Can African Nations avoid mass debt defaults?

COVID-19 has spared few countries from its effects, both in terms of health and economically. Despite African nations fairing relatively well in terms of deaths and case numbers compared to countries like of the UK, the continent has not escaped the economic difficulties induced by the pandemic. With falling commodity prices, reduced international trade and increased debt there are many challenges facing African economies, including the risk of default. This raises the question of whether there is a feasible solution to prevent this from happening.

Many African nations were already struggling to manage debts before the pandemic. Kenya had taken advantage of cheap credit from creditors such as China, while others, such as Mozambique, faced corruption scandals in 2016 that cost billions of dollars. There has also been an increase in lending from private sources, which are generally more expensive, with the S&P finding that 19 Sub-Saharan countries owe 39% of their debt to private investors. Moreover, with oil prices halving from the beginning of March for over two weeks, many countries reliant on exporting oil have had to reorganise their budgets. Deutsche Welle, a German international broadcaster,  reports for example that Gabon had predicted the oil price to be 57 USD per barrel for their budget and the economy to grow 5% in 2020, but the subsequent shock has resulted in a prediction of 26 USD a barrel and consequently growth to be limited at just 0.5%.

The shocks to oil and other commodities have exacerbated an already precarious debt situation. Now many countries are struggling to keep up with debt repayments, with Zambia defaulting on 42.5 million USD of payments in November. In response to this, the World Bank, IMF and G20 have all offered relief on debt. However, this does not fix the private debt issues, with Deutsche Welle reporting that private creditors are due 18 billion EUR next year and few signalling intent to offer relief.

Moreover, many loans have come from Chinese state-owned financial institutions, which brings further problems in classifying these as bilateral or commercial loans. China is also not part of the Paris Club, a group that helps restructure loans, and as such their attitude to restructuring is less predictable. As such, Chinese involvement may lead to complicating this debt situation further, with Angola being one such example. The country has been the biggest African borrower from China since 2000. Their state-run oil company has borrowed from the China Development Bank (CDB) while the government itself has borrowed from the China Export-Import Bank. The FT reports that the loans to the government are eligible for debt restructuring and relief, while China says the CDB loans count as a commercial loan, meaning it does not need to offer restructuring. This is just one example of the often intricate nature of trying to resolve debt issues.

Preventing African economies from defaulting is important not just for African nations themselves but also to wider global economy. Paul Collier, a British development economist from Oxford University, has argued that the Bank for International Settlements, a financial institution that helps central banks pursue financial and monetary stability, could copy what the European Bank for Reconstruction and Development did during the 2008 financial crisis. In 2008 they set up the Vienna Initiative, where international banks agreed not to pull capital or support from Eastern Europe, avoiding further financial distress in the region. Collier argues that this would grant the IMF and World Bank more time to create a more impactful response. Moritz Kraemer, chief economic adviser of the risk consultancy firm Acreditus, takes a different approach arguing that private bondholders should accept that they will need to forgive some debt, especially as they knew about the high risks when they invested initially. Nations may fall into the trap of debt relief from official creditors being used to pay off private investors. Kraemer suggests the sooner private investors realise their mistakes, the sooner the end to the economic and human suffering.

The COVID-19 pandemic has tested African economies and in many cases left them on the brink of default and collapse. The IMF has suggested that this crisis could nullify 10 years worth of development. In order for the continent to avoid such defaults there will have to be compromises between both bilateral and private creditors. This may involve pain and loss for both sides economically, but the alternative is to further stifle transitional growth for Africa in the long run.

 

By Gregor MacDonald

Sector Head: Jared Gibson

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