“We know how to bring an economy back to life. What we do not know is how to bring people back to life.” The words of Nana Akufo-Addo, the president of Ghana, were an eloquent rationale for his country’s lockdown amid the coronavirus pandemic, but only the second part was strictly true. Nobody knows how to resuscitate an economy after this emergency, because nothing like it has happened in living memory.
This false sense of déjà vu has also accompanied talk of African debt problems: a challenge which only superficially resembles crises of the past.
The unprecedented shock of Covid-19 has sent revenues plummeting at exactly the moment when governments need to be spending more. The immediate effect will be a squeeze on essential services and investment. In the tough years ahead, heavy debt burdens could push inflation up and pull growth down. Suppliers sink when the government stops paying its bills, and trade slows with uncertainty. Africa’s debt burden suddenly looms larger.
In mid-April the G20 announced a suspension of bilateral debt payments for 73 of the poorest countries, half of them in Africa. The moratorium brought respite until the end of the year. But many argued it did not go far enough.
“This initiative needs to be even more ambitious,” wrote the Ethiopian prime minister Abiy Ahmed in the New York Times. “It should involve not just debt suspension but debt cancellation.” It should last until well after the pandemic is over, he added, and cover borrowing from commercial lenders too.
Meanwhile the African Union and a group of finance ministers are calling for a $100bn stimulus package for the continent, including $44bn of debt relief and a two-year suspension of payments.
“There is no question of anybody defaulting and not paying,” says Ngozi Okonjo-Iweala, a special envoy for the African Union (AU) and former finance minister of Nigeria. “But we need a standstill across the board to give us the breathing room.”
Finance ministers were holding Zoom meetings with creditors as African Business went to press at the end of May. Through clouds of uncertainty, one thing was clear: the changing makeup of Africa’s debt will make negotiations more complex than ever before.
A looming crisis
No “African” debt crisis is only about Africa. The first great wave of borrowing began with the 1970s oil boom. Middle Eastern states parked their surplus “petrodollars” in Western banks, who funnelled them to the global South.
When the US Federal Reserve raised interest rates, the debt became unpayable. It was not until the turn of the century that more than $100bn of African debt was finally cancelled by foreign governments, the World Bank and the IMF.
But surplus capital was once again sloshing around the world economy – this time from thrifty Asian countries. Some of this money flooded into Africa as Chinese loans. The rest of it rippled through the West, where interest rates sank to historic lows. Investors came to Africa seeking higher yields than they could get at home.
Governments rode this new wave of capital, with many issuing their first ever dollar and euro denominated bonds at cheaper rates than they could raise funds domestically. By 2016, sub-Saharan Africa owed 19% of its external debt to bondholders. Another 30% was owed to those governments, including China, which sat outside the Paris Club of traditional lenders. Public debt doubled in a decade.
Last year the IMF said that seven low-income countries in Africa were in debt distress, and nine more at high risk of it.
Then came Covid-19. It was an “apocalyptic moment”, in the words of Ken Ofori-Atta, the Ghanaian finance minister. Commodity prices plunged, tourists vanished and remittances dried up. Capital fled to the relative safety of developed markets, at a faster rate than during the 2008-09 financial crisis.
“There is worry about what will happen to demand from China,” says Okonjo-Iweala. “And what about Europe which is projected to contract at about 5 or 6%? Those are the two large markets for Africa’s products.”
The IMF says the economies of sub-Saharan Africa will shrink by 1.6% this year, the worst performance on record; in most of North Africa the decline will be even steeper. And interest payments make it harder to fight the virus: even before the pandemic, 32 African governments were spending more on external debt servicing than on healthcare, calculates the Jubilee Debt Campaign, a UK-based advocacy group.
Some indebted governments are already on the brink.
Zambia’s Patriotic Front, in power since 2011, has splurged on roads, salaries, and a fleet of expensive fire trucks. “Because they didn’t grow the economy, they simply borrowed to finance the fulfilment of election campaign promises,” says Sishuwa Sishuwa of the University of Zambia.
