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Sub-Saharan Africa faces funding squeeze amid rising debt

Sub-Saharan Africa is grappling with a financial squeeze as governments across the region face rising debt levels and the challenge of relying more on domestic resources for development. The International Monetary Fund (IMF) has highlighted this trend, emphasizing that high external borrowing costs and low tax-to-GDP ratios are straining economies throughout the continent.

The IMF’s African Department Director Abebe Aemro Selassie indicated that despite efforts to stabilize public debt and address macroeconomic imbalances, significant obstacles remain. One of the main concerns is the risk of high debt service ratios and increased repayment costs potentially crowding out crucial development spending. This is particularly troubling as median revenues in Sub-Saharan Africa hover around 17% of GDP, a stark contrast to the 40% seen in developed markets.

Uganda provides a case in point, where its stock of debt has risen from $21 billion in June 2022 to $23.6 billion by June 2023. This increase means debt repayments now consume a substantial 23% of tax revenues, posing serious repayment challenges for the government.

To combat these issues, African nations are turning to Value Added Taxes (VAT) as a reliable source of revenue. This strategy is supported by measures aimed at formalizing economies, reducing tax expenditures, and refining tax design to boost collection efficiency.

The IMF’s Regional Economic Outlook report underscores the ongoing financial difficulties facing Sub-Saharan Africa, with external factors exacerbating internal economic pressures. As countries like Uganda demonstrate, without significant changes to both revenue generation and debt management strategies, the path to sustainable growth and development will remain fraught with challenges.

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