Should Africa’s external debt be re-evaluated?: a preliminary study

The study seeks to identify and examine possible motives for the re-evaluation of Africa’s debt, in view of the burden it exerts on the continent’s development efforts. The conceptual rationales that are proposed are consistent with neo-classical economics and focus on the possibility that market imperfections could cause mis-pricing of African debt claims. It presents a valuation model that helps to pinpoint channels through which Africa’s debt could be improperly valued.

Findings include:

• the investigative tools used in this study have not uncovered market imperfections that could affect the pricing of Africa’s debt
• there seems to be no basis for re-evaluating the debt on the grounds of imperfectly functioning debt markets
• empirical evidence shows that the interest rates charged on Africa’s debt are low and cannot be considered to be the main reason for the heavy debt service burden
• the size of the debt is found to be very large and growing at a time when net debt flows are negative for the continent
• the high variability of African countries’ export earnings limits their capacity to service large amounts of debt, which may explain their frequent instances of rescheduling
• the hypothesis that current debt relief initiatives may not be very helpful for Africa and that some lenders may engage in moral hazard conduct for which African countries ultimately pay the price could not be tested for lack of data
• to ensure long term sustainability, the total debt stock of Africa would have to be reduced to $143.2 billion if 1980 serves as a reference, but could go as low as $77.2 billion under more prudent conditions