Fueling growth in an economy primarily requires investments, whether for technology, infrastructure, or government interventions. The global financial system has evolved significantly: from the use of cash and traditional banking tools such as cheques and demand drafts, to more advanced systems like digital payments (e.g., UPI), and more recently, toward decentralized technologies like cryptocurrencies.
While financial technologies have modernised rapidly, the architecture of global development finance has also shifted, particularly in how Official Development Assistance (ODA) is distributed to countries in need. According to the latest available data concessional loans account for 33% of ODA, up from just 28% in 2011-13 (UNCTAD, 2025). This shift from developmental assistance in the form of “Aid” to “Loans” led to a sharp rise in public debt, reaching $102 trillion (IMF, 2025) in 2024 doubling in the last 14 years. The nominal public debt in developing countries has grown at twice the rate that of developed countries, reaching over $30 trillion (IMF, 2025).
Concessional loans are typically below market interest rates with long grace periods and extended repayment timelines and are perceived as less risky or more sustainable than commercial debt. This has sometimes led to over-borrowing and underestimating long term obligations, especially when multiple concessional loans accumulate. In other cases, countries take more loans to repay due debts to avoid a poor rating by Standard & Poor (S&P) creating a fiscal pressure in the economy. When this scenario occurs, developing countries are forced to compromise on the essential social services, putting poor populations at risk.
During the mid-1970s and 1980s, the global economy faced multiple shocks: soaring oil prices, stagflation, collapse of fixed exchange rates, and increased borrowing by developing countries lured by low interest rates. As interest rates rose and exports declined, countries like Mexico defaulted, triggering a chain reaction across different countries. Although the crisis of the 1980s was eventually resolved through bailouts and reforms, the lessons remain relevant today, especially as developing nations confront a new debt build-up in a changed global financial order and geopolitical system.
Africa’s Deepening Debt Challenge
The continent is home to 19% of the world’s population but contributes just 3% to the global GDP, estimated at $3.06 trillion (IMF 2025). According to (IMF 2024) data from 50 African countries, 20 nations have an annual per capita income below $1,135, equating to $3 per day while South Sudan is the poorest, with a daily income of less than $1.
Africa, being the only continent with the highest number of countries with elevated Debt-to-GDP ratio, is also the only continent where public debt has consistently outpaced GDP growth since 2013. 20 out of 9 low-income African nations have a Debt-to-GDP ratio exceeding 60%, and with many battling high inflation. Nearly half of Africa’s public debt is owed to private creditors, most of which is pro-cyclical– rising during booms and retreating in downturns, thereby increasing financial instability (Ngundu & Cilliers, 2025). Majority of funding from multilateral development banks (MDBs) and development finance institutions (DFIs) comes in foreign currency, exposing countries to currency risks (Horrocks et al., 2025).
Repercussions of Interest Repayments on Africa’s Economy
Africa spent over $70 per capita as per the latest figures on servicing its interest payments (Figure 1). Seventeen countries in Africa were spending more on interest and principal than they were receiving in new loans or aid. As of 2024, 10% of government revenues in Africa were diverted to interest payments, nearly 2.5 times more than in 2010. Moreover, African nations spent just $44 on health and $63 on education, whereas Latin America and Caribbean countries spent per capita $382 on health and $403 on education, indicating that countries in the African continent are now compelled to give up investment toward social upliftment due to growing interest payments.
These pressures are further supplemented via conditional debt repayment in foreign currencies which are directly affected by local currencies depreciation increasing the cost of repaying the foreign loans. Moreover some concessional loans tied with aid conditions of using foreign contractors and imports or services/ goods from donor countries makes the situation more complex.
Beyond debt and fiscal constraints, another persistent obstacle to development and domestic revenue generation is the size of the shadow economy (economic activities that are unreported, including illegal or unregistered businesses). According to Rozkrut et al., 2025, the median value of the shadow economy in various parts of Africa ranged from 24.1% to 41.6% of GDP, with Sierra Leone topping the list at 64.5%. The major contributor to the shadow economy in lower-income nations is said to be due to government ineffectiveness, weak governance, corruption, ineffective institutions and registered businesses with political connections which under-report their gross earnings or even bribe or assist revenue officers for misreporting. These have caused a severe loss of revenue to the African nations.
From Inter-African Trade to Sustainable Financing
The ongoing US aid cuts for African nations are already impacting a large population, resulting in reduced access to life-saving HIV medicine or food kitchens that have supported refugees displaced in conflict zones in Somalia and Sudan. African countries need to strengthen inter-African trade, develop their currency exchange rates, remove trade barriers, and allow free movement of people, goods and services. Africa is rich with many natural resources that must be tapped sustainably along with creating value-addition for export and increased investments in local manufacturing. African countries need to embrace innovation, technology, and AI to increase efficiency to compete globally. Governments also need to bring more fairness and accountability towards its policies to curb shadow economy by bringing significant reforms.
With global growth projected to slow from 3.3% in 2024 to 3.0% in 2025 as per IMF, and with limited investments in innovation, human capital, and infrastructure, African nations will face challenges in servicing their debt obligations increasing pressure on the exchequer causing further decline in the spending on domestic issues. This could potentially lead to rising prices and political instability.
At last, African nations need to shift away from their dependence on private creditors towards multilateral and bilateral creditors for aid not only to reduce debt burden but to re-focus on achieving their Sustainable Development Goals targets.