The country’s public debt will reach 110% of GDP this year, say the IMF, and a tumbling kwacha will make loans more costly to service. The government is seeking to restructure its debts
Ghana and the Republic of Congo are also a worry, says Yvonne Mhango, an analyst at Renaissance Capital, a bank. “We are most concerned about those countries which have payments in the short-term,” she explains.
Meanwhile Nigeria, the region’s largest economy, faces a different kind of fiscal crisis. Public debt is only 29% of GDP, but swallows 60% of federal government revenues.
“The debt itself is not that much relative to the size of the economy but the government just struggles to collect taxes,” says Nonso Obikili, an economist in Abuja.
Most of that debt is domestic, he adds, which means the government can pay it back by printing more money, at the risk of higher inflation.
“But it also means that things like debt relief and debt cancellation are not an option, because most of that domestic debt is held by pension funds, banks and institutions in Nigeria.”
In South Africa, government bonds have been downgraded to junk and bond yields have spiked. Capital Economics, a research firm, says the country would need an eyewatering fiscal squeeze of 0.5-0.6% of GDP a year to stabilise the debt level by 2030, unless there is a sharp acceleration in growth. But deep financial markets will allow the government to keep borrowing domestically, staving off a crisis.
The same luxury is not available for most other African countries, where local bond markets are small and undeveloped. And when governments are unable to borrow in their own currency internationally, notes Ndongo Samba Sylla, a Senegalese economist, a foreign exchange shortfall quickly becomes a debt crisis. “Debt in foreign currency is not only an economic problem but also a political problem,” he says.
Which countries should benefit from moratorium?
The G20 debt moratorium raises just such political questions. Which countries should benefit? And which creditors participate?
Zimbabwe, Eritrea and Sudan are all excluded from the initiative because they are in arrears with either the World Bank or the IMF.
And some of the continent’s biggest economies, including South Africa and five north African countries, are not poor enough to be included in the scheme – even though, in mid-May, they accounted for half of the region’s confirmed cases of Covid-19.
On the creditor side, the debt suspension only covers payments to other governments, which make up just over a third of Africa’s debt servicing costs.
It does not include loans from multilateral lenders, like the World Bank, which worries that its own triple-A credit rating would be jeopardised if it stopped collecting repayments. The IMF has offered a separate six-month debt suspension to 19 African countries, but only by dipping into a pot of grant money to cover their obligations.
The biggest gap is the debt owed to private creditors. Of the African countries which qualify for the G20 scheme, a dozen face bond payments totalling $3bn over the suspension period, according to figures from the Jubilee Debt Campaign. An even larger amount is due in deals with banks, commodity traders and others.
The G20 has called for private creditors to voluntarily join its initiative. The Institute of International Finance (IIF), a club of lenders, has said its members are willing “to support the aim”, but they have a number of concerns – including about the terms of participation, the impact on credit ratings, and the fiduciary duty that asset managers owe to their clients. A number of leading creditors have formed the Africa Private Creditor Working Group in order to negotiate, and have signalled their opposition to a “blanket approach” to the process.
“A government can say, ‘Yes, we don’t want to be paid’, and that’s it, you can defer the payment,” says Stuart Culverhouse, chief economist at Tellimer, an emerging markets research firm. “But for bondholders there are legal documents that dictate what you can do and what you can’t do, and that makes it harder to navigate around.”
Investors are concerned that the G20 initiative is “the thin end of the wedge”, he adds, fearing that the debt standstill may widen to include more countries or be extended into next year.
Calls for comprehensive debt suspension
Indeed, a more comprehensive debt suspension is exactly what African leaders are calling for. Finance ministers have requested relief from “bilateral, multilateral and commercial partners”, covering all African countries for the next two years.
The proposal, developed with the AU and the UN Economic Commission for Africa, would create a special purpose vehicle to swap sovereign bonds for new debt, to be paid back over a longer period at lower interest rates.
