Debt Dreams Turn to Nightmare

In 2002, Africa appeared ready for economic growth. Wealthy creditor nations canceled billions in debt for sub-Saharan countries, while global demand for the region’s commodities surged.

The United Nations and the United States encouraged the use of sovereign credit ratings to help these nations access global bond markets. They intended this initiative to bypass the strict spending controls of institutions like the International Monetary Fund, aiming to alleviate poverty.

Major U.S. credit rating agencies, including S&P Global Ratings, Moody’s Ratings, and Fitch Ratings, evaluated the economic conditions of sub-Saharan Africa. Due to the region’s challenging economic history, these agencies assigned mostly “junk” ratings, leading countries to offer high-interest rates to attract investors.

The expectation was that as these countries’ economies grew, their credit ratings would improve, reducing borrowing costs and enabling investment in development projects.

However, this strategy backfired. Over the past two decades, more than a dozen sub-Saharan countries borrowed nearly $200 billion from overseas bond investors. Instead of funding development, a significant portion of these funds now goes toward debt repayment. The region’s average debt ratio has doubled, reaching nearly 60% of GDP by 2022.

As a result, sub-Saharan Africa still faces severe economic challenges and has the highest rate of extreme poverty in the world. The initiative’s failure underscores the dangers of combining sophisticated financial tools with underdeveloped economies.