April 9, 2020

SUB-SAHARAN AFRICA: Debt questions loom large amid pandemic fallout

BY Malte Liewerscheidt, Anne Frühauf

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( 8 mins)

● Lockdowns and curfews are still being stepped up in response to rising Covid-19 numbers, and the real effects of economic disruption are only just playing out.

● Countries are queuing up for rapidly depleting IMF emergency support facilities. While African nations might receive preferential treatment, plans to boost the Fund’s lending capacity during next week’s IMF-World Bank spring meetings are eagerly anticipated.

● Simultaneously, regional governments and multilateral institutions are pushing for debt relief. While China will take center stage in this debate, private creditors are less likely to be targeted, at least for now.


Public health response

With a cumulative total of 6,363 cases reported as of 9 April, confirmed Covid-19 cases have tripled over the past two weeks. In response, from Angola to Ethiopia, states of emergency are being declared, and curfews and lockdowns are being tightened in 19 countries. Existing measures, including South Africa’s 21-day lockdown as well as the 14-day lockdown of Abuja and Lagos in Nigeria, seem likely to be extended. However, the painful trade-offs around public health, the economy, livelihoods, and even security will come into sharper focus the longer government interventions continue.

One notable outlier in the continent-wide trend towards drastic intervention is Tanzania, where President John Magufuli – much like other populist leaders – has refused to implement significant physical distancing measures. Like US Pentecoastalists, he has been attending church services exhorting believers to congregate in prayer because the “satanic” virus cannot survive in the body of the faithful. While many other African countries have banned religious services and arrested evangelical preachers, in Tanzania’s largest cities, attendance in mosques and churches is reportedly rising.

Concerning the equally important intervention of testing, South Africa remains the only sub-Saharan African (SSA) country to have rapidly stepped up capacity (with 63,776 tests reported as of 8 April), while countries like denialist Tanzania but also Mozambique and Burundi seem to be among the worst performers in the testing department.

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SUB-SAHARAN AFRICA: Debt questions loom large amid pandemic fallout 2

Debt conundrums sharpen

1. Vulnerability

As highlighted previously, all SSA countries will be hard hit by the fallout from the pandemic and oil price war, but some could be tipped over the edge. The World Bank expects the region to suffer its first recession in 25 years, with average growth shrinking by 2.1-5.1% in 2020. Especially vulnerable are oil exporters (Nigeria, Angola, Gabon, Congo-Brazzaville) and minerals exporters (like Zambia, DRC, Mozambique, South Africa). Tourist destinations will also suffer (think Kenya, Tanzania, Namibia, Botswana, South Africa) as will agricultural exports (Cote d’Ivoire, Ghana).

Countries’ fiscal capacity to respond to the crisis ranges from limited to zero. Most countries are in a much weaker state to weather a global economic downturn than they were a decade ago. Fiscal buffers have not been refilled, and structural reforms largely avoided following the 2008 global financial crisis. As highlighted previously, the accumulation of external debt over the last decade, on average, outpaced economic growth by a factor of six among the 20 most leveraged economies. Although the majority of this debt is still concessional bi- and multilateral (see graph), this exposure – combined with an increase in FX debt over the last decade – creates the risk of a disorderly descent into credit crises for the most highly leveraged sovereigns (like Zambia).

2. Outlook for IFI emergency funding

In light of the extreme economic shocks and looming balance of payments crises for multiple sovereigns, countries are making a beeline for emergency funding under the IMF’s Rapid Financing Instruments (RFI) and Rapid Credit Facilities (RCF). On 1 April, it was announced that Senegal would receive about USD 221mn under the RFI and RCF facilities for “urgent budgetary and balance of payments needs stemming from the COVID-19 pandemic.” Rwanda will receive USD 109.4mn from the RCF. Another early mover was Ghana, with a request for USD 35mn.