“The impact on the economies of the continent will not go away as fast as we thought,” says Okonjo-Iweala, the AU envoy, speaking in mid-May as discussions with private creditors were beginning. “We may need a little bit more time to recover.”
“We are looking at various options,” she says, but insists that default is not among them.
Credit ratings agencies have warned that a restructuring of debt owed to private creditors could constitute a default, causing some governments to worry that they will be shut out of debt markets.
“I think those are scare tactics,” says Okonjo-Iweala. “Look at the interest rates worldwide. They are so low.”
Crucially, neither the G20 nor AU plans entail debt cancellation at this stage (though African leaders say it may be needed later). The proposals change how and when countries pay, but not how much.
That is “kicking the can down the road,” said Richard Kozul-Wright of the UN Conference on Trade and Development (UNCTAD) in April. In an accompanying report the agency warned of “serial sovereign defaults”, caused in part by “a rapid and often premature integration [of developing countries] into heavily underregulated financial markets.”
UNCTAD urged that a debt standstill be used to create breathing space for a “global debt deal” which would write off $1 trillion of sovereign debt worldwide.
Without “a comprehensive debt package… it will only be a matter of time for countries to have to go back to start servicing their loans,” says Yungong Theophilus Jong of the African Forum and Network on Debt and Development, an advocacy group.
In February, 21 African governments had $115bn of outstanding bonds denominated in dollars or euros. Most payments this year are relatively small amounts of interest. But a wall of debt looms in 2024, when more than $11bn of these bonds mature.
There is another concern: if only some creditors cooperate, then debt relief just gets used to pay the hold-outs.
In the 1990s, so-called “vulture funds” bought up the debt of countries such as Zambia and Uganda at bargain basement rates, suing for payment and earning profits of up to 2000%.
Most bond contracts now have collective action clauses which mean that a restructuring can be imposed on all bondholders if a sufficient majority agree. But speculators may still be able to buy enough bonds to block agreement, says Danny Bradlow, a professor of international development law at the University of Pretoria.
He proposes that instead of offering to swap sovereign bonds for new debt, the AU’s special purpose vehicle should simply buy them up. The purchase could be funded with rich countries’ holdings of Special Drawing Rights (SDRs) – a kind of international reserve asset issued by the IMF – and with sales of the IMF’s gold, which has soared in value this year.
“They could sell some of that without eating into the ability of the IMF to help other countries,” says Bradlow.
Another suggestion comes from Tim Jones of the Jubilee Debt Campaign, who notes that the vast majority of African bond contracts are governed under English law.
“The UK government can and must urgently pass legislation to prevent any country suspending debt payments due to the coronavirus crisis from being sued in London,” he says.
What will China do?
The other big uncertainty is China. Its approach to debt cancellation may differ from that of Western lenders, who negotiate collectively through the Paris Club.
In Ethiopia, about 24% of the government’s debt service goes to China, and just 5% to Paris Club countries. Zambia’s crumbling, overpriced roads were built with Chinese money.
“The loans that have been obtained from China are not obtained in a transparent process,” says Trevor Simumba, an economist in Lusaka. “The quality of the infrastructure is very poor and so getting a return on that loan is actually very difficult.”
There are precedents for Chinese loan forgiveness, notes Yunnan Chen of the Overseas Development Institute, a think-tank. For example, China allowed Ethiopia to defer repayments on a loan for the Addis-Djibouti railway.
“But when China forgives loans it tends to be on zero interest loans which were originally given out as aid,” she says. Commercial loans from Chinese state banks are “very unlikely” to be written off and “any flexibility will be ad hoc and case-by-case.”
Whatever deal African countries strike with their creditors, it will only be one piece in the economic jigsaw. There is already talk of an aid-funded Marshall Plan or a fresh issuance of SDRs by the IMF, the international equivalent of printing money. If African leaders cannot revive their economies they will not just be living on borrowed money – they will be living on borrowed time too.
Source: Africa Business Magazine