Public debt comprises all outstanding loans and guarantees that a central government owes to its creditors. This debt may be internal, originating from the sale of bonds within the government’s territory; or external, as received from foreign governments or international institutions such as the World Bank.
The amount of public debt a government holds does not itself indicate that government’s economic strength or weakness. Often, strong economies are quite active with international Trade and have large amounts of public debt. Instead, the ratio of that public debt to the government’s Gross Domestic Product (GDP) is a more accurate, internationally accepted measure for assessing a nation’s debt and potential credit risk.
With public debt linked to the Southern African Development Community (SADC) Mandates for Economic Development and Regional Integration, SADC established guidelines for managing public debt in its Memorandum of Understanding on Macroeconomic Convergence in 2002. This Memorandum later became Annex 2 of the Protocol on Finance and Investment.
Public Debt and the Protocol on Finance and Investment
In Annex 2 of the Protocol on Finance and Investment, SADC recognised that macroeconomic stability is fundamental to economic growth throughout Southern Africa and, as such, encourages Member States to adopt policies aimed at fostering such stability. In particular, the Annex advocates that Member States strive to avoid increasing their public debt-to-GDP ratios. In pursuit of this objective, the Annex also encourages Member States to monitor and measure this ratio as an indicator of Macroeconomic Convergence, especially taking into account the sustainability of the debt. In order to obtain these Macroeconomic Convergence targets, Member States are advised to maintain a public debt-to-GDP ratio of no greater than 60%.
Towards Macroeconomic Convergence Targets
Through the 1990s, most SADC Member States experienced high levels of external debt. At US $62.12 billion in 2001, external debt was greater than 100% of the GDP in Angola, Democratic Republic of Congo, Malawi, Mozambique, Tanzania, and Zambia. At that time, five of these SADC Member States qualified for the Highly Indebted Poor Countries Initiative, a programme launched by the World Bank and International Monetary Fund to offer debt relief for nations with unsustainable debt burdens.
In part through this debt relief programme and in part through improved policies aimed at Macroeconomic Convergence, SADC Member States have been able to substantially improve their debt situations. From 2004 to 2010, SADC halved its average public debt to GDP ratio from nearly 80% to less than 40%. As of 2012, the regional average ratio remains near 40%, with only Seychelles and Zimbabwe holding debt to GDP ratios above Macroeconomic Convergence targets. Most Member States are well within their 60% ratio targets, Botswana leading the way with a debt to GDP ratio of approximately 16%.