Over-Indebtedness in Central Africa: Causes, Consequences, and Reform Strategies

By Atangana Stephane (Download PDF)

Summary: The CEMAC region is facing a concerning situation of over-indebtedness, exacerbated by external shocks and the volatility of commodity prices. This brief aims to analyze the structural and economic causes of over-indebtedness in CEMAC countries while formulating policy recommendations to improve debt management and enhance economic resilience. Targeted at policymakers, financial institutions, and regional bodies in Central Africa, this work relies on an econometric analysis using a mixed model (Multilevel Random Effects) based on data from 2010 to 2022. Key indicators include external debt and public debt service. The findings reveal a strong dependence on external debt, while fiscal reforms have a limited short-term impact. Structural reforms are essential to reduce debt vulnerabilities. Additionally, regional coordination is recommended to improve debt sustainability through institutional reforms, increased fiscal discipline, and economic diversification. However, this analysis does not account for potential global economic shocks that could affect the region.

Introduction

This brief analyzes the debt crisis affecting Central African countries, particularly in the CEMAC region, an economic zone facing specific structural vulnerabilities. Over the last decade, these countries have experienced an alarming increase in their public debt, primarily due to chronic budget deficits, volatility in commodity prices (notably oil), and major external shocks such as the COVID-19 pandemic and the war in Ukraine (1). These factors have compromised sustainable debt management and have also intensified the precarious economic situation of member states. The purpose of this brief is to understand how CEMAC countries can improve their debt management to reduce vulnerability to external shocks and promote sustainable economic development. The study focuses on the structural causes of over-indebtedness, budgetary imbalances, and institutional weaknesses that exacerbate this situation. It also focuses on the economic specifics of the CEMAC region and the use of a multilevel random effects econometric model. This approach allows for a better understanding of the unique dynamics of this area, characterized by excessive dependence on external debt and institutional weaknesses in budget management. The document is structured into several sections: an exploration of the causes of over-indebtedness, an assessment of its impacts on stakeholders, a presentation of the methodology used, and the results, followed by concrete policy recommendations to strengthen economic resilience and debt management in the CEMAC region.

I – Context and Causes of the Debt Crisis in the CEMAC Region

The debt crisis in the CEMAC region stems from several structural and cyclical factors. First, dependence on commodities, particularly oil, exposes the countries in the region to significant vulnerability to price fluctuations. The volatility of global commodity markets has regularly led to drastic declines in export revenues, forcing these countries to resort massively to borrowing to fill their budgetary gaps. Concurrently, external shocks such as global financial crises and, more recently, the COVID-19 pandemic have exacerbated financing needs while reducing fiscal revenues for states. The increased reliance on external borrowing has thus aggravated the already fragile financial situation of these countries. Additionally, poor budget governance, characterized by a lack of transparency and ineffective debt management practices, has amplified the crisis, making it difficult to adopt sustainable solutions.

Between 2012 and 2022, the median ratio of public debt to GDP increased by nearly 30 percentage points, rising from 28.8% to 59.1% (2). Although these debt levels remain lower than those observed in the late 1990s before debt relief initiatives such as the Highly Indebted Poor Countries (HIPC) Initiative, they now pose significant risks to debt sustainability (3). This increase is mainly due to budget deficits accumulated before interest payments and currency depreciations. In particular, the refinancing capacity has decreased, and countries in the region face difficult strategic choices, including debt restructuring, which could have complex consequences for future economic policies.

Dependence on Commodities

A fundamental factor in the debt crisis in the CEMAC region is the excessive dependence on commodities, particularly oil. This heavy reliance makes the region’s economy particularly vulnerable to fluctuations in oil prices on international markets. When oil prices fall, export revenues decrease, which reduces fiscal receipts and foreign exchange reserves, forcing governments to borrow more to maintain their public and economic spending. This situation was particularly evident during the drop in oil prices in 2014-2015, which severely impacted economies like those of Gabon, Congo, and Chad. The urgent need to diversify the economies of the region is therefore a priority to mitigate risks associated with commodity price volatility.

External Shocks and Budget Management

Global crises have also played a central role in worsening the debt situation. The COVID-19 pandemic caused a contraction in the global economy, leading to a decline in exports, a decrease in fiscal revenues, and an increase in borrowing needs to support public spending. Additionally, other geopolitical events, such as the war in Ukraine, have further exacerbated pressures on public finances. Between 2012 and 2022, the median ratio of public debt to GDP in the CEMAC region rose from 28.8% to 59.1% (4), reflecting this negative dynamic. These external shocks have increased borrowing needs and complicated debt management due to currency depreciation and declining foreign exchange reserves.

Budget Management

Poor budget management is another aggravating factor. In several countries of the CEMAC, public debt management is marked by a lack of transparency and budget discipline. Poorly planned expansionary policies and uncontrolled borrowing have contributed to the rapid accumulation of debt. Transparency in debt data is a major issue (5), especially with the increasing diversification of creditors, including domestic and commercial debt. The more complex composition of creditors, with a growing share of private and commercial debt, complicates debt restructuring processes, as it requires closer coordination among creditors, often characterized by a lack of trust and transparency.

II – Impact on National Economies and Regional Stability

The debt crisis in the CEMAC region has profound repercussions on national economies and regional stability. High levels of debt significantly limit the capacity of states to finance infrastructure projects and meet the socio-economic needs of their populations, while threatening regional cooperation.

