Is sovereign debt impeding Africa's COVID-19 recovery?

A currency trader changes US dollars at a market in Kinshasa in the Democratic Republic of Congo. Photo by ARSENE MPIANA/AFP via Getty Images.
A currency trader changes US dollars at a market in Kinshasa in the Democratic Republic of Congo. Photo by ARSENE MPIANA/AFP via Getty Images.

Although Africa is the least indebted region when judged against GDP or per capita, it is the most affected by sovereign debt pressure, it also contributes the least greenhouse emissions but is the most affected by climate change. So, the sad paradox of Africa being the least infected by COVID-19 but most damaged by its impact is no surprise.

The pandemic accelerated the unequal treatment of Africa, driven by the rules and systems of global economic governance. It exposed the practical implications of inequality – notably differences in state capacity to limit the socio-economic impact of lockdowns – uncovered the hyper-dependence of critical value chains, particularly to China, and revealed both the vulnerabilities of the international financing system and the limits on its coordination.

Some vital issues remain outside the gift of Africa’s leaders and people, notably around debt. Hitherto, lending was governed by the maxim of avoiding adding to already-high debt burdens, ‘you are too indebted; therefore, we will not lend you more’.

But this precautionary principle is not applied even-handedly as central banks of wealthy countries with strong currencies introduced expansive monetary policies they likened to ‘firing a bazooka’. Unorthodox measures now routinely employed by leading economies make a mockery of the traditional IMF macroeconomic conditionality rulebook.

The first two months of the pandemic saw $10 trillion of stimulus packages with European stimulus representing the equivalent of 30 times – in today’s value – the total Marshall Plan. Global debt rose to a new record high of almost $300 trillion and only five countries – Mexico, Argentina, Denmark, Ireland, and Lebanon – managed to keep a total debt-to-GDP ratio below pre-pandemic levels.

World debt ratio is now close to 260 per cent of GDP with virtually all developed countries above the 100 per cent threshold but Africa, by contrast, remains below 60 per cent on average – a star performer if this indicator is isolated from the rest.

But following leading economies into monetary unorthodoxy would have devalued Africa’s currencies while reducing its capacity to import and service sovereign debt. African ministers of finance called for $100 billion liquidity support but struggled to be heard as not only was there no new money to support economies, there was even a reduction in development programmes and capital flight hit new records.

Outdated systems

Strident calls for debt relief dominated the narratives about the pandemic impact on African economies because, as the powerful increasingly ignore the rules, the weight on the rest increases exponentially which is significant in relation to how public debt is governed. There are calls for a new approach to debt restructuring, a reinterpretation of sovereign risk to include future markets, and revisiting the impact in poor countries of the stringent requirements from the Bank of International Settlements.

Risk assessment by credit rating agencies is a particular problem because they claim to be evidence-based but frequently impose unspoken political criteria and consistently underestimate the size of most African economies. Despite steady economic growth of around 3.6 per cent in the 32 African states rated by agencies, almost twice as many received negative assessments compared to positive and only Botswana escapes the ‘non-speculative’ category in the entire continent. But on strict macroeconomic criteria, many African countries would be performing better than their global peers.

Major credit rating agencies are at the forefront of opposing any debt relief for Africa, arguing that relief provided by ‘official’ creditors is equivalent to non-payment of debt service and so is a sovereign default – and debt relief by private creditors can also in some cases constitute a sovereign default.

Such a harsh stance tempered the desire of many African countries to accept any arrangement which could ease liquidity pressure, and explains the poor use of the G20 special pandemic-related moratorium offer, the Debt Service Suspension Initiative (DSSI). Instruments such as a new IMF Sustainable and Resilience Fund mirror the conditionality checklist approach of the existing arrangements which proved so inadequate during the pandemic, and the IMF’s Special Drawing Rights (SDRs) allocation of $650 billion only delivers $34 billion in real new resources for Africa.

The focus on China

Accusations of Chinese debt trap diplomacy towards Africa attained fever pitch with the publication of a report by AidData revealing $40 billion of hidden debt accumulated by African countries between 2000 and 2017, and a total debt to China estimated at $207 billion – equivalent to around 25 per cent of the continent’s total external debt.

This is in many ways a product of outdated financial systems because the size of Africa’s GDP has more than doubled since 2000 and, while ODA and lending has also gone up, it has not come close to keeping pace. African countries find it difficult to access concessional finance despite the repeated promises of support to the MDGs, SDGs, and now climate transition because punitive commercial terms drive them to look for alternatives which avoid the iron rules of the credit rating agencies – and China has been by far the most sizable source.

But now even this wellspring may be running dry. China’s Belt and Road initiative (BRI) has been severely affected by the pandemic and the era of easy credit access for African countries seems to be ending with more stringent requirements likely to be put in place. COVID-19 has reduced fiscal space and made debt servicing more difficult, and needs are rising against public revenues constrained by low growth – the IMF predicts only 3.7 per cent growth for sub-Saharan Africa and that per capita incomes will remain 5.5 per cent below pre-pandemic levels.

Action required

This will continue for years to come if the continent does not act so enhanced African agency is vital. The Economic Commission for Africa is advocating for the establishment of a repo market using a $200 million-backed Afreximbank facility to serve as a guarantor to lower the cost of borrowing. And African sovereign Eurobonds issuance is also experiencing a comeback with a total investable universe exceeding $130 billion.

Climate finance is also taking root, although the $100 billion per year contribution promised by the Paris Agreement has been slow to arrive. On a political level, recent meetings of the African Union (AU) indicate an increased resolve to finally establish an African Continental Free Trade Area (AfCFTA), reform regional bodies and set the continent onto a more ambitious development path. ‘Building back better’ is now mainstream political discourse and green deals indicate a renewed ambition to do things differently, notably in strategic areas such as energy.

But these steps must be given space to flourish and, for exceptional situations, exceptional measures are needed, according to the IMF managing director Kristalina Georgieva. The pandemic has forced leaders across the world into unprecedented and extreme action – and it is incumbent on those who control the rules and practices of global finance to give African decision-makers the fiscal and policy space to find their own solutions.

Professor Carlos Lopes, Associate Fellow, Africa Programme. This article was produced as part of the Policy for Recovery in Africa series, held in partnership with the United Nations Development Programme (UNDP).

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