Africa’s debt penalty: What happens when the music stops

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In the 1960s and 1970s, several Latin American countries including Mexico, Argentina, Brazil and Chile, undertook purposeful development projects geared towards industrialisation, namely infrastructure projects.

To achieve this, they relied heavily on external debt from private creditors and government sources alike. At the time, borrowers were motivated to take on substantial debt due to the then-low interest rates.

The bubble would burst in 1979 following the “second oil shock”, which took place against the backdrop of geopolitical tensions and economic instability. The Iranian Revolution sent the global oil market into a tailspin, leading to a sharp decline in Iranian production and a decrease in global oil supply.

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In response, the Organisation of the Petroleum Exporting Countries (Opec) raised oil prices and cut production to stabilise the market.

This decision had significant consequences, as it led to skyrocketing oil prices and a worldwide economic downturn.

No sooner had the second oil shock happened, the Volcker shock followed thereafter, shifting US monetary policy and increasing interest rates to manage inflation, which was at double-digit figures at the time in that country.

These two external shocks strained fiscal resources and served as a prelude to disaster for indebted countries.

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In 1982, Mexico announced it could no longer service its $80 billion in debt, rattling financial markets and opening the door to regional defaults. This set off a debt crisis known as the “lost decade.”

Read: Africa is battling high debt, demands to spend and collapsing currencies

Life after the bubble burst was characterised by loss and disillusionment.

Countries were forced to implement austerity measures in the form of reduced public spending and increased taxes. Social and political unrest followed.

This historical context, with its nuances, serves as a warning to African nations that are in deep debt.

Much like Latin America, each country in Africa has its own unique context, and, like Latin America, Africa must move from consumption to productive investments to realise its development goals.

Africa’s debt landscape

A government’s ability to meet its debt obligations without sacrificing fiscal stability or essential public services is paramount. An argument has long been made that borrowing should serve as an enabler of economic progress rather than a liability that dwarfs development objectives.

Sustainable debt affords governments an opportunity to pursue productive investments such as infrastructure and human capital formation, among others. Conversely, unsustainable debt undermines economic and social stability.

According to research by Afreximbank, Africa’s debt-to-GDP ratios – a key indicator of a country’s ability to manage and repay its debt – remain elevated and vary from one country to the next, as a function of divergent fiscal paths and macroeconomic shocks.

The report further shows that in 2020, Africa’s central government debt was at nearly 63% of GDP and is expected to stabilise just above 55% of GDP by 2029. The benchmark is 50%.

In 2025, Sudan, Cabo Verde, Mozambique, South Africa and Malawi were among the continent’s most indebted nations.

The continent’s creditor structure is diverse, ranging from multilateral institutions such as the African Development Bank, the IMF and the World Bank, which offer concessional loans, to private creditors.

The latter is on the rise in Africa, with more governments turning to commercial markets for financing via eurobonds and syndicated loans.

In 2025, the cost of servicing debt rose significantly, with the median interest-to revenue ratio – the proportion of revenue that goes towards servicing debt – exceeding 12%.

In this episode of The Business of Africa Podcast, we speak to Professor Patric Bond of the University of Johannesburg,, who previously worked with then Federal Reserve chair Paul Volcker, about the global interest rate environment in the face of the latest conflict in the Middle East.

Central banks in advanced and developing economies have begun tightening monetary policy, which will directly affect the cost of servicing debt.

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