African countries are hurtling towards a debt crisis, which the pandemic and astoundingly unequal vaccine rollout have intensified. This debt crisis will exacerbate the long-term economic and social scars of the pandemic.
Almost half of all African countries are at risk of being unable to pay off their debts. Since the pandemic hit, African government revenues have sharply declined, while the need for public spending to protect lives and livelihoods skyrocketed.
While advanced economies spent upwards of 18% of GDP to protect their economies in 2020, low-income counties with limited fiscal space spent less than 2%.
African economies and government revenues are not keeping up with debt service obligations, in part because they are still in the height of the pandemic, as they await vaccines.
Before the pandemic, one in eight countries spent more on servicing their debt than on providing education and social services for their citizens. In Nigeria, where 1 in 5 people lost their jobs due to COVID-19, 97% of federal government revenues were spent on debt service in 2020.
Build back better? Not likely.
Between now and 2025, US$285 billion is needed just to finance Africa’s pandemic recovery, according to the International Monetary Fund. That figure is stunning on its own, but African countries are set to make over US$150 billion in debt repayments between 2022 and 2024 — moving the goalpost of financial recovery even farther away.
The scale of this crisis calls for transformative action. The IMF took a first step in August by approving the largest-ever issuance of Special Drawing Rights (SDRs) — effectively US$650 billion in new money — to boost global liquidity. But just 5% went to African countries. To maximize the US$33 billion that African countries received, borrowers and creditors alike need to work transparently to make debt levels more sustainable..
The end game is not good for Africa. And not good for the world. Countries are resorting to increasing natural resource extraction to finance their recovery from the pandemic. Uganda recently announced the construction of a US$3.5 billion oil pipeline. Sri Lanka must now export its US$150 billion oil and gas reserves to service huge debts — while also taking out a loan to purchase vaccines. Without these measures they risk missing debt payments, known as debt distress.
Countries have reached a fork in the road. They urgently need a lifeline to make debts sustainable, which will shape the critical years ahead and the trajectory of their development. The right path requires action from the big players: private lenders like big banks and hedge funds, multilaterals like the World Bank, and the powerful ratings agencies that effectively price Africa’s debt.
African countries at risk of debt distress
Thirty-one countries are already either in, or at risk of falling into debt distress, where they can’t repay their debt. It causes the economy to crash as investors leave and other finance dries up. These conditions last for five years on average, slamming the brakes on poverty reduction, provision of basic services, or critical infrastructure development.
This problem is much more costly to fix than to prevent.
Before the pandemic, there was a gap of up to US$108 billion per year in Africa for basic infrastructure like roads, electricity networks, and internet connectivity. Given this infrastructure is so critical to build a sustainable economy, countries took out loans to finance it.
Debt stocks jumped by almost 10% of a country’s gross national income between 2015 and 2019, adding US$200 billion to what African countries owed. Half of this was borrowed from private creditors, which also made sense as commodity prices were high (providing a means to repay) and global conditions meant that debt was cheap. After all, development aid and cheap finance provided by multilaterals like the World Bank was simply nowhere near enough to fill the gap.
China also stepped in to plug the gap; in 2011 China overtook France as Africa’s largest bilateral creditor, lending an estimated US$16 billion. In 2019, China held US$69 billion, or 13% of African countries’ debt. Yet recent estimates put Chinese official finance at over US$200 billion in 2017, accounting for over 10% of the economy for some.
Borrowing was, by and large, a smart move at the time. But then the pandemic hit, bringing sharp declines in income needed to repay, combined with the scandalous inequities in vaccine distribution that are having direct economic consequences for African countries.
The debt pandemic
In 2020, African governments were set to repay US$19 billion to rich countries. This meant that when the pandemic hit and countries scrambled to find money, African governments were meant to be using a big chunk of their money to repay rich country governments. In response, G20 lenders stepped up to lessen the strain on the world’s most vulnerable countries, by announcing a Debt Service Suspension Initiative, or DSSI.
