More than 20 African countries were at risk of debt distress earlier this year, according to the International Monetary Fund (IMF), with at least 6 African countries having debt-to-GDP ratios of more than 100%. There is a recognition that Africa will need all the help it can get to deal with multiple shocks from the Covid-19 pandemic, the Russia-Ukraine war and tightening global monetary conditions.
African governments are not being shy about asking for help: in early July 2022, African finance ministers and central bankers called for a “rapid, comprehensive and substantial” debt relief for African countries by the world’s richest economies. However, there are growing concerns that a world distracted by the Ukraine crisis may not give the looming debt distress in emerging markets and African countries the focus it deserves. A case in point, when the G20 foreign ministers met in Indonesia in July 2022, a communique was not even issued, a sign of growing discord in a group of the world’s largest economies that includes Russia, which is currently under a barrage of global economic sanctions, with retaliatory measures disrupting global food and energy supply chains in tandem.
Even so, there is an increasing global outcry for debt relief for the world’s poor countries, which are mostly African, in addition to other easing measures like moratoriums on debt repayments, elongation of loan tenors, and other restructuring measures. True, some of the African economies’ current plight was heightened by the Covid-19 pandemic and, later, the Russia-Ukraine war compounding woes just as the coronavirus crisis was beginning to ease. But as many are now faced with galloping inflation, increasingly unsustainable debt levels and revenues that are not sufficient to service debt obligations, and fund important basic public services to citizens, there is an urgent need for the world’s richest countries to rally around towards supporting them.
More needs to be done
In July 2022, David Malpass, the president of the World Bank, urged the G20 to hasten debt relief for the world’s poor countries, who together have about US$250bn in distressed debt. Progress has been unusually slow since the G20’s Debt Service Suspension Initiative (DSSI), which provided relief for poor countries from their debt servicing obligations owing to the Covid-19 pandemic, expired in December 2021. The Common Framework for Debt Treatment beyond the DSSI (Common Framework), also by the G20, which is aimed at restructuring what are increasingly distressed debts, is a natural next step, but has been floundering. As the name implies, the Common Framework brings together both public and private international creditors to ensure agreed restructuring terms are acceptable across the board, and thus robust and credible. As at least 60% of low income countries will probably default on their international debt obligations, according to the IMF, from just below 30% in 2015, there is an urgent need to pick up the pace on the Common Framework.
While the IMF made available US$23bn worth of Special Drawing Rights (SDRs) for emergency Covid-19 spending by poor countries in 2021, followed by a pledge of US$100bn worth of SDRs to weak economies by the G20, and more recently the creation of the Resilience and Sustainability Trust (RST), there is much more that needs to be done to ensure a successful navigation of the incipient debt crisis in poor countries, especially African ones. According to the IMF, a hitch-free implementation of the Common Framework should be top of the list. There is also a need to modify some of the design features of the RST. Vera Songwe, the executive secretary of the United Nations Economic Commission for Africa (UNECA), argues the requirement of a regular IMF programme for access to the RST is flawed, for instance, and that its objectives should include emergency short-term support, in addition to its originally intended long-term focus.
Chad, Ethiopia and Zambia, which are already renegotiating the terms of their external debt under the Common Framework, have faced complications owing to domestic and transactional challenges. The IMF reported progress on Chad negotiations in mid-July 2022, the first country to seek help under the Common Framework, but also highlighted delays in reaching an agreement with creditors, which includes Glencore, a private mining giant. Incidentally, Glencore is owed the most in the Chadian case via oil swap deals that go back almost a decade. A restructuring deal with creditors is a prerequisite of IMF support for these debt-distressed countries, the list of which is growing by the day. Negotiations by a creditor committee for the restructuring of Zambia’s debt, which is co-chaired by France and China, have also started, with a commitment announced in late July 2022 clearing the way for the IMF to provide support of up to US$1.4bn which though agreed in December 2021, was finally approved in late August 2022. The Zambian case is unique, as it is the first African country to default on its external debt of more US$17bn during this most recent incipient round of debt distress. Ethiopia’s creditors’ committee made a commitment on restructuring in August 2022 as well, with the IMF expected to announce a support programme pretty soon. As the case of Chad shows, moving from a restructuring commitment to a deal can be challenging, however.
Underwhelming debt servicing capacity points to imminent distress
Global public debt levels have risen to as much as the world’s total economic output, albeit developed economies account for much of it at 120% of their GDP compared to 63% for developing countries. In the case of developing countries, the ratio of external debt servicing to revenue is probably a more reliable metric for determining imminent debt distress (see Figure 1), albeit a juxtaposition with the debt-to-GDP ratio will still be necessary. What is unique about this recent round of emerging markets (EM) and African debt distress is that China has surpassed Western lenders and development financial institutions in lending to developing countries and has done so with opaque documentation and terms. Almost all African countries that will require IMF support in this latest round of debt crisis will involve creditor committees with China at the head of the table, complicating negotiations, being as about half of Chinese international lending is not recorded in official global debt statistics.