Impact on National Economies

In countries like Chad and Gabon, debt-to-GDP ratios have reached concerning levels, significantly reducing budgetary maneuverability. For example, in Chad, the stock of external debt represented 61% of the GDP in 2022, with debt service amounting to 4% of gross national income (GNI) (6). This situation forces the government to allocate a significant portion of its resources to debt repayment, at the expense of productive investments in infrastructure, health, and education. In Cameroon, debt service absorbs 20% of exports, creating severe budgetary constraints (7). This dynamic undermines long-term development prospects, limiting governments’ ability to stimulate economic growth and improve living conditions for their populations.

Regional Stability

Financial instability in one or more CEMAC countries can have negative spillover effects across the entire region. The strong economic and monetary interdependence, facilitated by the common currency (CFA franc) and coordinated budgetary policies, means that a debt crisis in one country can destabilize neighboring economies. For example, the excessive dependence on commodity exports, notably oil, exposes the entire region to the same external risks. When oil prices fall, fiscal revenues decrease drastically, jeopardizing economic cooperation mechanisms. In 2015-2016, the decline in oil prices led to a rapid increase in debt/export ratios in countries like Congo and Gabon, further exposing the region’s economic vulnerability (8).

Limited Fiscal Capacity for Investment

One of the most visible impacts of the debt crisis is the reduction in the fiscal capacity of countries to invest in essential infrastructure. Most budgetary resources are allocated to debt service, leaving little room for long-term development projects. For instance, Cameroon, with an external debt reaching 170% of its exports, is forced to limit its investments in critical infrastructure, such as roads, bridges, and energy projects (9). This stifles economic development, reducing the attractiveness of foreign direct investments (FDI) and exacerbating social and economic inequalities.

III – Methodology and Findings

To analyze the debt dynamics in the CEMAC region, an econometric approach was adopted, using a multilevel random effects model. This model was selected for its ability to capture both country-specific variations and common trends observed in the region between 2010 and 2022. By considering the unique characteristics of each national economy while incorporating global effects, this model helps explain the underlying factors influencing public debt in a regional context. The data used includes macroeconomic indicators such as debt service, levels of external indebtedness, fiscal revenues as a percentage of GDP, and annual economic growth. These variables were chosen for their relevance in assessing debt sustainability and the budgetary performance of CEMAC countries.

Findings

The results of the econometric analysis show that external debt is the primary determinant of the debt burden in the CEMAC region. The study reveals a significant positive correlation between the accumulation of external debt and the increase in debt service. For instance, an increase in the stock of external debt leads to an immediate rise in debt service payments, thereby limiting the ability of governments to finance other priority expenditures, including infrastructure and public service. In contrast, fiscal policies, while important for macroeconomic stability, have not had a significant short-term impact on reducing public debt. The fiscal reforms implemented in several countries in the region, although essential for improving revenue mobilization, have proven insufficient to alleviate the pressures imposed by external debt. This indicates that short-term reforms are not robust enough to mitigate the financial vulnerabilities associated with indebtedness.

Key Trends:

1. External Debt: The analysis shows that external debt is a key factor in exacerbating the debt crisis in the region. For example, in countries like Congo and Chad, the accumulation of external debts, often from commercial creditors, has contributed to a rapid increase in debt service, further straining public finance.
2. Debt Service: The debt service as a percentage of exports remains high in several CEMAC countries. In Cameroon, this ratio reaches 20%, which limits the funds available for essential economic investments. This highlights the need to rethink external borrowing strategies and prioritize more sustainable loans.
3. Economic Growth: The relationship between economic growth and debt management has proven weak in the short term. Even in countries where GDP growth has been positive, it has not been sufficient to offset rising levels of indebtedness, indicating that deeper structural reforms are necessary to improve economic resilience.

Recommendations

Based on the results of the analysis and the initiatives already undertaken by CEMAC countries to manage debt, several recommendations were formulated:

1. Strengthening Regional Coordination: Although budgetary policy monitoring mechanisms have been established by CEMAC, their effectiveness is hindered by a lack of political coordination. Therefore, it is imperative to create national debt management committees responsible for overseeing borrowing plans and assessing the use of borrowed funds. Regular audits must also be instituted to ensure transparency and debt sustainability. This approach could enhance regional cooperation and enable more effective management of public finances.
2. Improving Fiscal Policies and Structural Reforms: Countries such as Gabon and Cameroon have already undertaken budgetary reforms to broaden their tax base. It is crucial to intensify these efforts by strengthening the capacities of local tax administrations. This includes combating tax evasion and reviewing tax exemptions to ensure they deliver tangible economic benefits.
3. Strengthening Budget Discipline: To limit excessive borrowing, countries in the region must adopt strict budgetary rules, including the establishment of debt ceilings. While initiatives to ensure budget discipline exist, it is essential to ensure their effective implementation through robust monitoring mechanisms. Furthermore, increased transparency in managing external borrowings, along with regular budgetary reports, will strengthen government accountability and improve investor confidence.

Conclusion

This study aimed to analyze the causes of over-indebtedness in the CEMAC region and propose suitable solutions to improve public debt management. Through econometric analysis, the results highlighted that the excessive reliance on external debt is the primary factor contributing to the increasing debt burden in CEMAC countries. Furthermore, while the fiscal reforms implemented in certain countries have been beneficial for revenue mobilization, they have not significantly reduced short-term indebtedness. The high level of debt service continues to limit governments’ capacities to invest in essential sectors such as infrastructure and health.