Africa: External Debt Complicates Africa's Post-Covid-19 Recovery, but Mitigating Efforts Underway

External debt complicates Africa's post-COVID-19 recovery, but mitigating efforts underway

Mozambique was already struggling with repaying its $14 billion external debt when COVID-19 hit earlier this year.

The country's debt-to-GDP ratio, which was 100% in 2018 ballooned to 130% in 2020. With debt overtaking total economic output, Mozambique has little fiscal space to provide a robust response and recovery from the pandemic.

The COVID-19 pandemic is just the latest of Mozambique's woes. The country continues to recover from cyclone Idai which struck in March 2019, and during which 607 people lost their lives and thousands were displaced.

Like Mozambique, many poor and heavily indebted African countries such as Angola, Cabo Verde, Congo, Djibouti and Egypt--all with a higher than 100% external debt-to-GDP ratio--must now, amid a pandemic, decide how to navigate significant financial difficulties.

An African Union (AU) study on the economic impact of COVID-19 released in April 2020 showed that the continent could lose up to $500 billion and that countries may be forced to borrow heavily to survive after the pandemic.

UN Secretary-General António Guterres in in June 2020 warned that an additional "50 million people risk falling into extreme poverty in 2020 owing to the pandemic." Mr. Guterres has appealed for a "global response package amounting to at least 10% of the world's Gross Domestic Product. For Africa, that means more than $200 billion as additional support from the international community."

Africa needs at least $100 billion to immediately resource a health and social safety net response, and another $100 billion for economic stimulus, including a debt standstill, the financing of a special purpose vehicle for commercial debt obligations, and provision of extra liquidity for the private sector, according to the UN Economic Commission for Africa (ECA).

African countries' lack of fiscal space to tackle the pandemic and its aftermath could be attributed to four challenges, according to the International Monetary Fund (IMF).

The first challenge is high debt-to-GDP levels, which are unsustainable.

The second is that high fiscal deficits (gaps between spending and revenues) will force countries to explore alternative financing for development projects. Consequently, loans become a recourse, further exacerbating their debt burden.

The third challenge is the high cost of borrowing, with interest rates between 5% and 16% on 10-year government bonds, compared to near-zero to negative rates in Europe and America.

For sub-Saharan African economies, interest repayments constitute the highest expenditure portion-- and fastest-growing expenditure--of budgets.

Lastly, the depreciation of many African currencies against major international currencies has triggered inflation. For example, the Botswanan Pula and the South African Rand have lost about 8% of value against the US dollar and the euro since the outbreak of the pandemic.

To recover better, Mr. Guterres has called for debt relief, while advocating for a transition to low-carbon, climate-resilient growth that will create millions of green jobs and ensure sustainable production and consumption.

Addressing these challenges requires bridging inequalities based on income, gender and race, says Mr. Guterres. He continues to advocate for equity in global liquidity and has proposed a set of innovative solutions to financing post-pandemic recovery.

For example, the UN Chief has urged the IMF to increase its financial support to African countries under its Special Drawing Rights facility--a monetary reserve currency that countries in financial stress can draw from.

Call for debt cancellation

While the G-20 agreed to suspend debt repayment for the world's 75 poorest countries until the end of this year, Mr. Guterres maintains that debt suspension should be extended to all developing countries, adding that the private sector must be part of any dialogue on debt forgiveness.

The ECA also recommends a "complete temporary debt standstill for two years for all African countries, without exception."

The African Union has launched several programmes, such as the African Union Development Agency (AUDA-NEPAD) COVID-19 Response Plan to help countries fight the pandemic and recover better.

The CEO of AUDA-NEPAD Ibrahim Mayaki acknowledges that countries desperately need to lighten the burden of debt. "Consultations are ongoing with major financial development partners for a short- and medium-term scheme that can respond to those needs," he told Africa Renewal, in an interview.

Calls for debt cancelation for poor countries have been ongoing for many years. In 2005 the World Bank and the IMF canceled $55 billion of the debt owed by Africa's most impoverished states; still, a full cancellation would be unprecedented.

Also, total debt forgiveness usually involves intense political negotiations. The China Development Bank and the Export-Import Bank of China account for most of the lending to African countries. These institutions are closely linked to the Chinese government and its Belt and Road Initiative. Therefore, they are likely to toe the official position of the government.

In April 2020, China expressed a willingness to provide Africa debt relief, but not forgiveness.

In a meeting with African leaders in mid-June to discuss the COVID-19 response, China's President Xi Jinping offered to cancel Africa's interest-free loans, but indicated that negotiations would be carried out bilaterally.

However, Johns Hopkins University in the US analyzes that the loans China intends to cancel are less than 5% of Africa's debt to China--hardly a dent on the continent's debt.

Meantime, the Secretary-General of the African Continental Free Trade Area (AfCFTA) Wamkele Mene maintains that the implementation of the trade pact would increase intra-African trade and boost industrialization on the continent--precisely the stimulus Africa needs.

However, stimulus from AfCFTA implementation will have to wait as trading could not begin on the scheduled date of 1 July. The AU is expected to announce a new date soon.

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