Debt relief in Africa in Times of COVID-19: a Ticking Time Bomb Waiting to Go Off?
At a time when multilateralism has been undermined, the COVID-19 pandemic calls for a surge of international cooperation and solidarity. Although the world is witnessing the closing of borders, the virus itself knows no borders. To stem this pandemic, calls for solidarity with Africa have multiplied around the world, notably a letter published in the Financial Times and co-signed by world leaders to “call for an urgent debt moratorium and unprecedented health and economic aid packages”.
The leaders emphasize that a victory against the pandemic goes hand in hand with an aid program for Africa. To fail one would mean to fail the other. Tackling the coronavirus requires a strong and coordinated international response that fully involves Africa. What does Africa need to fight COVID-19 effectively? The answer has been in the headlines for the past week: debt relief.
Why does Africa need the debt relief and what does it imply? What are the limitations to the debt relief and the long-term repercussions?
An Overview of the Situation in Africa Before the Outbreak
Does the debt relief give you an impression of déjà vu? If so, you are right. A number of African countries have a history of debt cancellation and suspension. In 1996, the World Bank and the IMF initiated an important debt relief campaign that benefited 33 countries in Africa. The Heavily Indebted Poor Countries (HIPC) initiative was launched to prevent poor countries from being overburdened with debts. In 2005, the Multilateral Debt Relief Initiative (MDRI) came to supplement the HIPIC and provided 100% relief on eligible debts by the World Bank, the IMF and the African Development Fund (AfDF).
The multilateral institutions demanded certain criteria to be met through a track record of reform and policy changes. By 2011, 26 countries had reached their completion point. As a result, the institutions offered irreversible debt relief. Although the countries in question had to show a good track record, it doesn’t necessarily mean the money was well spent and some countries were undoubtedly headed for another debt crisis even before the coronavirus.
However, one has to highlight the progress made over the last decades. Before COVID-19 erupted, Africa was home to eight of the fifteen fastest-growing economies in the world. While the virus originated from Wuhan, the official detected cases show it was Europeans who brought the virus to Africa. The IMF estimates the Sub Saharan Africa’s GDP to shrink by 1.6% due to the coronavirus crisis. So far, the continent has had fewer cases and deaths from the coronavirus compared to China, Europe and the United States. And yet, the continent suffers enormously from the decisions taken by powerful leaders overseas, leading to the shutdown of the economy to save the lives of their population. These decisions have had a great impact in Africa that will, as a consequence, enter deep recession, the first of the kind in 25 years.
The recession has translated into a collapse of tourism, higher commodity prices, decreased remittances (the World Bank anticipates a drop of the diaspora remittances of at least 11 billion dollars in 2020) and lesser investments with an inevitable currency depreciation. 41% of African countries are commodity dependent whereas East Asia and the Pacific are only 17%. Another factor is to be taken into consideration, 66% of the total employment in Sub-Saharan Africa is represented by the informal sector, which is characterized by low salaries and the incapacity to collect taxes. With this perspective in mind, debt relief would allow more fiscal flexibility to focus on ensuring solvency for the most affected businesses and people.
Developed countries have been setting up different fiscal policy measures to keep the economic boat afloat to ensure minimal disruption to liquidity. Nonetheless, low-income countries do not have the capacity to deploy such fiscal policies as they are bound to repay their debts to the different bilateral, multilateral and commercial creditors. In average, the spending plans of Sub-Saharan countries in 0.26% of GDP compared to 9% in Europe and 11,5% in America. Another fact to take into account is the debt to GDP ratio which has risen from 31.7% between 2010–2015 to 50.4% in 2020 as shown in the figure below. The growth in debt is also synonym to an increase of the debt servicing costs, which represent a substantial sum in comparison with national investments in key sectors like health and education.
The Call for an Urgent International Mobilization
The critical situation led Cyril Ramaphosa, President of South Africa and current Chair of the African Union, to appoint on 12 April four special envoys to mobilize international support to Africa’s fight against COVID-19. Three days later, at the occasion of a virtual meeting, the G20 agreed on a Debt Service Suspension Initiative for Poorest Countries with different conditions: only IDA countries are eligible, the suspension will last from May 1st until the end of the year 2020, both repayments and interest payments are suspended and the repayment period will be three years with a possible extension of one year.
