As the pandemic continues to constrain the fiscal space of African countries – given the slowdown in domestic economies and decline in commodity prices – and occurs in a context where 40% of the continent was already faced with unsustainable debt burdens, discussions around restructuring Africa’s debt have begun to gain traction. Offering countries debt instruments with more favourable terms or cash, in exchange for existing debt, will not only provide immediate liquidity but also address debt sustainability concerns in the long term.
Generally speaking, there are four options for sovereign debt restructuring – debt forgiveness, debt rescheduling, debt swap, and debt assumption – each with its advantages, difficulties and cost.
While the partial or full cancellation of debt obligations could be in the economic and political interest of the global community, as economic stability in developing countries offers trade opportunities and reduces the risk of fragility and conflict, previous experience with debt forgiveness programmes shows that creditor motivations are not purely altruistic and participation is typically conditional on accepting far reaching economic reforms which could border on national sovereignty rights. A case in point is the Heavily Indebted Poor Countries (HIPC) Initiative of 1996 and the imposition of the popular Enhanced Structural Adjustment Facility (ESAF) on participatory countries with conditions ranging from implementing structural reforms such as reducing the size of government to having an influence over the use of budgetary savings from the interim debt service relief. Moreover, apart from the fact that creditors are generally not inclined to offer debt forgiveness as a first option, these programmes are typically led by international financial institutions and is unlikely to be welcomed by private lenders which would make such arrangements not as rewarding for the continent: 53% of Africa’s debt is owed to private lenders[1].
On the other hand, debt restructuringis amore probable option as lenders are more willing to offer haircuts than absorb full losses. This would allow debtor countries to deprioritize debt servicing, thus shifting resources to sectors of greater importance. However, the implications for debtor countries could be severe as reneging on debt obligations signals a “bad type” which could increase borrowing costs and/or undermine their ability to borrow. As a matter of fact, concerns around facing punishment from creditors for being a bad type are currently manifesting themselves across the continent. Despite the debt service moratorium programmes provided by the G20 economies and the International Monetary Fund (IMF), a number of eligible countries are wary of accessing these programmes amid unease over credit rating downgrades and being completely locked out of the debt market. Nevertheless, debt restructuring remains a useful tool in providing fiscal room for debtor countries and is more widely accepted by the range of creditors.
A menu of debt swap options including debt-equity, debt-for-nature, and debt for development are equally viable options for sovereign debt restructuring. The successful exchange of debt for local currency by foreign entities and the strategic utilization of these resources as investment in state-owned enterprises, eco-friendly initiatives, and development projects ensures transparency in the use of the savings from debt service relief, improves debt management, and increases foreign investment in one fell swoop. Of particular importance is the opportunity that the current wave of debt restructuring could avail the continent in mainstreaming climate change considerations and promoting climate resilience. With estimates putting the annual cost of adapting to climate change in developing countries at a range of US$140 and US$300 billion in 2030, formal climate finance funding and development assistance, while necessary, would not be sufficient. Intrinsically, debt swaps could be utilized to augment the existing financing sources, thus providing a win-win-win situation for debtors, creditors and the global community.
Lastly, the option of debt assumption, where a new debtor assumes the debt obligations of the debtor country and is liable for the repayment of the debt, however satisfactory is highly improbable.
So far, the restructuring of existing debt is the popular option among Africa’s creditors with the IMF and the G20 economies offering debt service moratorium programmes until October and the end of the year respectively. Combined, up to 40 African countries can stop the clock on debt servicing and reorient resources towards responding more aggressively to the pandemic and its effect. Nonetheless, noteworthy of mention is China’s intention to provide debt forgiveness to vulnerable African countries. Under the framework of the Forum on China-Africa Cooperation, the Chinese government has stated that some African countries will be exempted from the repayment of zero interest rates loans due at the end of 2020. Indeed, this would be a relief to the continent considering that 20% of Africa’s government debt is owed to China, and 5% of this lending is interest-free.
While the debt relief efforts are commendable, they expose the need for a new debt restructuring architecture. The shift in Africa’s creditor landscape away from multilateral and traditional bilateral creditors to private creditors and new entrants like China indicates that the existing mechanism for restructuring debt would need to be modified. For instance, the Paris club, the mechanism through which bilateral debt is restructured, has as its permanent members mainly OECD countries and Russia which could question its legitimacy in negotiating debt restructuring for a continent where China has emerged as a significant creditor. Failure to modify the existing debt restructuring framework could increase the likelihood of holdouts by creditors, and prevent timely and orderly restructuring. Perhaps, the increased focus on debt restructuring should be viewed as an opportunity to produce a positive outcome towards creating a more inclusive debt restructuring architecture.
[1] Based on the author’s computation from data on International Debt Statistics, it covers both debt owed to commercial banks and bondholders.
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