The post-pandemic world will be a less forgiving one, writes Professor Danny Leipziger on African debt distress in the wake of COVID-19.

The Current Situation

The global pandemic is a health crisis causing enormous human suffering and dramatic economic damage, with lasting negative effects for Africa. Even before COVID-19, the continent was expected to have the largest number of people below subsistence poverty in the coming decade, to exhibit the most rapid rate of urbanization among regions, and to face the most dramatic challenges of development.[1] Pre-COVID-19, there were many pundits pointing to the excessive debt levels of many Sub-Saharan African economies, with concerns rising over debt sustainability. Overall, Emerging Market and Developing Economies (EMDEs) over-borrowed to reach debt levels of $55 trillion or more than 165% of their combined GDP according to the World Bank’s latest analysis.[2]

The initial impact in the first quarter of 2020 has been a dramatic outflow of capital from EMDEs, reportedly totaling US$100 billion.[3] For many EMEs, this loss of external capital is compounded by an equivalent estimated loss in remittances. Contrasted with this aggregate US$200 billion turnaround, one needs to look at EMDE debt levels that rose dramatically between 2017 and 2019. Looking at Sub-Saharan Africa alone, 21 countries owe roughly US$115 billion in Eurobond debt, of which approximately US$75 billion was added in the last three years. While pricing may have been attractive, a bulge of external debt repayments will be due between 2022 and 2030. Indeed, this “wall of debt repayments” coming due averages roughly US$8-10 billion annually during these years,  with the largest debtors including Egypt, Nigeria, Angola, South Africa, Côte d’Ivoire, Kenya, and Ghana.[4]

The immediate outlook reveals a mixed picture, even though the G-20 have agreed to suspend official debt repayments for this year and there is hope to extend this further into 2021. This debt relief applies to low-income (IDA only) and lower-middle-income countries (IDA-eligible), but it doesn’t of course deal with a large portion of debt that is official but not subject to Paris Club rules, nor does it cover the large private debt described above. Recent estimates indicate that Zambia, Tunisia, Angola, and Ghana will face gross external financing requirements (namely current account deficits plus debt repayments due in 2020) that exceed foreign exchange reserves.[5] Prospects for Gabon, Senegal, Ethiopia, and South Africa also merit immediate attention on the heat-map produced by The Economist for 66 EMDEs.[6]

Upcoming Challenges for the Continent

This note seeks to examine three inter-related problems: first, what will be the situation in 2021 for countries that face debt distress; second, what is the financial outlook for highly-indebted countries for the remainder of the decade; and related to this, what changes in national economic policies may be required for African countries to avoid the “lost decade” that plagued Latin America in the 1980s when confronted with similarly unsustainable levels of external debt.

The immediate challenge

Turning to the immediate challenge, debt relief is merely a fillip for African indebtedness, and the G-20 will of necessity need to deal with the stock of official debt that is owed to bilateral and multilateral lenders. This is not a new problem, as the international community has had two previous rounds of debt forgiveness, the Heavily Indebted Poor Countries (HIPC) program that began in 1996 at the behest of the G7 countries, and the Multilateral Debt Reduction Initiative (MDRI) that followed in 2005. The former reduced about US$100 billion of low-income country debt to official lenders and involved 36 countries, 29 of which were in Sub-Saharan Africa, while the latter wrote off another US$76 billion in debt due to multilateral lenders.[7]

What is important to recognize is first that capital markets were not so generous to low and lower-middle income borrowers in those years, so that official debt was a larger portion of the overall debt coming due, and second, that most official debt was handled by members of the Paris Club of official lenders. Neither fact is true today. An increasing amount of debt coming due is to private creditors, and, even more importantly, a good deal of official debt is owed to China, which is not only not a member of the Paris Club, but also has indicated that it will handle debt relief bilaterally and on its own terms.[8] This is a problem for the G-20 to resolve since it involves the “free rider problem,” meaning that debt relief cannot and should not be granted by some creditors, merely to allow them to repay others. The first test case will be Zambia, which owes a great deal to China, and which may need to collateralize those debts, as did Sri Lanka, with the promise of national economic assets. Zambia will at the same time also be eligible for IMF and World Bank support.

The medium term

Turning to the debt unsustainability in the medium term for many EMDEs, including some prominent examples in Africa, we should begin with the IMF’s admonition in October 2019 that 34 out of 70 frontier economies faced high risks of debt distress.[9]

This situation has turned deadly as a result of the pandemic that has pushed the global economy into a recession, projected to be deeper and longer than 2008-2009.

