COVID-19 has further exacerbated the debt situation in sub-Saharan Africa (SSA). Prior to the pandemic about half of low-income countries (LICs) were at high risk of debt distress or in debt distress, including a large number of LICs in SSA. A shift in the composition of debt from concessional to non-concessional financing needed to finance infrastructure and human capital development contributed to higher debt levels. Weak fiscal and financial institutions and currency collapses led to increased repayment burden of foreign currency debt.
The International Monetary Fund (IMF) estimates that SSA’s general government debt, in percent of gross domestic product (GDP), has risen from about 25 percent in 2011 to nearly 48 percent in 2021. External debt to exports increased from 88 percent in 2009 to 153 percent in 2019. Declining government revenues to GDP ratio have further deteriorated the fiscal situation, decreasing from 12.7 percent of GDP in 2019 to 11.4 percent in 2020. The situation was exacerbated by lower foreign direct investments and inflows of remittances in 2020.
To cope with the severe economic consequences of COVID-19, the international community, particularly the G20 countries have a key role to play in providing short-term liquidity and debt relief to SSA. The IMF estimates SSA’s funding shortfalls of about US$ 890 billion between 2020 and 2023.
The role of the G20 and the International Financial Institutions in providing liquidity
To close this financial gap, the International Financial Institutions (IFIs) have already provided financial assistance to SSA by extending and reforming existing facilities, such as the Fund’s Rapid Credit Facility and the Catastrophe Containment and Relief Trust as well as the World Bank’s fast track facility. Further scaling up of funding by the IFIs is needed by eligible SSA borrowers with demonstrated capacity to use funds transparently, well, and on account of debt sustainability considerations. For these reasons, the G20 has a key role to play.
Already there is a chorus for a global SDR reallocation initiative led by the G20. This will require strong political ownership and commitment by G20 countries who collectively own the largest share of SDRs. By donating or agreeing to lend part of their shares, the G20 could considerably support LICs in SSA and elsewhere to meet their infrastructure and human capital needs.
The G20, the Paris Club, and the IFIs have established two processes for providing timely liquidity to developing countries: the “Debt Service Suspension Initiative” (DSSI) and the “Common Framework for Debt Treatments beyond the DSSI”. G20 countries assume a crucial role in providing bilateral grants and loans to LICs because at the end of 2019 they held 91 percent of the bilateral debt of countries that are eligible for the DSSI. An advantage of the DSSI and the Common Framework is that they include non-Paris Club members in debt treatments. This is important as the share of bilateral official loans from non-Paris Club members to DSSI–eligible countries significantly increased in the past decade. For example, China’s share of bilateral official debt to DSSI–eligible countries rose from 45 percent in 2013 to 63 percent at the end of 2019.
The Common Framework, however, has some weaknesses. First, it is not a comprehensive instrument for sovereign debt restructuring because private creditors have not yet committed on granting debt treatment on comparable terms. Second, debt treatments as proposed in the Common Framework should be tied to conditions, e.g., using the funds to promote sustainable development including poverty reduction, for the health sector, for infrastructure, or for the improvement of debt management. Third, to conduct fair and timely sovereign debt restructuring, transparency is key. Hence, all public sector creditors and debtors should disclose their loan agreements permanently. The G20 countries could serve as good examples in this area.
Non-financial support of the G20 to SSA
In addition to this liquidity provision, the G20 should support countries in SSA through non-financial measures, including capacity building and responsible lending. In this area, capacity for domestic resource mobilization is key in reducing reliance on external borrowing. G20 cooperation with SSA countries is crucial in three areas. The first one is the provision of technical capacity and capacity for knowledge generation and risk management to promote development of local capital markets. The second one is capacity for public finance and tax collection, including investments in digitization to enhance the mobilization of resources, and reduction in the levels of corruption. The third one is to restrict illicit capital flows from Africa; these amount to an estimated US$ 50 billion per annum according to estimates of the African Union and the OECD. Curbing illicit flows will enhance the ability of countries to repay their debt and enhance their domestic resource base. At the centre of these flows is tax evasion by multinational corporations originating from OECD countries. The G20 should promote global coordination to help elevate the capacity of SSA countries to curb such flows.
Responsible lending to SSA is also important to attain long-term debt sustainability. In this regard, the G20 established the Operational Guidelines for Sustainable Financing in 2017, while the IMF and the International Development Association (IDA) evaluated adherence to them in 2019. The G20 should emphasize the urgent need to implement these Guidelines.
Shared responsibility of the international community and the G20
The international community and the G20 have a shared responsibility to contribute to debt sustainability in LICs, including in SSA. This is vital for global financial, economic, and political stability. The immediate liquidity support (DSSI and the Common Framework) to LICs to address the devastating impact of COVID-19 is a step in the right direction. The G20 and the IFIs need to do more to support poorer countries, including those in Africa, along the lines indicated in this paper.
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