In the first two months of 2020, before COVID-19 hit the global economy, emerging market experts warned of a growing one “Wall” repayments of national debts that threaten many African nations. Obligations to official (ie national) creditors made up a large part of the burden, but to the same extent Concern, concern was the increase in indebtedness to private (ie, individual) creditors fueled by the increase in foreign bond issuance in recent years.
At the beginning of 2021, the concern turned into a crisis. Around the world, COVID-19 has devastated economies and government revenues. For many countries in sub-Saharan Africa (SSA), this has overturned the sensitive debt balance. Zambia was the first affected person to fail to meet their obligations in November. Many more must take action to avoid the same fate, including Angola, Gabon, Ghana, and Kenya, among others.
World Bank data from October 2020 International debt statistics Report and that of the IMF World economic outlook from the same month reveals problematic repayment plans across the region for the next decade. The following is the total annual debt service as a percentage of expected revenue for SSA 43 countries between 2009 and 2027.
Hover over data points to learn more. Click on a specific country (right) or a line chart to highlight it.
Another analysis shows the estimated composition of the SSA states’ debts. The pie charts below are based on the percentages of annual debt repayment to government revenue given above.
Hover over pie charts to learn more. Zoom in to see maps that are otherwise obstructed.
International organizations have recognized the need for support in the face of this crisis. At the beginning of the year, the IMF and the World Bank worked with the G20 countries to develop the Initiative to suspend debt servicing (DSSI), making 73 low to middle income countries eligible for a suspension of bilateral debt service obligations through June 2021. More recently, the G20 has focused on long-term solutions to this debt crisis and developed a proposal (the “Common framework”) for debt restructuring for the same nations targeted by the DSSI.
What matters is that the DSSI tried, but it was unsuccessful in engaging private sector creditors in a suspension arrangement. The effectiveness of the initiative was also hampered by the fact that 40% (as of early December) of the eligible countries were concerned about refuel national creditworthiness.
Overall, international support was therefore inadequate. Even when bilateral suspensions were granted, the failure to properly account for private sector debts such as outstanding bonds ensured that the looming problem was only partially resolved. Solving the private sector aspect of the African debt crisis must therefore be a priority at the moment.
Dealing with bond debt
There are three main issues that need to be addressed to ensure that SSA countries can both weather the debt crisis and ensure future debt sustainability.
First, centralization (or debt consolidation through an intermediary) is essential in providing emergency relief with the private sector debt burden. For many SSA states with significant bond debt, a large and diverse corps of bondholders is forcing debt handling negotiations to take place case by case Basis, which makes extensive repayment suspensions in the region almost impossible and short-term effective measures are prevented.
To combat this problem, separate proposals are made by the UN Economic Commission for Africa and the UK based Center for Economic Policy Research (CEPR) advocate the conversion of debt instruments into concession papers or their amalgamation in “central credit facilities”. In its new form, the debt would be guaranteed by a trusted intermediary (the World Bank as an example from CEPR) to allay investor concerns about timely returns. If successful, such centralization would represent a practicable solution for several polluted nations at the same time.
Second, transparency in debt is critical to both managing current debt and improving sustainability. In the short term, bondholders are reluctant to take debt vacation until they understand the full picture of a country’s debt structure. This was evident in Zambia, where a lack of transparency regarding the country’s commitments to Chinese creditors was one of the main reasons obstaclesto successful suspension negotiations, thereby contributing to the nation’s default. In addition, greater transparency can reduce the risk of investing in SSA countries in the long term and the possibility of possibility hidden debts that affect the ability of nations to repay other creditors (as in Mozambique in 2016).
State-funded Chinese loans to SSA countries are often high opaque, but recent data suggest that the volume of such loans transact. Pressure from the international community should, however, continue to be used to ensure that secret lending by state creditors is largely removed to ensure a more open investment environment.
Finally, recognizing that centralization and transparency are particularly useful in the short term to encourage debt moratoria, restructuring is an important step in that next level the crisis response. Merely deferring repayments means that SSA countries will suffer again at a later date. Outstanding debts between these nations and their private creditors need to be renegotiated and reduced.
Here the G20 Common framework for debt management, announced in November, is relevant. In relation to the private sector, the framework encourages restructuring talks with private creditors that are likely quota via SSA states negotiating IMF programs. Such discussions must begin soon, as any delay will mean further hardship.
An adequate answer to this debt crisis does not end with solutions for the short time horizon. If the immediate debt threat in sub-Saharan Africa is reduced, the focus must shift to reforming the current system (fairer Credit-worthiness, cheaper Credit terms) in order to avoid similar crises in the future.
But the crisis is raging right now, and the focus cannot yet turn to the distant future. Once solutions to public sector obligations emerge, private sector indebtedness needs to be addressed with equal intensity and with pragmatic solutions that are appropriate for all parties involved.
Stefan de Villiers is a former intern at the GeoEconomics Center of the Atlantic Council and is currently studying economics and data science at the University of Washington.
At the interface of business, finance and foreign policy, the GeoEconomics Center is a translation center with the aim of helping to shape a better global economic future.