The outbreak of the coronavirus continues to pose a threat to economies around the world, but for African and other developing nations there is an added risk of rising debt burdens. Despite shrinking economies and plunging tax revenues as a result of the pandemic, governments on the continent have ramped up spending on curbing the spread of Covid-19 and decrease deaths. With economic activity in the sub-Saharan region expected to contract by 2.8% in 2020, according to the latest data by the World Bank, being able to temporarily stop payments to creditors would free up much needed funds to combat the virus.
International and regional finance institutions such as the World Bank, the International Monetary Fund (IMF) and the African Development Bank (AfDB) have provided emergency assistance, but there still remains a funding gap to effectively fight Covid-19. African countries spend about $40-billion a year on debt service costs, according to South Africa’s former finance minister, Trevor Manuel.
Debt relief of that amount from Africa’s creditors would help the continent contain Covid-19, Manuel told the Mail & Guardian. The G20 countries have, through the Debt Service Suspension Initiative (DSSI), agreed to suspend debt repayments by the world’s poorest countries during the pandemic. But this payment holiday can be risky for countries that already have a debt burden, because it could negatively affect their future access to markets. Countries on the continent have opted to negotiate these terms based on, among other things, their fiscal standing and amounts owed to creditors. Mauritania, Burkina Faso, Cameroon have separately negotiated the terms of the lending agreement. The Institute of International Finance (IIF) estimates that debt service payments owed by DSSI-eligible countries to private creditors between May 1 and the end of 2020 will amount to $13-billion.
The IIF says these countries also owe $11-billion to bilateral creditors and an additional $7-billion to multilateral lenders. While negotiations with countries and the Paris Club (western European and Scandinavian nations, the United States, the United Kingdom and Japan) continue, only a few of the eligible poorest nations have so far opted to accept the debt relief. For debt troubled countries such as Zambia, which recently announced that it is in negotiations for the debt relief, suspending the debt service payments for the rest of the year would allow it to dedicate its resources to fighting Covid-19.
But asking creditors for leniency could lead to further credit downgrades by ratings agencies, which would add to the country’s economic woes. Manuel, however, says the African Union special envoys, of which he is one, are working on ensuring that African countries who have secured credit from private lenders are “not penalised”.
The group of special envoys, appointed by AU chairperson Cyril Ramaphosa in April, is tasked with mobilising international support for the continent’s Covid-19 social and economic relief measures. The other envoys are former Algerian finance minister Benkhalfa Abderrahmane, former Nigerian finance minister Ngozi Okonjo-Iweala, former president of the AfDB and former Rwandan finance minister Donald Kaberuka, former chief executive of Credit Suisse Tidjane Thiam and Zimbabwean business mogul, Strive Masiyiwa Manuel says the group has so far secured $54-billion in commitments from, among others, the IMF ($17-billion), the World Bank ($20-billion), the AfDB ($10-billion) and just under $4-billion from the European Union, to help the continent’s costly battle against the spread of the virus. Of the $54-billion, about $30-billion has been disbursed to date.
The funds are negotiated on a country-by-country basis. Conditions for the release of the funds from the World Bank and IMF are based on criteria such as transparency when procuring services and goods.
“The structural adjustment programmes of the 70s and 80s are no longer in use. So, effectively, one can say that there are no conditionalities,” Manuel says.
The medium to long term outlook for many African countries remains dire even as governments have begun opening up economies. To support the continent’s efforts against the virus, Manuel says the special envoys may have to negotiate a new tranche of international support by the end of the year “that may be at least as large as this round”.
The AU has also launched a platform for the procurement of personal protective equipment to enable member states to get the goods at “very favourable rates”, Manuel says. “The benefit of this will have a significant ‘cash equivalent’ value for countries that utilise the platform.”
Thando Maeko is an Adamela Trust business reporter at the Mail & Guardian