- While the G20 advocate for a recalibration of the International Monetary Fund (IMF)'s pandemic management support, reforms and more comprehensive solutions to debt problems remain a medium-term prospect.
- Yet in the hardest hit countries, pressure on private creditors to partake in debt restructuring negotiations will intensify in the short term.
- The restructuring case of Chad may be the most straight forward, but could set a precedent for private creditor participation for cases like Zambia and Ethiopia.
The communique of last week's G20 finance ministers and central bank governors' meeting mainly confirms longstanding trends as far as the group's approach to Covid-19-induced liquidity and solvency issues in sub-Saharan Africa is concerned.
The G20's Debt Service Suspension Initiative (DSSI) is set to expire by year- end, but discussions on how rich countries can transfer part of their IMF Special Drawing Rights (SDRs) allocations to countries in greater need remain woefully slow. The G20 communique shows that member states continue to push for a two-pronged approach. As analyzed previously, this should be achieved mainly by an upscaling of the existing Poverty Reduction and Growth Trust (PRGT)'s lending capacity, on the basis of member states' voluntary contributions.
Alongside this, the G20 nations reiterated their August call for a new IMF- managed Resilience and Sustainability Trust (RST) to “provide affordable long- term financing to help low-income countries, small developing states, and vulnerable middle-income countries to reduce risks to prospective balance of payment stability, including those stemming from pandemics and climate change.”
Overall, the thrust remains on broadening the hitherto narrow focus on least developed countries to include middle-income countries, as well as to move from Covid-19 emergency support towards climate transition funding. Unsurprisingly, this chimes with respective IMF statements, although the slow pace of decision-making – a “menu of options” was supposed to be on the agenda of the IMF Executive Board “this summer” – indicates that the RST is a medium- term priority.
Toughest debt cases
Meanwhile, going somewhat beyond previous communications, the G20 increased the pressure on private sector creditors to partake in debt restructuring negotiations under the Common Framework for debt treatment beyond the DSSI.
Negotiations with Chad are most advanced, as indicated by the joint statement of China, France, India and Saudi Arabia after the bilateral creditor committee's fourth meeting on 11 June. Last week the G20 issued a thinly veiled threat to Glencore, Chad's only noteworthy private creditor, by “reaffirm[ing] the importance for other official bilateral creditors and private creditors of providing debt treatments on terms at least as favourable, in line with the comparability of treatment principle, and urg[ing] in particular Chad's private creditors to act swiftly.” In a letter to the IMF, Glencore swiftly followed suit by announcing the start of negotiations with Chad to restructure its USD 1bn cash-for-oil loan. As such, while Chad may have been of peripheral interest from a Eurobond investor perspective so far, as the first country to advance in the Common Framework process it could become a trendsetter. Specifically, the increased pressure on private creditors in Chad may become the norm in negotiations involving debtors holding Eurobond debt elsewhere.
This is particularly problematic for Ethiopia, which has thus far sought to shield bondholders from the worst. Officials have repeatedly toned down rhetoric around restructuring to speak of reprofiling, and thus far Ethiopia has continued to pay its Eurobond coupon. However, the outlook is quickly worsening. Pressure for private sector lenders to participate in Ethiopia's Common Framework process is increasing after the creation of a creditor committee, co-chaired by France and China, was finally announced on 28 September. Credit risk – reflected in ratings downgrades, the most recent from Moody's on 20 October – is also heightened by a fresh and dramatic escalation in the Tigray conflict, which heightens the threat of US sanctions being implemented and poses a growing risk to public finances and the economy at large.
Zambia, by contrast, is on a more positive trajectory, albeit from a starting position of default. The administration of President Hakainde Hichilema, on the back of a recent landslide election victory, has promised to tackle the tough task of turning around Zambia's finances via an IMF deal and debt restructuring. The new government's most immediate task has been to quantify the exact debt burden left behind by ex-president Edgar Lungu's administration. New data released on 20 October showed that total external public sector debt (including state-owned enterprise debt and other liabilities) climbed to USD 16.9bn by the end of June, while total public debt stock (including local and foreign currency), reached USD 26.96bn. Zambia's debt figures had been widely expected to be worse than those disclosed under Lungu, but the Hichilema administration may gain credit for improving transparency.
There is little doubt that the IMF considers Zambia one of its most urgent cases and sees a political opportunity to cut a deal with a new, much friendlier administration. IMF Africa director Abebe Aemro Selassie has promised a mission to Zambia in the coming weeks, saying “[t]his is a country that needs official sector support and the involvement of the private sector as quickly as possible.” A key prerequisite for progress on the IMF talks will be the budget, which Finance and National Planning Minister Dr. Situmbeko Musokotwane plans to present to parliament on 29 October. It will be closely scrutinized for signals regarding Zambia's fiscal management and debt restructuring intentions.
