Sub-Saharan Africa’s debt problem: Mapping the pandemic’s effect and the way forward
Background
The COVID-19 pandemic has, thus far, spared Africa from the high number of cases and deaths seen in other regions in the world (Figure 1). As of April 2021, sub-Saharan Africa accounted for just 3 percent of the world’s cases and 4 percent of its deaths. Some experts attribute the relatively low case counts in sub-Saharan Africa to the region’s extremely young population or, importantly, the swift and preemptive lockdowns that many countries implemented in March 2020. While these lockdowns have likely saved lives, they have also left significant scars on the fiscal position of sub-Saharan Africa and the market conditions it faces. Dwindling revenues following the fall in global trade met a wave of unemployment among a population that lacks widespread access to safety nets and health infrastructure.
Figure 1. Population, COVID cases, and COVID deaths, sub-Saharan Africa vs. world
Source: Our World in Data, 2021. Data taken on September 1, 2021.
In response, African governments have, by and large, borrowed to finance stimulus packages to support at-risk groups, struggling businesses, creative education solutions, and health-related infrastructure. International and regional financial institutions, such as the World Bank, International Monetary Fund (IMF), African Development Bank (AfDB), and European Union (EU) countries (both bilaterally and multilaterally) have responded through debt relief measures and restructurings. The fiscal and monetary responses of sub-Saharan Africa and various financial institutions will have important consequences for indebtedness, debt servicing capacity, and debt sustainability more broadly.
Debt was an increasing problem across all income groups of African countries prior to COVID-19, and the pandemic has only exacerbated the problem. In fact, African countries had been borrowing heavily in the global financial markets in recent years—a trend that has created both new opportunities and new challenges. Rising debt levels have corresponded with rising debt service cost, but countries have not necessarily improved their ability to finance such obligations. Indeed, failure to meet debt service obligations will have devastating impacts, including downgrading of credit ratings (and, hence, future higher costs), heightened pressure on foreign exchange reserves and domestic currency depreciation, and the real possibility of being rationed out of the market—and negative reputational consequences.
This paper utilizes new data to study the impact of the COVID-19 pandemic on debt sustainability and vulnerability in sub-Saharan Africa and sheds light on the channels through which these impacts have taken place. We find that debt levels have risen substantially in sub-Saharan Africa since the onset of the COVID-19 pandemic. We utilize IMF projections as a comparison to analyze the impacts on the pandemic on debt levels and how they covary with key determinants of growth and fiscal space.
Related Content
In particular, sub-Saharan Africa experienced a 4.5 percent increase in “pandemic debt”—the debt taken on above and beyond projections due to the COVID-19 crisis. HIPC countries in particular saw large increases in pandemic debt, with levels 8.5 percent higher than projected. Non-HIPC countries took on mostly planned debt and borrowed from both private and official (that is, bilateral or multilateral) credit markets alike. HIPC countries, on the other hand, were largely shut out of private credit markets and instead relied on official credit to fund increases in (largely unplanned) debt. We also find that the domestic bond market played a more important role in private borrowing than it has in recent years and that eurobond issuance was relatively scarce. Countries that rely on metal exports issued less pandemic debt than did those that rely on oil, thanks to the strong growth and relative stability of metal prices during the pandemic.
Despite taking on substantial pandemic debt, HIPC countries experienced less extreme drops in GDP compared to their non-HIPC counterparts, underscoring the need for HIPC countries to accelerate financial sector development and enhance public-sector financial management, including mitigating financial leakages, curbing illicit follows, and galvanizing domestic resource mobilization. Looking forward, this paper argues that both sub-Saharan Africa’s recovery and debt sustainability depend on two factors: the success of the African Continental Free Trade Agreement (AfCFTA) and obtaining the participation of private partners in debt restructuring. Economic recovery, in this regard, will affect the millions of informal workers that have lost their jobs at the hands of the pandemic as well as revenue levels that coincide to some degree with the workers’ eventual participation in the formal economy.
Key findings
Debt levels in 2020 were 4.5 percent higher in sub-Saharan Africa than projections. The increase was particularly acute in HIPC countries, whose debt had mirrored non-HIPC countries the decade prior.
Non-HIPC countries and especially upper-middle-income countries retained access to credit markets and used a mixture of private and official creditors to finance increases in debt (which were largely in line with projections).
HIPC countries were largely shut out of private debt markets and instead relied on unplanned borrowing from official creditors.
Domestic bond markets played a relatively more important role in private borrowing. Eurobond issuance dropped sharply.
