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African countries are facing another debt crisis and will need more long-term help than the latest G20 debt plan offers to avoid problems and maintain much-needed investments, according to policy makers, analysts and investors. .
Roughly 40 percent of sub-Saharan African countries were at or at risk of over-indebtedness even before this year, while Zambia last Friday became the continent’s first pandemic-era default.
The United States, China and other G20 countries have offered relief to the world’s poorest countries, many of which are in Africa, until at least mid-2021 and have outlined rules to reschedule public debt to help avoid the risk of default in the wake of the coronavirus crisis.
But these plans to provide short-term respite might not be enough.
“In 2021, a strong liquidity and structural response, recovery and restart toolbox must be developed in partnership between emerging markets, the private sector and the G20,” said Vera Songwe, executive secretary of the Economic Commission for Africa of the UN.
Songwe is pushing for steps to unlock $ 500 billion to help avoid lasting scars from prolonged funding gaps in the poorest economies.
The debt ratios of sub-Saharan African countries had already risen dramatically prior to COVID-19, just over a decade after the International Monetary Fund and the World Bank launched the Highly Indebted Poor Countries (HIPC) initiative that drastically reduced the debt burden of some 30 -income countries of the continent.
Fast-forward to the pandemic year and Sub-Saharan Africa is on track for a record 3 percent economic contraction this year, while the debt-to-GDP ratio has doubled over the past decade to 57 percent, the IMF found.
“We’re definitely in a debt crisis already, there’s no question about it,” said Bryan Carter, HSBC’s global emerging markets debt director, referring to poor countries around the world.
“I am concerned about 2021. I am concerned about an agreement in which many countries that will once again have to finance themselves in a slow or even recessive economic environment where a vaccine is not yet available globally. For many countries, that is one more year to finance themselves.
Cancellations, suspensions, lower loan costs
Some countries will need help with their debt balance, not just payments.
Politicians such as Ethiopia’s prime minister and Ghana’s finance minister, as well as campaign groups have lobbied for the debt to be canceled entirely, in addition to widespread calls for a longer suspension of service and payment from countries. poorest on the continent.
Merchants sit in front of their store as Ghana lifts partial lockdown amid coronavirus spread in Accra [File: Francis Kokoroko/Reuters]
Others, such as UNECA and some private investors, have also suggested that the strength of development banks could be leveraged through loans and guarantees to reduce borrowing costs for countries under increased pressure.
“There are definitely some countries, like Zambia and Angola or Ghana, that are in quite fragile situations right now,” said S&P Global Ratings sovereign group managing director Roberto Sifon-Arévalo, adding that the proposed plans did not address structural problems. “You need something much deeper and more holistic than this particular approach.”
African countries make up half of the 73 countries eligible for the G20 Debt Service Suspension Initiative (DSSI).
Much has changed since the HIPC initiative, when the money was owed mainly to rich countries and multilateral institutions. Now, a lot of creditors complicate the help.
China plays a key role: Its government, banks and companies loaned some $ 143 billion to Africa between 2000 and 2017, according to Johns Hopkins University.
“About 10 African countries have a debt problem with China,” said Eric Olander, co-founder of the China-Africa Project, adding that Chinese loans were concentrated in a small number of countries. “Djibouti, Ethiopia, Kenya, Angola, Zambia – they all have very serious debt problems.”
A third of the $ 30.5 billion of public debt service payments owed in 2021 by DSSI eligible sub-Saharan African nations is owed to official Chinese creditors, while another 10 percent is tied to the China Development Bank , calculated the Institute of International Finance.
China’s adherence to the G20 framework was very well received, although many have criticized the lack of transparency in its loans.
“If you look at China, the loans are mostly secret,” said Nalucha Nganga Ziba, Zambia director of the ActionAid anti-poverty charity.
A woman walks past a fashion boutique in the Piassa neighborhood of Addis Ababa, Ethiopia [File: Tiksa Negeri/Reuters]
In a brief before the G20 leaders’ meeting, IMF Director Kristalina Georgieva said the G20 framework, if “fully implemented”, could allow poorer nations to request permanent debt relief. She did not elaborate. Some G20 members, such as China and Turkey, are skeptical of actual debt cancellations.
Meanwhile, shifting payments under the G20 deal from the short to the medium term could simply be pushing the problem into the future.
For example, Scope Ratings estimates that Angola’s participation in the DSSI could increase its debt service requirements from 2022 to 2024 by more than 1 percent of GDP per year.
An increase in Eurobond payments following a debt sale bonanza that sent African hard currency debt markets surpassing the $ 100 billion mark in 2019 could add to the pressure.
With dollar bond yields nearing double digits, governments such as Angola, Ghana and Mozambique would have a hard time accessing markets at this time.
In fact, no government in sub-Saharan Africa has sold Eurobonds since Gabon and Ghana did so in February, before COVID-19 hit.
Nonetheless, access to capital markets will be needed to refinance, but also to help close an external financing gap that the IMF estimates at up to $ 410 billion over the next three years.
“The potential battle is really going to be between countries that want to grow and investors who say we need to talk about fiscal consolidation right away,” said Andrew Macfarlane, Bank of America’s emerging markets credit strategist.
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