The writer is president of South Africa and chair of the African Union
The G20 summit ended last weekend with a call for “immediate and vigorous measures” to address the effects of the Covid-19 pandemic. Among these is a looming sovereign debt crisis, particularly in Africa. Urgent and collective action is needed there to stave off that crisis and to maintain the invaluable social gains that the continent has made.
In the early 2000s, multilateral debt relief provided a much needed reprieve for heavily indebted, poor countries around the world. Many African nations took the opportunity. Their economies grew and their development indicators improved. Nevertheless, some countries’ debt became unsustainable as ultra-low interest rates allowed them to increase borrowing.
Indeed, based on the latest IMF and World Bank analysis, six sub-Saharan African countries are now in debt distress, while 11 are at high risk of distress. Before the pandemic, sub-Saharan Africa’s debt load was forecast at 56.4 per cent of gross domestic product for this year; the current projection is for 65.6 per cent. To stop this rising level of debt turning into a crisis, several steps need to be taken now.
The first has partly been made through the G20 debt service suspension initiative. This has benefited 46 countries, and deferred $5.7bn of debt payments. It has also recently been extended by six months until the end of June 2021, and may be extended further to the end of 2021. Africa accounts for 38 of the 73 eligible countries.
Unfortunately, there are several obstacles to the region taking full advantage of the initiative. There remains a risk that major credit rating agencies will put countries on negative credit review if they seek relief from private creditors under the scheme. This possibility has deterred some countries from requesting debt service suspension from private creditors — even though that would support economic recovery and future creditworthiness.
Furthermore, the lack of participation by the private sector and multilateral development banks have constrained the initiative, currently limited to official government-to-government loans. Private and multilateral creditors account for about $18bn and $7bn, respectively, of the $49bn of payments due from eligible countries from May to the end of the year.
The second step is an allocation of the IMF’s special drawing rights. This is a low-cost way of adding to countries’ international reserves, allowing them to reduce their reliance on more expensive domestic or external debt. However, neither this proposal nor an alternative solution — the reallocation of existing SDRs to countries that need them most — have received the necessary support.
The third step is a sovereign debt restructuring framework. The G20’s new common framework is a move in the right direction in that it seeks to facilitate orderly treatment for DSSI-eligible countries via broad creditor participation. But its success will depend on whether there is appropriate burden sharing by private lenders. Currently, the DSSI lays the burden of repayment on official bilateral creditors.
Lastly, countries need continued technical assistance to improve debt transparency and their debt management offices.
Implementing these steps would give substance to the sentiments recently expressed by the G20. The pandemic “marks a defining moment in our history,” it declared. “Building on the benefits of our interconnectedness, we will address the vulnerabilities revealed by this crisis, take the necessary steps to recover stronger, and work to ensure that future generations are safer.”
For three decades, Africa has worked strenuously towards a more sustainable future. The world cannot allow short-term debt dynamics to derail its march towards a green, digitally enabled and globally connected future.