Some resource-rich countries saw sharp increases in bond yields despite having comparatively low yields pre-pandemic.
Metal prices showed more stability and higher growth than oil prices during the pandemic. Consequently, top metal exporters took on less debt than top oil-exporting countries.
Many sectors, especially manufacturing, witnessed “formalization” of employment during the pandemic.
Policy recommendations
Obtain full participation of all creditors, including private ones, in debt restructuring
Accelerate financial sector development
Enhance public financial management and internal resource mobilization
Mitigate financial leakages and illicit flows
Harness and accelerate opportunities afforded by AfCFTA
Design incentive-compatible and state-contingent contracts
Revisit existing institutional mechanisms for debt resolution
This paper is organized as follows. Section 2 begins by taking brief stock of the region’s debt landscape prior to the advent of COVID-19, before illustrating how the debt burden has changed during the pandemic. It also reviews key reasons why indebtedness has risen, including stimulus packages, current account deficits, and borrowing costs. Section 3 examines key economic channels along which the pandemic shock unfolded. Section 4 considers the magnitude of revenue loss and the vulnerability of the informal workers during the pandemic. Section 5 discusses attempts to rectify the unexpected, unsustainable increases in debt (or “pandemic debt”) and explores important considerations of which effective policies must take account. Section 6 recommends a number of policies and the way forward.
Download the full report
Sub-Saharan Africa’s debt problem: Mapping the pandemic’s effect and the way forward
Background
The COVID-19 pandemic has, thus far, spared Africa from the high number of cases and deaths seen in other regions in the world (Figure 1). As of April 2021, sub-Saharan Africa accounted for just 3 percent of the world’s cases and 4 percent of its deaths. Some experts attribute the relatively low case counts in sub-Saharan Africa to the region’s extremely young population or, importantly, the swift and preemptive lockdowns that many countries implemented in March 2020. While these lockdowns have likely saved lives, they have also left significant scars on the fiscal position of sub-Saharan Africa and the market conditions it faces. Dwindling revenues following the fall in global trade met a wave of unemployment among a population that lacks widespread access to safety nets and health infrastructure.
Figure 1. Population, COVID cases, and COVID deaths, sub-Saharan Africa vs. world
Source: Our World in Data, 2021. Data taken on September 1, 2021.
In response, African governments have, by and large, borrowed to finance stimulus packages to support at-risk groups, struggling businesses, creative education solutions, and health-related infrastructure. International and regional financial institutions, such as the World Bank, International Monetary Fund (IMF), African Development Bank (AfDB), and European Union (EU) countries (both bilaterally and multilaterally) have responded through debt relief measures and restructurings. The fiscal and monetary responses of sub-Saharan Africa and various financial institutions will have important consequences for indebtedness, debt servicing capacity, and debt sustainability more broadly.
Chris Heitzig
Research Analyst – Africa Growth Initiative
Twitter
ChrisHeitzig
Aloysius Uche Ordu
Director – Africa Growth Initiative
Senior Fellow – Global Economy and Development
Twitter
AloysiusOrdu
Lemma Senbet
William E. Mayer Chair Professor of Finance – University of Maryland
Member, Distinguished Advisory Group – Africa Growth Initiative
Twitter
lsenbet
Debt was an increasing problem across all income groups of African countries prior to COVID-19, and the pandemic has only exacerbated the problem. In fact, African countries had been borrowing heavily in the global financial markets in recent years—a trend that has created both new opportunities and new challenges. Rising debt levels have corresponded with rising debt service cost, but countries have not necessarily improved their ability to finance such obligations. Indeed, failure to meet debt service obligations will have devastating impacts, including downgrading of credit ratings (and, hence, future higher costs), heightened pressure on foreign exchange reserves and domestic currency depreciation, and the real possibility of being rationed out of the market—and negative reputational consequences.
This paper utilizes new data to study the impact of the COVID-19 pandemic on debt sustainability and vulnerability in sub-Saharan Africa and sheds light on the channels through which these impacts have taken place. We find that debt levels have risen substantially in sub-Saharan Africa since the onset of the COVID-19 pandemic. We utilize IMF projections as a comparison to analyze the impacts on the pandemic on debt levels and how they covary with key determinants of growth and fiscal space.
