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Addressing Africa’s Debt Burden Once the Pandemic Is Under Control

As of early 2020, macroeconomic fundamentals in Africa were improving, with investments, rather than consumption, accounting for more than half of the region’s growth. Inflation was falling and the continent was making impressive strides towards accomplishing the United Nations Sustainable Development Goals (SDGs).

In 2019, Africa’s GDP growth at 3.6% was insufficient to accelerate economic and social progress and reduce poverty. Growth per capita was around 0.7% and job creation has not kept pace with the need to provide opportunities to the 29 million young people entering working age each year. Since 2000, Africa’s GDP growth has largely been driven by domestic demand (69% of the total), rather than increases in productivity. Africa’s labour productivity as a percentage of the US level stagnated between 2000 and 2018, and the Africa-to-Asia labour productivity ratio has decreased from 67% in 2000 to 50% today. Global markets account for 88% of Africa’s exports, mostly in oil, mineral resources and agricultural commodities.

Social expenditure also loses out to rising debt costs. Government spending on public services in sub-Saharan Africa dropped by 15% between 2014 and 2018, according to the European Network on Debt and Development. In South Africa, debt-service costs will grow faster than any other spending category over the next three years and in Kenya and Ghana governments will spend more on debt than on infrastructure, health or education.

Already a minor player in global trade terms, African economies are in danger of even further marginalization as a result of these macro trends. It is unfortunate that the African Union has decided to postpone the implementation of the Africa Continental Free Trade Area (AfCFTA) to next year, perhaps the most ambitious free trade project since the WTO itself. It is envisioned that, through reducing barriers to trade, the economic prospects of a continent of over 1.3 billion people with a combined Gross Domestic Product (GDP) of $2.5 trillion almost identical to India’s will be boosted. It has been calculated that if Africa was to increase its share of global trade from 2% to 3%, the one percentage point increase would generate approximately $70 billion of additional income per year for the continent.

At the onset of the crisis, prospects differed across economies. Some were displaying high growth-rates, in excess of 7.5% (Rwanda, Côte d’Ivoire and Ethiopia), but Africa’s largest economies had slowed down. In Nigeria (GDP growth of 2.3%), the non-oil sector has been sluggish, in Angola (-0.3%) the oil sector remained weak, while in South Africa (0.9%) low investment sentiment weighed on economic activity.

Conversely, COVID-19 has deepened the debt burden to an extent, where countries felt some form of financial relief is needed or where the debt burden should rather be shared between lenders and issuers. Although the IMF and World Bank and others are assisting Africa countries, with special loan facilities, the relief are short term of nature and not considering the longer-term effects of the higher borrowing requirements.

An African Union (AU) study on the economic impact of COVID-19 released in April 2020 showed that the continent could lose up to $500 billion and that countries may be forced to borrow heavily to survive after the pandemic.

Cumulative losses in gross domestic product (GDP) across the continent could range between $173.1 billion and $236.7 billion in 2020 and 2021. The coronavirus pandemic threatens to increase the debt burden of African countries from 60 per cent to 70 per cent of gross domestic product, heightening the likelihood of a sovereign debt crisis. The additional financing required to cushion the consequences of the crisis could be in excess of $150 billion.

In a part of the world where 85 per cent of the population earn their living in the informal sector, unemployment as a direct result of the coronavirus pandemic could push an additional 28 to 49 million people into extreme poverty. Moreover, if we fail to take adequate action, the impact of the crisis on food insecurity and malnutrition may be even worse than anticipated.

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The COVID-19 pandemic’s health and economic consequences means countries will need to raise even more money to have any chance of delivering on the Sustainable Development Goals (SDGs). With lower growth expected, reduction in tax collections, stimulus packages, as announced and reallocations in Budgets towards health and social protection, the impact of COVID-19, has posed enormous challenges for public debt management in Africa.

According to the World Bank, the total debt for sub-Saharan Africa climbed nearly 150% to US$583 billion between 2008 and 2018, and already led many in this pre-COVID context to issue warnings of instability, as average public debt increased from 40% of GDP in 2010 to 59% in 2018.

