In response to the COVID19 crisis, governments across the world, including in Africa, have had to rapidly expand their budgets for healthcare and to avoid widespread poverty as economic activity slows. There are concerns that African countries are – as a result – vulnerable to a protracted debt crisis. The framing of this, however, may lead to the wrong policy prescriptions, and this is why.
The current narrative that Africa as a whole is entering an unavoidable debt crisis due to COVID19 has a poor evidence basis for three reasons.
First, the total external debt owed by the 55 African countries together is 775 billion – similar to equivalent owed by single countries to external creditors – for instance 1.4 times the amount owed by Brazil, or 2 times Indonesia’s debt, while China owes 2.5 times more than Africa does to external creditors. African debt levels can be managed as an overall portfolio of diversified debt. Indeed, while African debt levels have been rising over the past few years, the overall debt to GDP ratio on the continent is actually at the (relatively low) levels last seen in the early 1980s – well below the highs of the 1990s.
Second, within Africa, 84% of all debt is owed by just 16 countries, with the vast majority of African countries having external debt ratios equivalent to less than 50% of their GDP.
Third, there are a range of immediate options for providing extra liquidity to African countries in need of finance urgently to manage COVID19. The easiest is to suspend debt payments for a limited period of time, such as 1 to 2 years. This is what G20 countries have already agreed to for 76 poor countries around the world, freeing up a potential US$6bn in 2020, and more in 2021. Multilateral organizations and private sector organizations should follow suit.
However, there are some specific African countries of concern, whose vulnerability to external shocks have been exacerbated by the COVID19 crisis.
For instance, there are three African countries that have debt levels around or larger than the current size of their economies (Djibouti, Mauritania and Mozambique). One of these countries – Djibouti – and seven others (Mauritius, Angola, South Africa, Nigeria, Ghana, Cote D’Ivoire and Botswana) are paying over 10% of the value of their total debt in debt service payments, indicating that their premiums are very high, which indicates a sustainability problem. There are also seven African countries who owe over a third of their debt to private creditors – for instance via Eurobonds – with Mauritius, Nigeria and Zambia owing over 40% – which could pose an immediate challenge as private creditors have been very reluctant in the past to negotiate debt relief.
But far more important than these vulnerabilities around debt itself is the abilities of countries to grow and therefore pay off debt. The COVID19 crisis has been a huge economic shock to African countries – especially those who largely depend on hard-hit global industries such as commodities, trade, and tourism. Certain African economies – though not the majority – fall into these three vulnerable categories.
Commodity dependent economies were the first to demonstrate their vulnerable to price volatility caused by the COVID19 shock, for instance, an early substantial decline in oil prices. As a result, the International Monetary Fund (IMF) forecasts a 5.4% recession in Nigeria in 2020. While Nigeria has a relatively low debt to GNI ratio of about 12%, overdependence on the oil sector in Nigeria becomes a problem for debt when oil revenue generation is low. Nigeria may spend close to all its 2020 government revenue on debt service payments.
Another vulnerability is high inward trade-dependency. Countries like South Africa and Egypt – who together own over a third of Africa’s debt and depend on both inward and outward trade have suffered a double whammy – reduced demand for their goods as well as higher import prices and therefore domestic inflation. As a result, their economies are expected to decline, with the IMF forecasting a difficult 7.2% contraction in South Africa, whose economy was already in recession by the end of 2019 – its third since 1994.
A final but perhaps most challenging vulnerability is dependency on tourism. The tourism industry has been decimated by COVID19 due to border closures and travel restrictions. While Africa as a whole attracts few global tourists – just 4% of the world’s total – there are some tourism dependent African economies like Morocco, Mauritius, Seychelles, Tunisia and Tanzania, and this has left them exposed. For a relatively high-debt to GNI country such as Tunisia (90%) where the tourism sector accounts for almost 10% of the overall GDP, tourism revenues have declined by 50% in the first five months of the year. Although Tunisia has now reopened borders after months of lockdown its economy may still shrink by 7% in 2020.
What does this all mean? Will COVID19 shock Africa into a debt crisis through these vulnerable countries, or will they find some resilience, from somewhere? The fact is that while the current narrative is focused around “debt” any “debt” problems being experienced can be traced back to broader, underlying challenges these African countries are facing. These challenges to some degree are internal – for example, uncertain business environments that make it difficult to invest in new areas and diversify away from commodities (Zambia and Nigeria are examples). But the challenges are external too. COVID19 exposes the fact that many African countries at all levels of income and poverty – from Mauritius to South Africa to Tanzania – have been unable to forge a strong, resilient relationship with the rest of the world.
Yes, the vulnerable countries must develop recovery strategies for commodities, the traded sectors as well as the tourism industry. They also must put pressure on their creditors to support them through the crisis – lenders should equally share the burden of dealing with the unforeseen COVID19 shock, not just borrowers. China’s recent unilateral announcement to cancel interest-free loans on top of taking part in the aforementioned G20 initiative is a further step in the right direction. More from all creditors is urgently needed – and options such as IMF “Special Drawing Rights” issuance and reallocation should be on the table. While COVID19 is spreading more slowly across Africa, it could be more protracted over time in Africa than elsewhere, which means liquidity challenges could be felt for over two years.
However, in the medium-term, and to really avoid a debt crisis, African countries need to forge a more resilient relationship with the rest of the world. Part of this means looking inwardly – improving business environments, ensuring highly productive investments from all debt taken up, and focusing as much on intra-African trade as much as extra-African trade.
But it is not all internal. What must be avoided at all costs is the kinds of internal policy conditions that were set on African countries the last time – in the late 1970’s and 1980’s – a global problem they had nothing to do with created a debt crisis. Back then, African countries took years to recover from a hike in interest premiums, with some going into civil war as a result, and millions falling into poverty due to “structural adjustment” policies.
Learning from these mistakes, African countries must therefore, while adjusting internally, equallybecome more intentional towards, and demanding of its global development partners – from the private sector, to the IMF or China. African countries must demand better premiums on the loans they need for infrastructure, so that they can avoid future liquidity constraints while still investing for the future. They must insist on investment in domestic manufacturing and trade in added-value goods rather than raw commodities, and encourage other countries to send more diversified and higher-quality tourists to their countries.
COVID19 has exposed that all countries – including in Africa - need more sustainable, low-risk growth. The time is now for both debtors and creditors to be flexible and innovative, and look to a future together where they equally share responsibility for righting the vulnerabilities the pandemic has exposed.