The DSSI enabled 73 eligible countries to defer debt service payments to rich countries during the pandemic. This was a pause on repayments, not cancelation of those repayments or the principal of the loans. Only bilateral debt was included, so the $US19 billion of repayments owed to private creditors and the World Bank kept flowing out of African treasuries as they struggled with the pandemic.
Yet concerns over DSSI application causing restricted and expensive future borrowing (through Credit Ratings Agencies’ downgrades) meant that only about two-thirds of vulnerable countries applied. Since May 2020, only about 10% or US$5 billion of eligible countries’ debt service has been suspended. Some have already started repaying.
While the US, the UK, and France suspended its bilateral debt, no pressure was placed on commercial banks to do the same, despite the fact that 60% of Africa’s commercial debt is owed to banks in these countries — bonds and commercial banks account for US$100 billion or half of the increase in debt stocks.
Back to normal, please
The threat of debt distress is even higher than when the pandemic first hit. Battered economies and more debt has meant that debt is estimated to be at almost 60% as large as Africa’s economic output, up from 50% in 2019. Food prices are at their highest in a decade, and some countries are cutting their health and education budgets to maintain debt service. But G20 leaders appear to be oblivious. The DSSI is due to expire at the end of 2021.
From 2022, countries struggling with their debts will have to rely on another tool: The Common Framework for debt treatment beyond the DSSI.
Agreed in November 2020, the Common Framework intends to provide a longer term solution to making debt manageable for countries. Whereas the DSSI just kicked the can down the road, the Common Framework should provide a way to reduce and restructure debts so that they are affordable.
Under a successful Common Framework, debts would be cancelled, postponed, and spread out. That means it does what the DSSI did and more, but this time permanently. Countries would no longer be weighed down by unaffordable debt service and would have breathing room should there be another unexpected event — like a natural disaster, disease outbreak, or change in prices of oil, minerals, or other export goods. This breathing room enables investment in health systems, education and basic infrastructure for their citizens.
That sounds great, but currently there are three major challenges.
First, the countries that have applied have been punished with credit rating downgrades, restricting access and increasing the cost of finance. That is deterring others from even participating.
Second, those that have applied have seen little progress. And there’s absolutely no proof that the private sector is willing to participate — and with little transparency around the negotiations, it is near impossible for civil society and organisations like ONE to put pressure on those not playing fair.
Lastly, middle-income countries like Nigeria are not eligible, despite having the most debt, making some of them the most vulnerable of all.
One significant plus is that China, which is Africa’s largest bilateral creditor, has agreed to participate. The China Africa Research Institute (CARI) estimates that at least US$12.1 billion has been forgiven by China in 2020 and 2021 so far, which is double the DSSI and shows just how important China’s role is if these initiatives are to be successful.
China has announced that it has made deals with 19 African countries to ease their payments — but without knowing even the basic details like which countries deals were made with, it’s hard to tell if this is good or bad.
Removing the three blocks to progress
For African countries to financially recover from the pandemic, the Common Framework has to work swiftly. Even for the countries that it does apply to, progress has been far too slow.
On average it takes a year for a country to restructure its debt if it is done before the country misses a payment. With the one year anniversary fast approaching, only three countries had applied and not one had managed to reach an agreement with their lenders. The G20 must urgently address three key stumbling blocks:
- All creditors must participate: Countries owe money to multiple governments, multilaterals, private banks, bondholders, and Chinese agencies. Unless the mechanism forces everyone to participate and secures agreement on all creditors taking a loss that they think is fair, it won’t work. The G20 is perhaps the only body with the power to make this happen. It should do so.
- Credit rating agencies should respond to the world we now live in: Big ratings agencies like Fitch have made it clear that applying to the Common Framework will mean that a country is downgraded, making it harder and more expensive to access finance in the future — effectively punishing countries for efforts to reduce the economic toll of the pandemic. They are effectively forcing those worst affected by the pandemic to bear the cost from a global event impacting everyone.
- The World Bank should do what it was created to do: It is shocking that the World Bank has refused to offer debt relief, despite its mandate to support countries with long-term development and crisis management. This in turn gives private creditors without such a mandate an excuse to stay out. It’s time for the World Bank to do what it was built to do.