A recent Africa’s Pulse report found that COVID-19 is likely to drive sub-Saharan Africa into its first recession in 25 years, with economic growth in the region declining from 2.4% in 2019 to between -2.1% and -5.1% in 2020. The effect of this will be compounded by a looming food security crisis, as a result of agriculture production decreasing between 2.6% and 7%. However, the report points out several factors that pose challenges to the containment and mitigation measures, in particular the large and densely populated urban informal settlements, poor access to safe water and sanitation facilities, and fragile health systems.

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. 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.

As export and tax revenue decline due to subdued global demand and domestic activity, debt costs are eating up a larger share of countries’ income in a region that already spends less than any other on infrastructure.

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After all, combating COVID-19 is more challenging in Africa than in other parts of the world. Access to quality health care across the continent remains limited, despite some countries’ recent progress. One-third of Africans cannot wash their hands regularly, because they lack access to clean water. And many millions of workers’ livelihoods are in jeopardy because they have limited access to broadband connectivity, telework, or other opportunities to maintain basic incomes.

Nonetheless, African governments are responding to COVID-19 with determination, including by instituting states of emergency, requiring physical distancing, imposing forced quarantines, and restricting travel and public gatherings. And private sector firms, civil society groups, and grassroots movements are joining the fight any way they can.

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Africa needs at least $100 billion to immediately resource a health and social safety net response, and another $100 billion for economic stimulus, including a debt standstill, the financing of a special purpose vehicle for commercial debt obligations, and provision of extra liquidity for the private sector, according to the UN Economic Commission for Africa (ECA).

While, the World Health Organization recommends that countries spend $86 per person per year on health services. Yet Uganda spends $6 and Malawi spends $8 per head. On average, there are just 1.2 hospital beds per 1,000 people in Africa, and most of these are concentrated in urban areas. WHO recommends that there be least 44.5 physicians per 10,000 people, but today there are 12 per 10,000 in Zambia, 8 per 10,000 in Uganda, and just 2 per 10,000 in Tanzania.

Several countries Congo, Gambia, Ghana, Kenya, Zambia, and Sierra Leone are spending more on debt servicing than they are on health and education combined.

These low-income countries did not randomly choose to cut health spending. For decades, the International Monetary Fund has pushed loans as a silver bullet, but we know that the coercive conditions attached to these loans demand public sector wage freezes. When countries are said to contain their wage bills, it results in fewer doctors, teachers, and nurses. In practice, this means countries cannot spend more on health without falling foul of the IMF.

Cameroon was one of the countries that indicated it had a problem simultaneously managing its debt burden and the unprecedented health crisis. It applied for the debt relief, which has helped it mobilise 0.5% of GDP in DSSI savings. Taxes are a prime source of revenue for the government and were projected to cover half of the 2020 state budget. In May, Cameroon had lost 22 billion francs CFA ($39.7 million) in projected customs duty and 92 billion francs CFA ($166 million) in tax revenue due to tax relief granted by the state to economic operators.

Much of Africa’s pre-COVID debt was accrued on international financial markets through Eurobonds that were taken on in 2018 and 2019. As of March 2019, outstanding African sovereign Eurobonds reached US$102 billion. Negotiations will need to be opened with these creditors to avoid defaults that could quickly lead to many countries becoming ‘locked out’ of markets.

Among Africa’s largest creditors are China’s so-called “policy banks” that have been extensive lenders to African countries over the course of the past decade or more. It is to be expected that the continent’s debt will increasingly become politicized between Western creditors and China.

Meanwhile, in certain respects, it may appear that this was too little, too late. Interest-free loans account for less than 5 percent of Africa’s rapidly mounting debt to China, according to researchers at Johns Hopkins University. Only a handful of countries, such as Zambia and Djibouti, owe most of their debt to China. Other countries have loaned heavily from other bilaterals, multilaterals or the private sector. Countries such as Ethiopia (one of China’s main borrowers in Africa), Nigeria, and Kenya spend more money to pay back private creditors than the Chinese government and policy banks.

Outstanding debt figures reveal China to be the largest creditor to sub-Saharan Africa’s low-income countries, having lent $64 billion versus the World Bank’s $62 billion. There are many reasons to support this evolution, but there is also cause for concern.

