Use loans for investments in revenue-generating resources, rather than everyday spending, African Development Bank advises nations

The African Development Bank has cautioned African nations, including Nigeria, to allocate borrowed funds towards assets that can stimulate economic growth and enhance living standards, thereby ensuring that such investments yield tangible benefits.

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Prof. Kevin Urama, the AfDB's Chief Economist and Vice President for Economic Governance and Knowledge Management, made this recommendation during an interview with the News Agency of Nigeria in Abuja on Tuesday, while discussing the pressing issues of debt sustainability and financing challenges confronting African economies.

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Urama emphasized that the primary concern lies not with the volume of debt accumulated by countries, but rather with the quality of the debt, its terms, and how the borrowed resources are utilized, highlighting the need for prudent management of borrowed funds.

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He stressed that the key issue revolves around the quality of debt, and posed pertinent questions, including the purpose of borrowing, the source of the loan, the terms of the loan, and the allocation of the borrowed funds, underscoring the importance of responsible borrowing practices.

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According to Urama, debt becomes sustainable when it is channelled into investments that boost economic output, create employment opportunities, and improve infrastructure, thereby contributing to the overall development of the economy.

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The AfDB's chief economist warned that excessive borrowing without corresponding investments in productive sectors could have a debilitating impact on labour productivity and overall economic performance, ultimately hindering the growth and development of African economies.

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Findings from the African Economic Outlook, as cited by Urama, indicate that countries with high debt-to-GDP ratios often experience declining debt productivity, which in turn affects labour and capital productivity, highlighting the need for judicious management of debt and investments.

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Urama cautioned against financing long-term infrastructure projects with expensive short-term commercial loans, as such practices can create refinancing pressures and heighten fiscal risks, ultimately jeopardizing the economic stability of African nations.

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He urged African countries to prioritize debt productivity by ensuring that citizens derive tangible benefits from borrowed funds, including improved infrastructure and public services, thereby justifying the allocation of borrowed resources.

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Urama also advocated for stronger support for African-led financial initiatives, such as the African Financing Stability Mechanism, which aims to assist countries in addressing debt refinancing challenges within the continent, promoting regional cooperation and self-sufficiency.

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According to him, African countries need to strengthen cooperation and develop home-grown solutions to reduce their vulnerability to external shocks and financial market volatility, thereby enhancing their economic resilience and stability.