The Gambia’s financial woes do not portend an African public-debt crisis

TIMES are tough in Africa. Ebola, in addition to claiming many lives, has also damaged economies. Tourism is suffering as frightened foreigners stay away. Falling commodity prices are also taking a toll. Investors are pulling money out of riskier spots, prompted by the prospect of rising interest rates in America. The IMF is cutting its growth forecasts. So is the unfolding public-debt crisis in the Gambia, which has suffered from all these trends, a harbinger of things to come?

In mid-January the IMF announced that it is considering a bail-out for the Gambia. In part, the problems of the tiny west African country of 2m stem from a 60% fall in tourism, the source of 30% of its export earnings. (Although it has not suffered a single case of Ebola, it is close to Guinea, one of the most affected countries.) Falling commodity prices mean that exports of wood and nuts will also bring in less. No wonder the local currency, the dalasi, fell by 12% against the dollar last year.

But it is mismanagement of the government’s finances that has pushed the Gambia over the edge. From 2009 to 2014 its debt-to-GDP ratio increased by 18 percentage points, more than all other countries in sub-Saharan Africa except Cape Verde and Ghana. Now 80%, it is one of the highest in the region. It is likely to increase further thanks to the latest budget, released in December, which boosts spending by 11%.

The Gambia’s debts are not just growing; they are of unusually short maturity. The cost of servicing them has therefore jumped very quickly as rates have risen. A rule of thumb favoured by the IMF suggests that a poor country’s debt is unsustainable when the government is devoting more than 20% of its revenue to paying it back. In 2009 the Gambia devoted 15% of revenue to debt-service; in 2014, 23%. Forecasts from the Economist Intelligence Unit, a sister company of The Economist, put this year’s figure higher still.

A few other African economies are under similar pressure. In June Zambia, which has suffered from low copper prices, turned to the IMF. It was soon followed by Ghana, which devotes a massive 36% of government revenue to debt-service. Malawi and Eritrea may be the next casualties: they have big deficits and must make hefty payments on the public debt every year.

Happily, debt problems like the Gambia’s are increasingly rare. Thanks to a series of debt-relief programmes the continent’s debt-to-GDP ratio is 38 percentage points lower than it was in 2000. At 30%, it is about one-third the level of the euro zone’s. No sub-Saharan countries except Eritrea fall foul of another indicator of imminent debt problems, when the ratio of debt-service to exports tops 20% (though these numbers are worsening, thanks to falling commodity prices). Budget deficits are lower than in 2009, the last time commodity prices dived and the dollar rose. Most African currencies held up well in the past year, another sign that investors are not panicking. Times are tough, but only a few countries are really struggling.

2015-01-30T09:40:46+00:00January 30th, 2015|Categories: Gambia News|Comments Off on The Gambia’s financial woes do not portend an African public-debt crisis

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