The emergency was to suspend the repayments, but African leaders want the G20 to go further to help the poorest countries to free up liquidity in order to enable more investments in their health systems. Ngozi Okonjo-Iweala, one of the four special AU envoys, declared the G20 initiative is “a good opening for discussion. My belief is that until the end of this year will not be adequate. We need a two-year time scale”. Even though Emmanuel Macron is taking the lead in the quest for debt relief, going so far as to demand “massive cancelation”, it appears that there is still a long way to go to meet the demands of the African leaders, who are not entirely satisfied with the conditions imposed by the G20. Indeed, the present program of aid present certain limits, namely “the debt principal and interest will have to be paid when payments are due to restart next year. Meanwhile interest will continue to accrue on those suspended debts”. That means a wall of payment awaits once the crisis is over.
The EU pledged €15 billion to help partners worldwide to combat the coronavirus. However, this money is taken from existing humanitarian grants and redistributed to health projects, this deceiving maneuver will have a serious impact on sustainable development. African countries would be caught in a downward spiral and vicious circle of economic regression. To avoid this situation, Emmanuel Macron along with Angela Merkel and other leaders, are pushing for the expansion of the IMF’s Special Drawing Rights (SDRs) to improve liquidity in developing countries. The SDR is a supplementary international reserve that can provide liquidity to supplement countries’ reserves. The reserve was used in the 2008 financial crisis. With the fear of seeing the global GDP falling by an extra 3%, The IMF granted a six months debt cancellation to 19 African countries and already approved a $500 million grant this week.
For African economies to have enough breathing room, the AU special envoy team is counting on a stimulus package of $100–150 billion (a trivial amount compared to the €1 trillion of national stimulus packages across the EU). Eight leading African economic and political leaders are advocating for more measures including the expansion of the number of countries benefiting from a debt moratorium — Algeria, Egypt, Libya, Morocco, South Africa and Tunisia –, an increased participation of private creditors, a reinforcement of SDRs and a better governance over the use of these resources.
There are still many hurdles to overcome, such as the debt negotiation with Africa’s private creditors who detain $115bn in debenture, also with the US and China that showed reluctance in participating in the program. Today, the private sector represents an important part of the African debt, notably with a significant part of the payment of the debt service. The repayment of interest can be up to 20% of the country’s income.
What Role for China?
China does not publish official data on its foreign lending, but different analyses rank China as Africa’s most important bilateral creditor with 40% of the continent’s bonds, more than $146 billion worth of loans. Chinese officials announced that they will deal with African debt on a case-by-case basis rather than in a multilateral forum. Renouncing debt would mean for Beijing to deprive itself of a strong instrument of influence and give up its political leverage.
From the figure, we can see the loans are not evenly allocated. Angola is by far China’s most important debtor in Africa with $43 billion in signed loans.
Although China seems to be reluctant to participate in the debt relief program, the country has canceled more than $4 billion in low income countries’ debt since 2000. It is important to note here it concerns a specific range of loans which are interest-free.
China offers loans with different conditions from the IMF or the World Bank. Regarding the issue of debt relief, a committee led by China’s Ministry of Finance with the participation of the Ministry of Commerce, China Exim Bank, and China Develop Bank, meet to consult on the applications for debt relief and evaluates the extent to which a loan is not repayable. In addition, China is composed of multiple lenders with more than 30 Chinese banks and companies.
The repayment conditions are somewhat opaque and challenging. China has been accused of seizing African assets in cases where a country couldn’t meet the conditions of loan payments. There is no official evidence of asset seizures in Africa but there is an example of Congo divesting its highway exploitation to a Sino-French consortium. Given that China itself owes money to its creditors, the country would rather collect its repayments to pay their bondholders.
With the challenges outlined here, it is improbable to see China joining the debt relief program so soon. Moreover, the relationship between China and Africa has been tarnished after reports of serious mistreatment of Africans in China. Beijing faced a “diplomatic crisis in Africa after reports of alleged coronavirus-related discrimination against African nationals in China”. Will this event influence the government’s decision?
The economic aftermath of the COVID-19 crisis will be long-lasting. Debt relief plays an important role in the short term to prevent even worse consequences, however Africa will be faced with a number of challenges to repay its debt in case the “massive cancelation” call from Macron doesn’t end up successful.
With the youngest population in the world, Africa has the potential to innovate and create local solutions to achieve quick wins without waiting for the international community’s assistance. As a priority, public-private partnership would be highly beneficial to locally manufacture medical supplies and equipment to fight against the pandemic. Different projects have emerged, such as 3D printing for protection equipment in Senegal and Morocco, and such projects have to be encouraged by the government. The governments can provide the means and the private sector would offer its savoir-faire.
The call for immediate debt-relief is an essential first step to create the fiscal room countries need to respond to the pandemic, but the conditions are very constraining as they are just postponing the problem. To exit the crisis, Africa needs to play not only internationally but also locally. Playing on both boards simultaneously with a push for timely and targeted policies will make the difference and help defusing the bomb.
