African sovereign debtors are caught on the horns of a dilemma. On the one hand, they are obliged to help their populations deal with the COVID virus. This requires them to mobilize as quickly as possible the maximum available resources to spend on health care and on supporting people facing hunger, homelessness and unemployment. However, they know that they cannot raise sufficient financing for these purposes merely by mobilizing domestic resources and accessing official sources of finance.
On the other hand, unless their private creditors provide debt relief, they are contractually bound to service their debts or risk losing access to international financial markets. The gravity of this risk is underscored by the fact that they are increasingly dependent on these markets. They account for about 25% – $117 billion – of the total long term external debt of sub-Saharan Africa.
Managing relations with these investors is difficult. They have different business interests. They each have legal responsibilities to their own clients and shareholders. Since the bonds are tradeable, some of them may decide that they would rather sell their bonds, even if at a discount, rather than risk becoming involved in future African debt renegotiations. The speculators who buy these bonds know from past experience that they can earn substantial profits – between 300 and 2000% – by forcing the borrower, through litigation if necessary, to honor their original terms.
This situation pushes African countries towards deferring to their private sector creditors – even if it exacerbates their domestic economic and social situations. Some states deem this risk to be tolerable because they do not currently owe significant debt payments. They also wish to avoid any hint of the stigma that may attach if they participate in negotiations with those states that urgently need debt relief.
Consequently, there are powerful centrifugal forces working against a strong collective African position on debt relief. This enhances the creditors’ bargaining position. It also allows them to escape responsibility for the consequences of a virus that was unforeseen and is beyond the control of both debtors and creditors.
Africa and its friends can take two actions to restore some balance in the distribution of negotiating power between the parties.
First, an African regional organization can advocate for a general approach to African debt. Thus, UNECA is exploring the feasibility of creating a Special Purpose Vehicle (SPV) backed by creditworthy institutions such as the central banks of rich countries. This SPV would receive the debt service payments of participating African states, thereby enabling the debtors to demonstrate that they have met their contractual obligations to their creditors. The SPV would issue securities worth an equivalent amount to the creditors which should enable them to treat the debts as performing assets. The SPV could then use the payments to provide COVID-related financing to the debtors.
The success of the UNECA proposal depends on three things: the consent of the creditors; credit rating agencies agreeing that the plan does not adversely affect the debtors’ credit ratings; the creditors avoiding the temptation to sell their holdings of African debt, even at a substantial discount, to vulture funds.
Second, Africa’s friends can help change the dynamics on the creditor side. They can create a vehicle, a DOVE (Debts of Vulnerable Economies) Fund, to buy African debt and become an influential enough creditor that it must be included in all negotiations between the debtors and creditors.
The DOVE Fund would buy the bonds of participating African states at their current discounted market prices. It would commit to implement a payment standstill on its bonds until the global health crisis abates. It would also pledge that after the crisis it will work with African debtors to ensure that their debt is not an undue burden on their efforts to rebuild their economies.
It would stipulate that any future debt renegotiations will be consistent with all applicable international standards such as the UN Guiding Principles on Business and Human Rights, the Principles on Responsible Investment, and the UNCTAD Principles on Promoting Responsible Sovereign Lending and Borrowing.
The Fund would also advocate that all other private sector creditors commit to applying the same approach and the same principles in dealing with the debt of the participating countries.
It can remind them that most of the leading financial institutions in the world are signatories to the Principles on Responsible Investment, and have environmental, social rights policies that require them to be socially and environmentally responsible in all their operations. Many of them also have human rights policies that confirm that they respect all international human rights conventions. In addition, many of them have acknowledged that their companies should serve the interests of all their stakeholders and should not prioritize the interests of their shareholders.
The DOVE Fund can raise funds from a range of sources including governments, international organizations, foundations, financial institutions, companies and individuals. Clearly, the biggest portion would need to come from governments and international organizations.
The purpose of raising funds from foundations, companies and individuals is both political and financial – their involvement will increase the pressure on the bondholders to comply with the Fund’s objectives. Financial institutions could contribute "in kind" by promising to manage their holdings in compliance with the Fund’s principles.
Governments could donate their current unused holdings of Special Drawing Rights (SDRs), the International Monetary Fund’s (IMF) reserve asset. The IMF could contribute through a sale of a portion of its gold holdings, which at the end of 2019 were valued at about $138 billion at current market prices and at about $4,4 billion at historical cost. The Multilateral Development Banks (MDBs) could contribute from their retained earnings and reserves.
Africa is facing a profound crisis that could set its development back a generation. It needs a solution to its debt problems that makes sure that no future African leader is forced to ask, as did former Tanzanian president Julius Nyerere: “Should we really let our people starve so we can pay our debts?”