite these hurdles, tokenization’s transformative potential for African debt management cannot be understated. Collaborative efforts between African governments, fintech enterprises, and regulatory bodies can forge a conducive atmosphere for the integration of tokenization into debt management. This can be a pivotal move in addressing African debt and fostering sustainable economic growth across the continent.

Early adopters

Several African countries are already exploring the potential of tokenization to revolutionise their debt management.

In 2022, Nigeria launched a pilot project to assess the use of tokenization for government bond issuance. The project demonstrated that tokenized government bonds could be traded more efficiently and at lower costs than traditional bonds. This was a significant step in exploring the potential of blockchain technology in debt management.

Ghana has partnered with a fintech company to launch a tokenized debt platform. The platform allows investors to buy and sell Ghana’s government debt instruments in the form of digital tokens. It has been well-received by investors, with significant trading volumes recorded since its launch.

Kenya has announced plans to develop a tokenized debt platform. The platform will allow investors to trade Kenyan government debt instruments on a decentralised exchange. This initiative is part of Kenya’s broader strategy to leverage digital technologies for economic growth.

Other African countries, including Senegal, Rwanda, and South Africa, are also considering launching tokenized debt platforms soon. These initiatives highlight the growing interest in leveraging blockchain technology for debt management in Africa.

Tokenization, an emerging technology, carries significant potential to overhaul African debt management practices. By amplifying efficiency, transparency, and global accessibility, tokenization can empower African governments to better manage their debt and champion sustainable economic growth.

There are, however, challenges to be addressed, including enhancing awareness, clarifying regulations, and ensuring cybersecurity.

But, with concerted efforts from African governments, fintech entities, and regulatory bodies, a conducive environment for tokenization in debt management can be established. This could be a momentous change in reducing African debt and advancing sustainable economic growth throughout the continent.

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