For many advanced economies, IMF estimates of the downturn show a recovery to previous levels of economic activity (GDP) lasting 16-24 months. The resulting effect on global commerce will be devastating, not only for 2020, but likely for 2021 and beyond. Not only can we expect depressed global demand as household and firms reel from the collapse of the global economy caused by pandemic and lockdown, but there will also be irrevocable changes in Global Value Chains, re-shoring of production, and strife among trading blocs as businesses strive to recover. This is not good news for most EMDEs, especially those in Africa.

The ability to repay debt hinges not only on the terms of that debt, but more importantly on the level of economic activity, export growth, and reserve accumulation, and relatedly, the strength of exchange rates. These factors determine debt sustainability, and the medium term outlook is not a promising one, although, admittedly, the degree of uncertainty is also unusually high. What we do know is that in the numerator of any debt-to-GDP ratio, we now see a larger portion of Africa’s debt due to China on terms that are opaque and with rules that have no precedent. One need only look at the cases of Mongolia, Laos, and Cambodia to see how an over-reliant debt burden will emerge that involves non-concessional lending to countries whom the global community has declared too poor to accept commercial debt terms.

Any Paris Club rescheduling of low-income country debt will need to include China as a full-fledged participant. Moreover, any private sector rescheduling arrangement, such as the previous London Club, will again need to include China, now one of the globe’s largest creditor nations. Moreover, Chinese lenders associated with the Belt and Road Initiative cannot hide behind the veil of secrecy that they currently use as an excuse. For this reason, Africa’s call for an additional US$100 billion in debt relief will have to be preceded by greater transparency by both creditors and debtors with respect to their outstanding debts and their national debt profiles.[10]

The long-term aftermath

Now turning to the final issue of whether the pandemic and its aftermath will necessitate a change in development strategy among Sub-Saharan African governments. This difficult issue is complicated by the facts that global trade growth will be modest, commodity prices low, and Chinese demand for raw materials restrained. All this points toward the need for greater efficiency as seen in improved quality of public investment and better governance; more regional trade (such as promised via the African Continental Free Trade Area) that captures increased local demand; a more productive financial relationship with China; and smarter national development plans.

Countries are grappling with the need to generate more domestic demand and be less reliant on external trade. This often leads to ideas of aggressive industrial policies, buy-national programs, and greater protectionism. This is the wrong recipe. Greater regional trade can only follow improved competitiveness and greater competition within the continent and inside economies. Improved public policy can complement stronger and more competitive private sectors, but this can only happen through policies that promote exports and enhance productivity.[11] Looking inward would not be the right policy, but neither would a return to previous policy stances that lacked sufficient buy-in and suffered from poor implementation.

Conclusions

The post-pandemic world will be a less forgiving one. First of all, most EMDEs will enter with sizeable external debt service obligations and a lack of domestic fiscal space. Second, the global economy will be less well off and driven less by global value creation than by national goals. Third, China’s role will be evolving. In this environment, there will be forces arguing for greater self-reliance, which can be accommodated as long as productivity is promoted and measured by the ability to successfully export. Public sector inefficiencies can no longer be tolerated, especially in the delivery of health and education. Infrastructure bottlenecks will require quicker resolution. All this points to the need for greater revenue generation, a more efficient and accountable public sector, and a greater reliance on competitive private markets. One may say, Plus ça change, but that would be wrong. Much has changed, and the continent will need to drastically change in order to continue to make progress on its development agenda.

Notes

[1] See Africa’s Pulse, No. 20, World Bank (October 2019)

[2] See Global Waves of Debt: Causes and Consequences, World Bank (2020)

[3] See “Global Debt Monitor: COVID-19 Lights a Fuse,” Institute for International Finance, (April 2020)

[4]  “Can Africa’s wall of eurobond repayments be dismantled?” Bond Vigilantes (January 1, 2020)

[5] See “Emerging economies set to struggle to meet debt obligations,” Financial Times (April 6, 2020)

[6] See “Which emerging markets are in most financial peril?,” The Economist (May 2, 2020)

[7] It should be noted that HIPC relief took many years to be finalized as eligible countries had fulfill certain conditions, including rounds of reform, agreement on poverty reduction strategies, and actions to make their debt profiles sustainable.

[8] See “China faces wave of calls for debt relief on ‘Belt and Road’ projects,” Financial Times (April 20, 2020)

[9] See “Emerging and Frontier Markets: Mind the Debt” in Global Financial Stability Report: Lower for Longer, IMF (October 2019)

[10] See “Communiqué -African Ministers of Finance: Immediate call for $100 billion support and agreement the crisis is deep and recovery will take much longer,” UNECA (March 31, 2020)

[11] See Leipziger and Manwaring, “Uganda’s Industrialization Strategy,” IGC Policy Note Series, International Growth Centre (April 2020)

The views and opinions expressed in this publication are solely those of the author. They do not purport to reflect the opinions or views of COVID-19 Africa Watch or any affiliated organization.