Ghana and Nigeria provide a useful contrast in the West African case. Because even as both Ghana and Nigeria are troubled, the degree and circumstances vary. For instance, Ghana's debt-to-GDP ratio is about 80%, which could be as high as 85% in 2022, according to the IMF, whereas Nigeria's is about 23%, albeit if you add monetary financing, it is much higher. In any case, the IMF is already calling on the Nigerian government to restructure its debt to avoid potential default. Economic populism in both countries is a common factor for their ongoing fiscal troubles, although forced Covid-19 spending, and the other global headwinds that followed, from the Russia-Ukraine war, the supply shocks in tandem, to the global monetary tightening in response, are making what were increasingly bad situations much worse. Ghana has already begun to implement austerity measures ahead of an IMF deal, revising its 2022 budget deficit downwards in late July 2022 and cutting its economic growth projection for the year to 3.7% from 5.8%. Nigeria may very well have to as well, but upcoming elections in February 2023 point to likely continued deterioration until a new government is installed in May 2023.
Source: World Bank
In East Africa, Kenya, Tanzania, Ethiopia have either clinched IMF deals or are negotiating one. In Southern Africa, the story is the same. South Africa turned to the IMF in mid-2020 during the height of the Covid-19 pandemic. Zambia is negotiating with international creditors on a debt restructuring and has already secured IMF credit support. Judging from the trend, almost all key African economies will have credit programmes by the IMF before end-2022.
Debt restructurings must reduce moral hazard
Africa has been here before. Debt relief of about US$100bn for highly indebted poor countries since more than two decades ago provided breathing room for a lot of poor economies, allowing them to deploy revenue to more productive purposes. But the discipline did not last. Cheap credit from China for ego-boosting elephant projects were taken without care for proper costing, and under terms that are increasingly now leaving countries cornered, with the prospect of default increasingly high. Zambia, which has already defaulted on its Chinese loans, is an archetypal example. Chinese loans have been very helpful to build new infrastructure, ranging from a new international airport, to additional power generation capacity. With a power surplus of at least 1,000MW, Zambia has something to show for its debt binge. Still, Zambia can no longer fulfill its debt service obligations under the original terms. As China is new to this all too frequent complication with African lending, the Zambian case is also an opportunity for China to demonstrate its capacity to manage the unique vagaries that come with lending to African economies that typically like to bite more than they can chew.
If African economies take loans to build infrastructure and provide public services in a sustainable way, their recurrent debt troubles might be justifiable. But that is all too often not the case. These loans are taken without much care for sustainability, are often used for vanity projects at bloated costs, and a great deal of the proceeds end up in private pockets through corrupt means. Even so, the case for another round of African debt relief and restructurings is strong. But there is clearly a moral hazard problem as well. If African leaders expect that their countries’ international debt will always be forgiven or restructured, there is no incentive for them to borrow wisely, spend cautiously, and pay back their debt. The Chinese approach of liens on assets being funded has proved to be risky, as the citizens’ backlash to this approach in African capitals and abroad has shown. Conditional loans by the IMF and western countries have been problematic in the past as well. True, the IMF and World Bank are now more nuanced with the conditionalities attached to their support programmes. And there are good results to show for this effort, as it is indeed true that many African economies are today better managed. But the Covid-19 pandemic provided an opportunity for a regression to economic populism, with many African countries resorting to borrowings from their central banks and the international debt markets at suboptimal costs.
As the botched Chinese experiment with unconditional African lending is showing, international development support is more effective if it is conditional. But these conditions must be ones that take into cognizance the unique political and social characteristics of each African economy. Telling a country like Nigeria to float its currency abruptly and totally, for instance, will almost certainly cause a political crisis. Incrementalist economic reforms that are supported with hedges and mitigants by international development financial institutions are best. But this will require a long-term joint commitment with African governments on debt sustainability and economic reforms. As administrations change hands every four or five years via elections, sometimes to new parties, this may not be easily achieved for many African countries. Still, an elite commitment across tribal, political, and religious persuasions to common economic causes can be secured towards what are clearly optimal developmental ends. There is an opportunity in the incipient African debt crisis once again to do this right. Yes, African economies should yet again be forgiven some of their debt. Yes, international creditors should yet again restructure some of the increasingly costly loans. And yes, the IMF and World Bank should open their vaults to help African economies during yet again another period of need. But there has to be a robust and enforceable agreement on a minimum quality of economic management going forward, with global mechanisms put in place to ensure that African leaders know the price will be high when they lose their way yet again.