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In particular, sub-Saharan Africa experienced a 4.5 percent increase in “pandemic debt”—the debt taken on above and beyond projections due to the COVID-19 crisis. HIPC countries in particular saw large increases in pandemic debt, with levels 8.5 percent higher than projected. Non-HIPC countries took on mostly planned debt and borrowed from both private and official (that is, bilateral or multilateral) credit markets alike. HIPC countries, on the other hand, were largely shut out of private credit markets and instead relied on official credit to fund increases in (largely unplanned) debt. We also find that the domestic bond market played a more important role in private borrowing than it has in recent years and that eurobond issuance was relatively scarce. Countries that rely on metal exports issued less pandemic debt than did those that rely on oil, thanks to the strong growth and relative stability of metal prices during the pandemic.
Despite taking on substantial pandemic debt, HIPC countries experienced less extreme drops in GDP compared to their non-HIPC counterparts, underscoring the need for HIPC countries to accelerate financial sector development and enhance public-sector financial management, including mitigating financial leakages, curbing illicit follows, and galvanizing domestic resource mobilization. Looking forward, this paper argues that both sub-Saharan Africa’s recovery and debt sustainability depend on two factors: the success of the African Continental Free Trade Agreement (AfCFTA) and obtaining the participation of private partners in debt restructuring. Economic recovery, in this regard, will affect the millions of informal workers that have lost their jobs at the hands of the pandemic as well as revenue levels that coincide to some degree with the workers’ eventual participation in the formal economy.
Key findings
Debt levels in 2020 were 4.5 percent higher in sub-Saharan Africa than projections. The increase was particularly acute in HIPC countries, whose debt had mirrored non-HIPC countries the decade prior.
Non-HIPC countries and especially upper-middle-income countries retained access to credit markets and used a mixture of private and official creditors to finance increases in debt (which were largely in line with projections).
HIPC countries were largely shut out of private debt markets and instead relied on unplanned borrowing from official creditors.
Domestic bond markets played a relatively more important role in private borrowing. Eurobond issuance dropped sharply.
Some resource-rich countries saw sharp increases in bond yields despite having comparatively low yields pre-pandemic.
Metal prices showed more stability and higher growth than oil prices during the pandemic. Consequently, top metal exporters took on less debt than top oil-exporting countries.
Many sectors, especially manufacturing, witnessed “formalization” of employment during the pandemic.
Policy recommendations
Obtain full participation of all creditors, including private ones, in debt restructuring
Accelerate financial sector development
Enhance public financial management and internal resource mobilization
Mitigate financial leakages and illicit flows
Harness and accelerate opportunities afforded by AfCFTA
Design incentive-compatible and state-contingent contracts
Revisit existing institutional mechanisms for debt resolution
This paper is organized as follows. Section 2 begins by taking brief stock of the region’s debt landscape prior to the advent of COVID-19, before illustrating how the debt burden has changed during the pandemic. It also reviews key reasons why indebtedness has risen, including stimulus packages, current account deficits, and borrowing costs. Section 3 examines key economic channels along which the pandemic shock unfolded. Section 4 considers the magnitude of revenue loss and the vulnerability of the informal workers during the pandemic. Section 5 discusses attempts to rectify the unexpected, unsustainable increases in debt (or “pandemic debt”) and explores important considerations of which effective policies must take account. Section 6 recommends a number of policies and the way forward.
Download the full report
SDRs for COVID-19 relief: The good, the challenging, and the uncertain
In August 2020, as a response to the pernicious impact of the COVID-19 pandemic on the global economy and on the finances of member states, the International Monetary Fund (IMF) decided to issue $650 billion of special drawing rights (SDRs). Conceptually, SDRs are a form of unconditional financing for addressing urgent liquidity challenges.
SDRs were created in the late 1960s as a precautionary mechanism to address potential sovereign liquidity shortfalls in the context of the rigid monetary order of fixed exchange rates of the Bretton Woods system. SDRs were designed to serve as a low-cost reserve asset that could be sold by a government via the IMF acting as intermediary to another government and thereby converted into currency using an exchange rate pegged to a basket representing five of the world’s leading currencies. Currently, these five currencies are the U.S. dollar, the Chinese renminbi, the euro, the Japanese yen, and the British pound sterling. SDRs are not technically the IMF’s currency but a claim on reserves. To that effect, SDRs are not money per se but rather a means to establish a line of credit with a sovereign lender (government) acting as buyer of SDRs. Besides paying a low rate of interest on SDR use, countries benefit from the absence of refinancing risks imposed by conventional maturities. For foreign currency-strapped economies, many emerging markets, and lower-income economies in Africa, SDRs can, therefore, provide the immediate means to pay for vaccines and/or other health care investments.