China’s relationship with Africa is an outgrowth of the Cold War and its interests there have sometimes appeared stuck in the logic of that conflict. When Beijing first made its push onto the continent in the 1950s, it did so to advance its Maoist ideology, build support beyond Moscow’s and Washington’s blocs, and undermine its northern neighbor following the Sino-Soviet Split of the early 1960s. It found success in all its ambitions, and as African nations swung the 1971 vote to oust Taipei and bring in Beijing to the United Nations, it became clear that China’s investment in Africa was a good one.

However, in the decades that followed, the relationship never evolved beyond an “investment” in the most material of senses. Searching for little more than political and financial yield, Beijing entered the new millennium stalking sites of human rights abuses and abundant oil wealth, such as Angola and Sudan, from which Western states largely kept a distance.

As China now grows fitfully into its role as a global leader, its relations with African nations appear to be expanding beyond such power and resource grabs. In the past two decades, Beijing has come to complement its controversial $152 billion worth of loans with meaningful relief efforts, restructuring or refinancing $15 billion of them. But cancelling debt outright, as was announced at the Extraordinary Summit, has remained a rarity. Since 2000, Beijing had written off just $3.4 billion of African debt.

Where a restructuring, such as extending maturities, raises concerns of kicking the can down the road, and a refinancing, such as issuing new loans, threatens to increase the debt burden, cancellations promise much-needed fresh starts. Xi’s announcement of cancelling interest-free loans is therefore a welcome development, marking only the ninth such pledge in the history of China-Africa relations. Though the proportion of China’s interest-free loans to its total loans, just 5%, may appear small as a headline figure, it will nonetheless prove useful as debtor nations work to build fiscal space in the months ahead.

Given the scale of Africa’s debt crisis, it should be taken as a great reassurance that China, its largest official lender, has warmed to the idea of cancellations. African nations will also benefit from the fact that China does not generally attempt to compel Western private creditors to participate in debt relief which, when attempted by the G-20, has led credit rating agencies to issue costly warnings and downgrades of African nations’ sovereign debt. Private creditors, however, have been less forthcoming, choosing to review debts on a case-by-case basis. It is imperative that multilateral financial institutions move rapidly to alleviate the dire financial situation in many capital-constrained African countries.

Post-covid era appears to be one of increasing divergence between the advanced and developing world. The ability to counter the crisis and adapt will require a change in many stagnant political systems of African states that continue to impede change, now more than ever before. If this shift does not take place, then the quest for structural reform and inclusive growth will remain unachievable.

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. Effective implementation of the African Continental Free Trade Area (AfCFTA) and the African Union’s productive transformation agenda can strengthen regional value chains, reduce vulnerability to external shocks, advance the digital transition, and build economic resilience against future crises.

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Change of behaviour from both borrowers and lenders is needed to improve Africa’s resilience and reduce its vulnerability to external shocks. Freeing up fiscal space to enable African governments to fight the heath and economic crisis is essential but debt relief is complex. In the medium-to-long term, in partnership with the international community, governments should continue to strengthen health systems and extend health and social protection coverage.

Similarly, debt relief should also extend to middle-income countries that currently are experiencing capital flight and unsustainable debt burdens. Assessments of these economies’ debt sustainability must go beyond the debt-to-GDP ratio and also consider the ratio of debt-service payments to government revenue. Several middle-income countries currently spend 20% or more of their revenues on debt service, which crowds out much-needed health, education, and infrastructure expenditures.

With the benefit of immediate debt relief, African governments should focus on protecting vulnerable populations and bolstering social safety nets. And, like governments elsewhere, they should also support the private sector, especially small- and medium-size enterprises.

That includes paying these firms’ arrears, and ensuring minimal disruption to the flow of credit, in order to avoid a deeper and more prolonged banking and economic crisis. Such measures will help to preserve jobs. Without them, Africa could face an unprecedented human and economic catastrophe that could morph into even costlier political and social instability.

The policy measures should cushion income and job losses, while tackling the specific challenges of high informality. Beyond the immediate response, recovery strategies should include a strong structural component to reduce dependence on external financial flows and global markets, and develop more value-adding, knowledge-intensive and industrialised economies, underpinned by a more competitive and efficient services sector.

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