The Invisible Tax: Why Africa's Citizens Are Paying the Price

There exists a quiet but crippling injustice that few outside of financial circles ever discuss: the "Africa Risk Premium." It is an invisible tax levied not on goods or services, but on the very possibility of progress. This premium forces African nations, businesses, and citizens to pay a vastly inflated price for capital, stifling growth and making homeownership and intergenerational wealth-building an unattainable dream for hundreds of millions.

The vicious cycle begins with international credit ratings, which consistently overstate the risk posed by lending to African nations. Statistical analysis from Standard Bank shows that the average African sovereign is rated four notches below what its economic fundamentals suggest. This is not just a matter of numbers; it's a massive financial drain that has a domino effect. In 2024 alone, African governments spent an estimated $102 billion to service external debt, with a significant portion going to private creditors at the highest rates. Between 2016 and 2021, this "premium" cost the continent an additional $56 billion in interest payments.

What makes this situation particularly illogical is that the perception of high risk is not supported by facts. Africa’s default rates for infrastructure projects are significantly lower than those of Latin America and Asia. The average return on equity for the continent's top 500 companies is a robust 15%. Yet, African companies trade at lower multiples, and vital infrastructure projects face higher financing costs. 

Last year, Côte d’Ivoire had to pay 50 basis points more than Serbia for a comparable bond on the international market, even though both countries had the same credit rating. The persistence of this "geographic discount" leads some people to argue that the system is designed to create risk. Gagan Gupta, CEO of Arise IIP, a company developing logistics and infrastructure in Africa, certainly believes so. At an investor conference last year he  said "The concept of risk is completely invented to ensure that investment doesn’t come to Africa." He should know. His business just concluded one of the largest private infrastructure capital raises in Africa.

Whatever your views, the tragedy plays out in the real lives it affects. The hefty premiums paid by African sovereigns are passed on to local banks, then to citizens and businesses, creating  a situation in which African small and medium-sized enterprises often face interest rates of 15-30% compared to just 4-8% for their European or US counterparts; while Kenyan families face mortgage rates ranging from 14.9% to over 21%, dramatically higher than the approximately 5.1% available in the UK today. This pricing makes homeownership and wealth building an unattainable dream for millions of people, and stifles job growth.

Towards solutions
This issue demands systemic change rather than minor adjustments, as delegates at the Financing Africa Forward summit in August made plain. It demands reforms to the international financial system, fair credit rating practices, increased transparency in debt management, domestic reforms to enhance revenue mobilisation and economic diversification, and international collaboration to provide more concessional financing for Africa. Specifically: 

• Credit ratings agencies must be more transparent about the qualitative elements of their ratings. It should be possible for African sovereigns to trace the evidence behind their own ratings, so they can engage with rating agencies on their own terms and challenge ratings they believe are wrong.
• Prudential requirements  must be adapted. Current risk-weights do not align with actual risk levels and hinder private capital flow into African infrastructure projects.
• The "sovereign ceiling" principle must be amended. This outdated rule prevents private entities from having a higher credit rating than their sovereign, regardless of their financial health, unfairly penalising robust projects.
• African sovereigns need to improve their financial data quality. Transparent spending, taxation, and funding information will foster accountability, empower citizens to demand that financial gains are translated into development outcomes, and create a more accurate view of their economies, ultimately boosting creditworthiness. 

Converting a vicious cycle of debt into a virtuous cycle of development
Lenders, agencies, and  borrowers must all do better. It starts with reducing the cost of capital for African sovereigns. By lowering sovereign borrowing costs, we can transform a cycle of debt into a virtuous cycle of development. Reduced capital costs will enable greater investment in crucial infrastructure, lower operational expenses for businesses, boost productivity, and create much-needed jobs. This, in turn, will lead to increased domestic savings, higher tax revenues, deeper financial markets, and further reductions in capital costs, ultimately ensuring Africa's growth is driven by its own mobilised savings and competitive FDI, not aid or expensive foreign debt. 

As Sidi Ould Tah, the President of the African Development Bank, so powerfully states: "There is no global development without African growth. And there can be no African growth without a fundamental reset of how capital is priced for the continent."  

The disparity in borrowing costs must end so African nations can pursue their growth and development unimpeded.