The Good
As the pandemic has wreaked havoc on both developed and developing country finances, the IMF moved to address the liquidity shortfalls in the global economic system and help provide financing for many countries. Given the pronounced contraction in output and employment, this injection of liquidity represents a lifeline to countries with scarce reserves. SDRs buy time as they can be used to finance critical expenditure, build reserves, and service debts, although they do not provide a long-term remedy for underlying problems. In operational terms, the IMF SDR department facilitates the exchange of existing SDRs between countries and reduces any transaction costs.
The Challenging
The formula for SDR allocation is based on a country’s quota within the IMF, which reflects its relative position in the world economy (Table 1). The problem with the SDR allocation is that richer countries receive more than poorer countries. In fact, barely 3 percent of the $650 billion total in pandemic response went to low-income countries, and only 30 percent went to middle-income emerging markets. In other words, the countries that are most in need of financial relief and support are not the top beneficiaries of the SDRs. Instead, countries like the U.S., which can print its money, and China, which has several trillions in reserves, benefit the most.
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This disconnect occurs because SDRs were created to address potential liquidity shortfalls in an entirely different monetary system rather than in the present context. As a result, experts are proposing reforms to this system. In October 2021, the IMF began building support among members for a proposed “Resilience and Sustainability Trust”—a funding mechanism that would allow richer countries to channel their IMF reserves to poorer countries in need. By lending at cheaper rates and with longer maturities than the IMF’s traditional lending terms, and with funding targeted toward areas such as climate and pandemic preparedness, the trust could help channel funds toward development projects. Another potentially good option is for the IMF to work closely with the regional development banks, such as the African Development Bank, to channel some of the SDR financing through the regional bank’s lending program. Given the regional banks’ proximity to the client, this approach could help to ensure greater links to the development strategies and programs of member states.
Table 1. Select country SDR quotas and SDR allocations
Country
Quota (%)
Allocation (USD billions)
USA
17.43
79.5
China
6.4
29.2
France
4.23
19.3
United Kingdom
4.23
19.3
Nigeria
0.52
2.4
South Africa
0.64
2.9
Cote d’Ivoire
0.14
0.62
Kenya
0.11
0.52
Mali
0.04
0.18
Source: IMF.
The Uncertain
SDRs were not originally designed as open-ended cash transfers. For one, SDRs are not included in the assessment of debt sustainability. While the SDRs can provide liquidity, there is no mechanism for ensuring that money is used productively and reaches those in need. Conversion of SDRs into foreign currency happens on a sovereign level with few strings attached, meaning multilateral leaders cannot ensure that the SDRs are properly used for COVID-19 relief. There is also no discrimination between progressive or dictatorial countries in terms of SDR allocation. Some of the SDRs can end up being used by developing-country governments to pay debt service to public and private creditors in the absence of debt restructuring. For instance, SDRs can be used to boost reserves in Nigeria and South Africa, to pay back debt in the case of Argentina or, in the case of the CFA franc zone, especially in countries like Equatorial Guinea and Republic of Congo, to postpone necessary governance and exchange rate reforms. In this context, it would be good to have oversight by international experts to ensure SDRs are used for developmental impact. However, even assuming effective governance frameworks, for low-income African countries, the flows of SDRs may be too low to have a strong impact anyway.
Conclusion
Unless we believe limited liquidity shortfalls of a more-or-less temporary nature are the only consequence of current macroeconomic and public health stresses, policymakers should not just fall back on SDRs to avoid the more complex questions typically raised in the context of conventional debt or more permanent financial transfers. Beyond a limited (and welcome boost), liquidity SDRs appear to be an imperfect substitute for a financing package able to serve both specific pandemic relief and long-term development objectives. In sum, SDRs represent a second-best solution to a complex problem, with clear advantages and clear shortcomings.
SDRs for COVID-19 relief: The good, the challenging, and the uncertain
In August 2020, as a response to the pernicious impact of the COVID-19 pandemic on the global economy and on the finances of member states, the International Monetary Fund (IMF) decided to issue $650 billion of special drawing rights (SDRs). Conceptually, SDRs are a form of unconditional financing for addressing urgent liquidity challenges.
