African countries are scrambling to pull together the necessary resources to face the COVID-19 health crisis, cushion its fallout on the poor, support their economies, and stay current on debt obligations. Some are redirecting public spending, with Angola and Nigeria lowering the oil-price assumptions in their budgets to more realistic levels, at $33pb and $28pb respectively. Others have approved stimulus packages to contain the impact of the crisis on their economies and the poor. However, except for South Africa’s (10% of GDP), most stimulus packages have been around the global Low-Income Country average of 1.1% of GDP, indicating that room for manoeuvre is limited.
Given stretched budgets, donors have stepped up to provide more resources. The International Monetary Fund (IMF) has extended support to 83 countries, including 32 SSA countries (with 2 more requests pending approval) for a total of $10bn. The World Bank, the African Development Bank and the BRICS’ New Development Bank also increased their assistance, providing essential lifelines to many African economies. Although domestic borrowing will allow some countries with more developed local currency markets - e.g. in Ghana, Nigeria and South Africa – to plug some of their widening financing gaps, many countries will have to cut spending further or look to the capital markets when these reopen to them. Overall, the IMF predicts that SSA’s total public debt will rise by a relatively modest 4.6% of GDP this year, to 46.1% of GDP, compared to +18.5% of GDP in G20 countries. However, it highlights that the risks to these projections are skewed to the downside.
COVID-19 has made debt again front and centre in African discussions. With the IMF classifying 16 of the 36 Low-Income SSA countries as either in “debt distress” or “high risk” thereof before this crisis hit, it has become increasingly apparent that some countries may struggle to meet their debt obligations in the near future. Since the spring, calls for debt relief have resulted in the G20, the IMF and the Paris Club providing a moratorium on debt payments from May to December 2020 – the Debt Service Suspension Initiative (DSSI). While Kenya is still weighing its options, Chad, DR Congo, Ethiopia, Ivory Coast and Senegal have signed up and look to save $940mn in G20 debt servicing alone. Separately, Angola and China have reportedly found an agreement over the $4bn in debt servicing that Angola owes every year for the next three years. Finally, Zambia has announced to its Eurobond holders that it is looking to enter debt restructuring discussions.
How has SSA debt evolved over the past twenty years?
The G20, the IMF and Paris Club temporary debt relief efforts via the DSSI have received significant focus. While they are positive, their impact – with few exceptions – will be rather modest, at 0.6% of GDP for the average SSA economy. This is because over the last twenty years African countries have increasingly borrowed from other sources that do not necessarily participate in the DSSI, namely other multilaterals lenders (e.g. the World Bank, AfDB, etc.); new bilateral lenders, like China; and on commercial terms, including from the capital markets and other private creditors.
The World Bank is not involved in the DSSI. It argues that, given its net resource transfer to SSA countries, it would not make sense to suspend their debt repayments and that this could potentially jeopardise the health of its own balance sheet, impacting broader poverty reduction efforts.
China has lent SSA over $30bn since the Global Financial Crisis, according to Johns Hopkins University. This has implications for the political economy of debt in Africa; the institutional set up of Chinese lending; and the long-term prospects for debt relief from China. Firstly, China’s rise as a creditor in SSA has been mirrored by the reduced relevance of more traditional bilateral lenders such as the EU, the USA and Japan. Secondly, only a small portion of Chinese lending has been traditional bilateral (i.e. government to government) lending, with Chinese financial institutions, such as the China Exim Bank and China Development Bank, becoming prominent players. This is especially interesting because China views these as independent financial institutions operating on commercial terms, rather than SOEs and extensions of its policy infrastructure as they are often deemed to be by outside commentators. At last month’s “Extraordinary China Africa Summit on Solidarity Against COVID-19”, President Xi Jinping confirmed that China was going to participate in the DSSI and has agreed to cancel the interest-free government debt of SSA countries maturing this year. However, this is only around 5% of total lending from China, according to Johns Hopkins University. The rest of Chinese lending is from financial institutions – e.g. the China Exim Bank, the CDB – that President Xi “encouraged […] to respond to the G20 DSSI” and to work out debt arrangements with debtor countries, implying that these institutions may ultimately move in a more independent and less coordinated fashion. Finally, Chinese loans have also come in the form of oil-backed facilities in Angola or infrastructure project loans in Zambia, for example, where previous episodes of debt relief agreements (e.g. during the oil price shock of 2014-15) have hardly served as templates to understand China’s attitude to debt relief as deal terms have not been made public.
Lastly, SSA’s Eurobond stock has risen more than tenfold in 10 years, amounting to $58bn. As Quantitative Easing-induced low interest rates have favoured new entrants in the market, J.P.Morgan’s EMBIGD Index now hosts 13 SSA countries’ Eurobonds – virtually all post-global financial crisis entrants. This has helped develop an SSA Eurobond stock that has become more diversified and longer dated, with the first maturity hump not until 2024-25 ($6.2bn p.a. on average). With a few exceptions, the issue is one of liquidity rather than solvency. However, any debt relief from Eurobond holders is only likely be granted on a voluntary and country-by-country basis. This reflects the inherent challenges of both getting to a coordinated stance on the part of bond holders and of concerns from African nations about the negative implications of requests for debt relief on their credit rating and future market access. The latter will be key in the longer term for these countries to meet their development objectives as donors’ funding alone cannot meet such needs.
An altogether more complex and less transparent stock of debt is that owed by African nations is in the form of commercial borrowing, including bank lending, syndicated loans and commodity-backed lending, whose terms are not generally public.
What next? Innovative solutions for Africa’s debt needs
This more complex composition of SSA’s debt stock is likely to complicate any attempt to ease the debt burden of some of these nations. With the G20, IMF and Paris Club efforts being positive but insufficient to meaningfully alleviate Africa’s debt service burden, the focus will remain on China and private creditors as other countries – on top of Zambia – may request debt restructuring talks over the next couple of years, especially if the economic recovery proceeds slowly.
So it makes all the more sense to consider innovative solutions for Africa’s debt needs, in the context of this evolved debt stock composition and persisting development needs. Some of the ideas emerged thus far remain at early development stages and none has secured sufficient buy-in from debtors and creditors alike. For example, UNECA’s proposal of a $44bn Special Purpose Vehicle that re-routes African private debt payments towards Sustainable Development Goals’ expenditures for the next two years has yet to receive widespread support.
A few other innovative solutions have recently been proposed. One is to issue partially-guaranteed SDG bonds (Sustainable Development Goals), with a partial guarantee from an International Financial Institution (IFI) – e.g. the Ghana 2030 Eurobond – but also an SDG-focused use of proceeds. In this context, Africa can learn from its own best practice example of Nigeria’s Virtual Poverty Fund, set up in the aftermath of the Paris Club debt relief in 2006 to channel savings made from the deal towards the then Millennium Development Goals. Another one is setting up an SDG-aligned bond fund, where a group of IFIs could leverage their balance sheet to provide first-loss absorption so as to achieve a credit uplift for countries’ sovereign debt, thereby attracting more investors. Finally, debt for nature swaps could be used to tie a sovereign restructuring to commitments to invest in environmental goals, e.g. the Seychelles’ Blue Bond. All these initiatives remain niche but could be feasibly broadened to encompass the full spectrum of SDGs and structured in way that appeals to the international financial markets.