● The temporary debt moratoria for poor countries announced by the G20 and IMF are designed to buy time as the conversation around comprehensive debt restructuring is only about to take pace.
● The African Union (AU) is pushing to extend debt moratoria to more countries and calls for private creditor participation, but international support for a ‘Brady bonds’ scheme is lacking for now.
● Coordination problems among donor governments, multilateral organizations and private creditors could see efforts for a comprehensive debt relief package disintegrate, increasing the likelihood of a disorderly descent into sovereign debt defaults.
● Within African governments, fault lines may emerge between populist ruling party officials and the bureaucratic apparatus concerning the implications of defaults on external debt.
So far, the focus of G20 creditor governments and international finance institutions (IFIs) in providing debt relief to poor countries amid the Covid-19 crisis has been limited to moratoria. Recall that, on 15 April, the G20 announced the suspension of bilateral debt repayments (both principal and interest) for a group of 77 low- and middle-income countries, defined on narrow technical criteria and including 39 African countries, until the end of the year. This was echoed by a similar moratorium granted by the International Monetary Fund (IMF) to 29 of its poorest member countries, including 23 African countries (see maps below).
Resorting to time-limited moratoria makes sense insofar as it buys time for all parties involved: debtor countries benefit from immediate cashflow relief, while creditor governments – currently preoccupied with the domestic response to Covid-19 – and IFIs can work out a comprehensive solution, which will be technically complex and politically difficult – if consensus can be reached at all. As the scale of the potential need for debt restructuring is unprecedented in terms of the number of countries involved, the initial six-month moratoria should in any event be regarded as a first step in a prolonged process, rendering subsequent rounds of extensions highly likely. Given the exclusion of certain countries on narrow technical criteria, calls to include a greater number of middle-income countries in any broader debt deal will probably also grow louder.
The African Union position
African governments are pooling their efforts at the AU, which has appointed several well-connected former public officials – including former Nigerian finance minister and IMF official Ngozi Okonjo-Iweala and the former CEO of Credit Suisse, Tidjane Thiam – to lobby on their behalf. The key aspects of the proposal put forward by these AU special envoys refers to:
- A moratorium on the payment of private and commercial debt matching the G20 moratorium on bilateral debt;
- A two-year standstill on all external debt repayments, both interest and principal, as an interim measure enabling creditors to work out a more comprehensive debt restructuring;
- An extension of debt relief – that has so far focused mainly on low-income countries – to middle-income countries.
However, the AU is keen to enable private sector participation without triggering default ratings by international rating agencies and thus locking out debtor countries from commercial debt markets. Therefore, the special envoys refer to an 31 March proposal by African finance ministers calling for the creation of a ‘special purpose vehicle’. Referencing the Brady Bonds scheme set up by then-US treasury secretary Nicholas Brady to resolve a major emerging and frontier markets debt crisis in the 1980s, bi- and multilateral donors are supposed to pool USD 44bn to cover interest and principal payments owed to commercial debtors.
Creditor countries’ reactions
However, while the IMF and the World Bank seem to support the idea, unlike in the 1980s, it does not appear to have US backing nor that of any other major power. It therefore seems out of the question that the US Treasury would act as a guarantor this time around, which is why thinking has thus far focused on the IMF/World Bank underwriting such bonds. Yet, as shown above, decisions taken at G20 level concerning debt relief tend to revolve around the lowest common denominator, while the bandwidth and willingness to engage with ‘out-of-the-box’ initiatives to tackle developing countries’ debt appears limited at this stage.
In fact, the minimum consensus found in April could crumble over time, with individual countries or groups of countries announcing their individual initiatives. For instance, among Western leaders, French President Emmanuel Macron has been most vocal in his support for African debt relief. While it would arguably exceed France’s capacity – as well as its strategic interest – to act as the guarantor for a Brady bonds scheme, France may ponder working with like-minded countries on a debt relief campaign outside the G20 framework. China, the most important bilateral creditor on the continent, might work on its own scheme as well, with the 2021 Forum on China–Africa Cooperation (FOCAC) summit providing a prominent stage to unveil any initiative.
Private sector participation
While governments apparently struggle to coordinate amongst themselves and IFIs, it remains unclear how private sector participation – which the G20 described as voluntary – could look like in practice. Private sector participation in the 1980s debt restructuring mainly concerned bank loans and could be negotiated with a manageable number of creditors through the London Club. However, the evolution of debt markets since then has led to a rise in heterogeneity and anonymity among creditors, alongside a diversification of their concerns and behaviors. While the G20 has called upon private creditors to coordinate through the Institute of International Finance (IIF) as the global association of the financial industry, the IIF caters to more than 450 member institutions and enters uncharted territory with this mandate.
The lack of a coordinated, structured approach to debt relief among G20 countries and IFIs suggests private sector players might be able to withstand public pressure to contribute to the debt effort. However, while this might sound like good news at first glance, this might actually increase the likelihood of a disorderly descent into sovereign debt defaults, including lengthy and potentially-very-difficult-to-
Domestic dynamics across the regions
With Africa's GDP now expected to shrink by 1.6% in 2020 – the region’s first recession in 25 years – the pandemic-induced global economic shock, local lockdowns and mounting debt burdens risk triggering economic and social crises in many countries. One question is how domestic pressures could shape the debt relief debate.
The risks of financial market exclusion might be perceived differently across the region. While South Africa is extremely dependent on financial market access, in some other countries the debate could begin to shift. On the ground, it certainly seems likely that opposition will grow to private creditors being paid in the context of scarce resource for the public (health and economic) emergency. Arguably, the temptation to score points domestically by pushing rhetoric against foreign creditors is near universal. Nevertheless, the vast majority of governments will be reluctant to stick their necks out without seeing safety in numbers by pushing for an AU-wide debt relief arrangement.
Underneath this, there will likely be important nuances and differences in approach emerging between more technocratically-minded administrations and more populist governments. In some cases, disagreements within governments/ruling parties and the bureaucratic apparatus may emerge: Treasury officials and many finance ministers (say Zainab Ahmed in Nigeria or Adriano Maleiane in Mozambique) would probably take the risk of losing market access seriously, but the party machinery (particularly populist constituencies) may easily latch onto the idea. Even if skeptical publics do not necessarily buy into this blame game, the latter constituency would probably try to use ‘evil creditors’ as a way of distracting from governments’ very obvious debt management failings of recent years (for example in Zambia).
Depending on how the ‘Africa Bond’ discussion evolves (for example in a more chaotic scenario where the AU regional proposals stall and a broad IMF/World Bank-sanctioned approach is not forthcoming), distinctions may emerge between countries where policymakers are trying to maintain or rekindle close relations with the IMF and other lenders (say Angola and Mozambique), and those resisting IMF programs. Of course, this would primarily speak to policymakers’ intentions. When push comes to shove on payment deadlines, the risks in terms of payment capacity may be distributed differently across countries.