Ali Zafar
Author – The CFA Franc Zone: Economic Development and the Post-COVID Recovery
Macroeconomist
Twitter
zafarglobal
Jan Muench
Banker
Aloysius Uche Ordu
Director – Africa Growth Initiative
Senior Fellow – Global Economy and Development
Twitter
AloysiusOrdu
SDRs were created in the late 1960s as a precautionary mechanism to address potential sovereign liquidity shortfalls in the context of the rigid monetary order of fixed exchange rates of the Bretton Woods system. SDRs were designed to serve as a low-cost reserve asset that could be sold by a government via the IMF acting as intermediary to another government and thereby converted into currency using an exchange rate pegged to a basket representing five of the world’s leading currencies. Currently, these five currencies are the U.S. dollar, the Chinese renminbi, the euro, the Japanese yen, and the British pound sterling. SDRs are not technically the IMF’s currency but a claim on reserves. To that effect, SDRs are not money per se but rather a means to establish a line of credit with a sovereign lender (government) acting as buyer of SDRs. Besides paying a low rate of interest on SDR use, countries benefit from the absence of refinancing risks imposed by conventional maturities. For foreign currency-strapped economies, many emerging markets, and lower-income economies in Africa, SDRs can, therefore, provide the immediate means to pay for vaccines and/or other health care investments.
The Good
As the pandemic has wreaked havoc on both developed and developing country finances, the IMF moved to address the liquidity shortfalls in the global economic system and help provide financing for many countries. Given the pronounced contraction in output and employment, this injection of liquidity represents a lifeline to countries with scarce reserves. SDRs buy time as they can be used to finance critical expenditure, build reserves, and service debts, although they do not provide a long-term remedy for underlying problems. In operational terms, the IMF SDR department facilitates the exchange of existing SDRs between countries and reduces any transaction costs.
The Challenging
The formula for SDR allocation is based on a country’s quota within the IMF, which reflects its relative position in the world economy (Table 1). The problem with the SDR allocation is that richer countries receive more than poorer countries. In fact, barely 3 percent of the $650 billion total in pandemic response went to low-income countries, and only 30 percent went to middle-income emerging markets. In other words, the countries that are most in need of financial relief and support are not the top beneficiaries of the SDRs. Instead, countries like the U.S., which can print its money, and China, which has several trillions in reserves, benefit the most.
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This disconnect occurs because SDRs were created to address potential liquidity shortfalls in an entirely different monetary system rather than in the present context. As a result, experts are proposing reforms to this system. In October 2021, the IMF began building support among members for a proposed “Resilience and Sustainability Trust”—a funding mechanism that would allow richer countries to channel their IMF reserves to poorer countries in need. By lending at cheaper rates and with longer maturities than the IMF’s traditional lending terms, and with funding targeted toward areas such as climate and pandemic preparedness, the trust could help channel funds toward development projects. Another potentially good option is for the IMF to work closely with the regional development banks, such as the African Development Bank, to channel some of the SDR financing through the regional bank’s lending program. Given the regional banks’ proximity to the client, this approach could help to ensure greater links to the development strategies and programs of member states.
Table 1. Select country SDR quotas and SDR allocations
Country
Quota (%)
Allocation (USD billions)
USA
17.43
79.5
China
6.4
29.2
France
4.23
19.3
United Kingdom
4.23
19.3
Nigeria
0.52
2.4
South Africa
0.64
2.9
Cote d’Ivoire
0.14
0.62
Kenya
0.11
0.52
Mali
0.04
0.18
Source: IMF.
The Uncertain
SDRs were not originally designed as open-ended cash transfers. For one, SDRs are not included in the assessment of debt sustainability. While the SDRs can provide liquidity, there is no mechanism for ensuring that money is used productively and reaches those in need. Conversion of SDRs into foreign currency happens on a sovereign level with few strings attached, meaning multilateral leaders cannot ensure that the SDRs are properly used for COVID-19 relief. There is also no discrimination between progressive or dictatorial countries in terms of SDR allocation. Some of the SDRs can end up being used by developing-country governments to pay debt service to public and private creditors in the absence of debt restructuring. For instance, SDRs can be used to boost reserves in Nigeria and South Africa, to pay back debt in the case of Argentina or, in the case of the CFA franc zone, especially in countries like Equatorial Guinea and Republic of Congo, to postpone necessary governance and exchange rate reforms. In this context, it would be good to have oversight by international experts to ensure SDRs are used for developmental impact. However, even assuming effective governance frameworks, for low-income African countries, the flows of SDRs may be too low to have a strong impact anyway.
Conclusion
Unless we believe limited liquidity shortfalls of a more-or-less temporary nature are the only consequence of current macroeconomic and public health stresses, policymakers should not just fall back on SDRs to avoid the more complex questions typically raised in the context of conventional debt or more permanent financial transfers. Beyond a limited (and welcome boost), liquidity SDRs appear to be an imperfect substitute for a financing package able to serve both specific pandemic relief and long-term development objectives. In sum, SDRs represent a second-best solution to a complex problem, with clear advantages and clear shortcomings.
Big techs in finance: on the new nexus between data privacy and competition
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