However, nearly all SSA countries (including Nigeria and South Africa) are queuing up for IMF emergency funding, and about half of the available USD 50bn available through the RFI and RCF facilities have already been requested by countries around the globe. However, the Fund is already much more invested in Africa than in any other region, with 16 states currently under key programs such as the Extended Fund Facility (EFF, 35% of total beneficiaries are from SSA) or the Extended Credit Facility (ECF, 95%). Given the longstanding relationships with the Fund across the region, SSA countries, should arguably have an advantage tapping into ‘classical’ IMF facilities more quickly than others.

However, the IMF conservatively estimates that global financing needs amount to at least USD 2.5trn, while the IMF’s current lending capacity is only about USD 1trn. Against this background, the IMF and World Bank’s virtual spring meetings on 16-17 April will be keenly watched for signs of how the Fund can boost its lending capacities. Creative thinking will be required, as raising the overall number of quotas is highly controversial, requiring an 85% majority of IMF members and implying a reshuffle of countries’ voting shares in the Fund’s governing structure. The US government can block this unilaterally with its 16.5% vote share, as it has done in the past. Besides, raising quotas does not necessarily lead to rapid disbursements, which is required under the given circumstances.

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3. Debt moratorium

Just as closely watched at the spring meetings will be whether proposals for a continent-wide, temporary moratorium on bilateral and multilateral debt, including Eurobond obligations, make any headway. To date, differing proposals seem to have been advanced, with the most authoritative suggestions coming from African finance ministers and the IMF and the World Bank. The finance ministers had the support of the UN Economic Commission for Africa (ECA) when they requested USD 100bn in immediate pandemic support including an “immediate waiver of all interest payments on all debt estimated at USD 44bn for 2020 with possible extension to the medium term,” referring to official debt owed to governments, multilateral institutions, and sovereign bondholders. “The Ministers recommend to use disbursements for public sector debt and interest payments, including on sovereign bonds.” This was backed by a joint call from the IMF and World Bank, which seemed to focus on bilateral donors in the first instance, to suspend debt payments by the poorest countries with immediate effect.

Since then, a letter from African figures in finance – including former Credit Suisse chief executive Tidjane Thiam and Nigeria’s ex-finance minister Ngozi Okonjo-Iweala – has proposed a two-year “standstill” on about USD 115bn of African sovereign debt owned by private creditors. However, it should be noted that key signatories to this initiative no longer hold public office. The Nigerian government, for example, has been keen to emphasize that it has no plans to suspend its Eurobond payments. Most countries, even those at high risk of debt distress, will likely prioritize bondholders unless they can find safety in numbers under a continent-wide agreement.

Besides, such a proposal presents at least two major problems: under most circumstances such a moratorium on debt would be tantamount to default, cutting African sovereigns off from capital markets in the future. Secondly, there will likely be a significant coordination problem with any such plan. Unlike the Heavily Indebted Poor Countries (HIPC, an initiative targeting 39 countries of which 33 are located in SSA), under which primarily multi- and bilateral donors provided debt relief amounting to USD 76.2bn as of 2017, the importance of non-Paris club creditors such as China, as well as private sector creditors has risen sharply since the inception of the initiative in 1996. The number of SSA governments that have emitted Eurobonds has meanwhile risen from one (South Africa) to 17. While the IMF noted that private sector participation has remained weak during the more than two decades of the HIPC initiative, reaching an agreement with a much larger group of Eurobond investors within a matter of weeks seems a very long shot. A plausible scenario is that bi- and multilateral debt relief will come first, while the broader debt debate will stay with us for the next couple of years or so.

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In the short-term, the role of China will come increasingly into focus. While the extent of Chinese lending in Africa remains murky and subject of debate, there is no doubt that bilateral debt owed to China has become a significant factor over the past two decades. Accordingly, governments such as Nigeria or Ghana have singled out China as a target for debt restructuring, and countries such as Zambia or Angola that are known to be heavily indebted to Beijing may well take a similar approach.

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