Various shocks have resulted in commodity price pressure and fiscal constraints globally, but sub-Saharan African countries, in particular, have been experiencing a “funding squeeze” as a result of these events, which necessitates a rethink of financing solutions and the policy direction.

Speaking on the topic at the University of the Witwatersrand (Wits) on March 13, International Monetary Fund African development director Abebe Selassie said the funding shortfalls in the region have resulted in many countries, particularly South Africa, having high public debt levels.

He noted that, from the turn of the century until the onset of the Covid-19 pandemic, most African countries had periods of high economic growth and much development progress, which reflected successful domestic reforms, a favourable external environment, with much resource demand and ample financing resulting from capital flows to the region.

However, since a commodity cycle downturn in 2015, growth started decelerating in many resource-rich countries, especially oil exporters. The period from 2020 to 2023 brought on a series of shocks, including the pandemic, the Ukraine war and other conflicts and financial markets tightening owing to aggressive policies.

These factors have exacerbated borrowing costs, reducing funding inflows and foreign direct investment, including in the emerging markets of sub-Saharan Africa.

However, after a difficult few years, a long-awaited rebound was on the horizon, with global economic conditions improving and inflation and rates easing, Selassie stated.

He cautioned, however, that these countries were not yet “out of the woods” as high debt levels remained.

Selassie elaborated that South Africa, Nigeria and Ghana were among the countries in the region that had returned to the international finance market, but given that sizeable uncertainties remained regarding China’s internal restrictions and prevailing challenges in sectors such as property, it remained to be seen what the knock-on impacts would be to emerging markets.

In South Africa’s case, Selassie said, the country had historically been reliant on portfolio inflows from around the world, but this trend had reversed as of late, with more outflows occurring. He noted that domestic investment opportunities had not been attractive enough to keep capital flows in the country.

Additionally, both corporate and sovereign bond issuances had been declining, as foreign investor confidence had eroded.

It helped that South Africa had a large financial sector, as government had had to increasingly rely on domestic borrowing. However, Selassie explained that South Africa’s public debt situation was testament to the low economic growth in recent years.

“Prospects remain weak without resolute reforms to address growth impediments and fiscal sustainability concerns.”

Selassie listed some of South Africa’s strategic strengths as being that a large chunk of its sovereign debt was in domestic currency, and that it had a robust monetary policy framework and a flexible exchange rate.