The African "Borrowing Without Transformation" Paradox

An interesting article published on the Pan-African Review illustrates the pattern of “borrowing without transformation” that many African countries face, where debt accumulates but fails to generate sustained economic growth. Despite their vast natural resources, many African countries face persistent challenges, including infrastructure gaps, poverty, weak institutions, and stalled development. To tackle these issues, they often turn to external borrowing.

Borrowing itself is not inherently problematic. The critical factor is how the debt is deployed. When strategically invested, it can stimulate growth and enhance productivity. Mismanaged, it can undermine development and create a cycle of fiscal strain. Nigeria exemplifies the challenge: the country spends nearly 75% of its revenue on debt servicing, yet continued external borrowing has yielded limited gains in productivity growth and infrastructure development.

Rwanda, in contrast, provides a model of efficient borrowing. Despite a debt-to-GDP ratio rising from 20% in 2010 to over 80% in 2025, the country has focused borrowing on strategic investments in infrastructure, health, and technology, guided by long-term planning and relatively strong governance. This demonstrates that robust institutions are essential for efficiently managing debt contracted with donors and multilateral partners, ensuring that borrowed resources produce tangible development outcomes. Similar lessons can be drawn from Asian success stories, where disciplined borrowing fueled industrialization, export growth, and poverty reduction.

The Debt Productivity Index (DPI), which measures the relationship between debt levels and productivity growth, underscores this contrast. Comparing Nigeria, Ghana, and Rwanda with South Korea, Singapore, and China reveals a stark divergence: in Nigeria and Ghana, rising debt correlates with declining productivity, reflecting unproductive borrowing and weak institutional management. By contrast, Rwanda and the Asian examples show a positive link between borrowing and economic growth, demonstrating that debt, when strategically invested and overseen by strong institutions, can become a driver of development.

Rwanda's experience highlights that high debt can support transformation if aligned with credible national plans, productivity-enhancing investments, and strong institutional governance.

Key lessons for Africa:

Based on this analysis, Africa can draw several key lessons to transform debt from a systemic barrier into a driver of sustainable progress. These lessons are the following:

• Align debt with national development strategies and ensure that borrowed resources fund measurable, growth-enhancing projects.
• Strengthen institutions to guarantee efficient and accountable management of borrowed funds.
• Implement governance and transparency mechanisms to maximize returns on public investment.
• Treat debt as a deliberate development tool, not a reactive mechanism for covering deficits.
• Enhance domestic revenue mobilization to reduce reliance on external borrowing, while carefully balancing fiscal pressure to avoid stifling development.

The latest point needs to be further elaborated. Expanding domestic revenues can provide governments with more fiscal space to invest in productivity-enhancing projects, reduce vulnerability to external shocks, and limit unsustainable debt accumulation. However, this objective must be pursued wisely. African governments should focus on broadening the tax base, particularly by supporting the transition of the informal sector in the formal economy through adequate programs (we discussed this aspect here), rather than overburdening a few "easy" contributors with excessive taxes. Excessive taxation indeed risks driving investment flight and triggering public protests, which can undermine political stability, as recent events in Kenya illustrate. The goal is to mobilize resources efficiently without constraining the financing of critical public goods and infrastructure that drive sustainable growth.

Conclusion

The African debt paradox is not merely a fiscal challenge: it is a systemic barrier to progress. However, Rwanda and the Asian examples demonstrate that disciplined borrowing, strong institutions, and strategic planning can transform liabilities into productivity, inclusive growth, and lasting prosperity. For African nations the path is clear: do not renounce to borrow. Few modern economies have achieved sustained, large-scale development without leveraging some form of borrowing or external financing to fund critical investments. Rather, turn borrowing into a driver of sustainable development through fiscal discipline, strategic planning, and strong institutions that ensure debt is invested in productivity-enhancing projects rather than consumption or politically motivated initiatives. Ultimately, this will not only strengthen economies but also build resilience, foster stability, and lay the foundation for lasting prosperity across the continent