Ongoing debt restructuring must involve Africa’s new creditors

By Arthur Minsat, OECD Development Centre and Yeo Dossina, African Union Commission[i]

This blog is a part of a thread looking more specifically at the impacts of the COVID-19 crisis in terms of capital flows and debt in developing countries.

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The global recession caused by the COVID-19 pandemic calls for a cancellation or restructuring of African countries’ debt. The crisis has triggered a double fiscal shock of soaring government expenditure and slumping revenues. Restoring African borrowing capacity is essential to fighting a loss of fiscal space.

Prior to the shock, Africa had already shown signs of vulnerability. Although the African continent boasted the world’s second highest economic growth rate at 4.6% on average between 2000 and 2018, it had started to slow down from a peak of 6.8% in 2012 to 3.2% in 2019. In 2020, Africa’s growth is likely to fall between -2.1% and -4.9%, significantly reducing the fiscal space of all countries. Overall, financing for development has dropped since 2010 in per capita terms. For both domestic revenues and external financial inflows, the amount of financing per capita has decreased by 18% and 5% respectively throughout 2010-2018. A less favourable global economy and persistently high demographic growth in most African countries have driven this downward trend.

 As for domestic resources, tax-to-GDP ratios had already been stagnating at 17.2% since 2015 in the 26 African countries covered by our Revenue Statistics in Africa, despite important tax reforms by several governments. Commodity exporter countries were even more vulnerable: between 2012 and 2017, non-tax revenues declined by 2.3 percentage points, driven by drops in oil revenues and grants. In 2020, local tax bases are shrinking as domestic industries lose revenue, beginning with African airlines losing USD 4.4 billion in revenue in the first three months of 2020 due to reduced international flights.

 In terms of external financial inflows, the crisis is hitting Africa more than other developing regions; they make up 11.6% of Africa’s GDP (compared to 6.6% of developing economies’ GDP). The World Bank forecasts remittances will drop by 23.1% to USD 37 million in 2020, especially hitting Nigeria (which, together with Egypt, makes up 60% of the continent’s remittances), and 13 more countries whose remittance inflows exceed 5% of their national GDP. To better mobilise remittances for development, the international community must move faster towards Sustainable Development Goal 10c, aiming to reduce transaction costs to under 3%. Today, sending USD 200 remittances to Africa costs 8.9% and up to 20% for some intra-African corridors (compared to 5% for South Asia and 6% for Latin America and the Caribbean).

Foreign direct investment to Africa will likely fall between 25% and 40%, a drop similar to other world regions in 2020. While Multi-National Enterprises assess re-shoring from Asia closer to OECD economies, Africa has the potential to attract much more foreign direct investment, especially with the implementation of its Continental Free Trade Area in 2021. Between 2000 and 2019, foreign direct investment flows to Africa grew at a compound annual rate of 8.5% reaching USD 45.4 billion, driven by foreign direct investment into services. Despite sturdy growth, Africa remains too small a destination: it attracted only 2.9% of global foreign direct investment flows, compared to Asia (31.1%) and Latin America and the Caribbean (9.9%) in 2017-2019.

Official development assistance (ODA) to Africa increased to USD 55.3 billion in 2018, but too slowly to meet international commitments. Only five donors of the OECD’s Development Assistance Committee (DAC) matched the collective ambition of 0.7% ODA to gross national income set by the 2030 Agenda for Sustainable Development. Moreover, due to the GDP decline in DAC countries, the total value of ODA in the future is uncertain.

Servicing African debt has become more challenging than before. Within the first month of the COVID- 19 crisis, Africa’s frontier and emerging markets experienced a record-breaking capital flight exceeding USD 4.2 billion. This exacerbated certain countries’ pre-existing currency volatility. Since 2013, 13 African countries have experienced a drop in their exchange rates with the USD of at least 25% a year. Foreign exchange reserves of African countries also fell from 22% of GDP in 2009 to 14% in 2018. Already by the end of 2019, the IMF had classified eight African countries as being in debt distress, and 11 at high risk.

For it to work, Africa’s debt restructuring or relief must bring different actors to one same table, chaired by the African Union. Private lenders accounted for 39% of lending to African governments in 2018, up from 24% in 2008. Engagement with private actors will be more important for middle-income countries, since they hold around 45% of their total external debt, compared to 14% for low-income countries. Yet, coordinating the growing number of private bondholders is more complex than coordinating private bank lenders, as more actors are involved. Low-income countries need to engage strongly with public lenders, since 48% of their total external debt is concessional. Regarding non-Paris Club lenders, China agreed to participate in the G20’s COVID-19 Debt Service Suspension Initiative (DSSI); however, it is not yet clear which Chinese bank will be considered official creditor for the DSSI, and how Paris club terms will be applied at country level. Horn, Reinhart and Trebesch (2020) estimate that about 50% of certain resource-rich African countries’ debt stock to China went undeclared to the IMF or the World Bank. Leadership, in particular by the European Union and the African Union, can provide the necessary impetus to better include private sector and non-Paris Club lenders, in order to make debt relief or restructuring and its monitoring more transparent.

The African Union has appointed five special envoys to support the continent in mobilising financial resources and ensuring the debt relief pledged by the G20, the IMF, the European Union and other international organisations. Strong ownership is key for African countries to better adapt solutions to their diverse needs and risks, like their exposure to private and foreign denominated debt. Seven middle-income countries hold three quarters of Africa’s debt to private creditors (South Africa, Egypt, Angola, Nigeria, Morocco, Ghana, and Côte d’Ivoire) – they require tailored approaches. African countries can also adopt a wide armoury of tools to engage private creditors in debt restructuring and monitoring, such as cash equivalents, value recovery instruments, loss reinstatement features and credit enhancement, among others. These tools must also match African central banks’ capacity to adapt and implement macro-prudential rules, while retaining their independence.

[i] When not specified, all figures come from Chapter 2 of Africa’s Development Dynamics 2020: Harnessing Digitalisation for Quality Jobs and Agenda 2063 (forthcoming 2020).

This article was co-published both in French and English together with le Grand Continent, the journal of the Groupe d’études géopolitiques.

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