Debt suspension and debt relief are laudable initiatives, but a radical step towards debt cancellation can free the world’s poorest countries from the unending cycle of unsustainable debt-service payments, abject poverty, and underdevelopment.
Africa’s sovereign debt situation is worrying. According to the International Monetary Fund (IMF), 22 countries are either in debt distress or at high risk of debt distress. African countries are struggling to repay their debts.
This development was not entirely unexpected. The total external debt stock in Sub-Saharan Africa has more than doubled over the past 10 years: in 2012, the total external debt stock was US$380.9 billion and by 2020 it had increased to US$702.4 billion. The amount owed to official creditors (such as multilateral lenders, governments, and government agencies) also doubled over the same period from US$119 billion to US$ 258 billion.
But is it all doom and gloom?
Misheck Mutize, a Lecturer of Finance at the Graduate School of Business – University of Cape Town, on The Conversation, writes that “the problem is not that African countries are borrowing too much, but rather they are paying too much interest.”
African governments are not on borrowing spree compared to other regions
Statistics support this view. Sub-Saharan Africa’s debt-to-GDP ratios are way below the 100% debt-to-GDP ratio mark, and way below ratios in other regions. However, the perception of higher debt-GDP ratios shores up assessments of Africa’s risk profile, and subsequently higher interest rates on debt. African governments are not on borrowing spree, compared to other regions. Debt issuances in the continent amount to only 1% of the continent’s total GDP. With the continent’s GDP is estimated to grow annually at 4%, the ability to generate income is expected to outstrip the burden of annual debt accumulation.
On the contrary, while debt-to-GDP levels are comparably low, African countries pay disproportionately high interest payments. Studies show that African governments pay between 5% and 16% for ten-year government bonds compared with the near zero to negative rates observed in America and Europe. World Bank data suggests that interest repayments are not only disproportionately high, but also constitute the fastest growth expenditure in fiscal budgets in Sub-Saharan Africa.
African countries pay disproportionately high interest payments — between 5% and 16% for 10-year government bonds compared with the near zero to negative rates in America and Europe
The high interest rates are attributable to the structure of African debt portfolio. In the past decades, the official lenders were primarily rich western countries and multilateral institutions (World Bank and IMF). Today, the creditor list has expanded and include countries such as China, India and Turkey, and multilateral institutions such as Africa Export-Import Bank. This list has further expanded to include a broad range of investors such as investment banks, hedge funds, insurance companies, pension funds, and individual investors. The last entrants are responsible for the increased number of Eurobonds floated in the international market.
An examination of the composition of external debt in the region indicates that while the debt portfolio is predominantly composed of multilateral loans and bilateral loans, these highly concessional loan has been on the decline. This has created a gap in financing and forced Sub-Saharan African countries to seek expensive short-term loans for long-term projects, particularly through issuance of large bonds in the international market.
China has been accused of practicing debt diplomacy, by overburdening heavily indebted poor countries with expensive loans to exert political influence in recipient nations
The result: African countries are paying higher-than-norm coupon rate on private sovereign bonds, an aspect that exacerbates their debt repayment burden. In the face of declining financing from the typical multilateral lenders (IMF, World Bank, and Africa Development Bank) and Paris Club governments; African countries in need of financing for infrastructural development, also turned to China through China Exim Bank. Unlike the old multilateral lenders and Paris Club lenders, China has been accused of practicing debt diplomacy, one characterised by overburdening heavily indebted poor countries with expensive loans as a way of exerting political influence in recipient nations.
In 2020, medium and long term (MLT) debt for the poorest countries amounted to $36 billion. In the face of COVID-19, most of these countries were severely affected, especially those countries that are commodity dependent, and rely on tourism receipts, and remittances. With UNCTAD data showing that two-thirds of all developing countries are commodity dependent, it means that MLT debt is an issue in nearly all countries that are eligible for support from the International Development Association (IDA).
The inability to make timely debt repayments, due to a myriad of internal and external factors, including COVID-19 and the Russia-Ukraine crisis, have increased concerns about an impending debt crisis in Africa.
In the height of the COVID pandemic, the G20 countries set up the Debt Service Suspension Initiative (DSSI) to enable poor countries to focus their resources to fighting the pandemic and safeguarding the livelihoods of more than 100 million pushed into extreme poverty. The initiative was intended to support the 73 countries eligible for IDA. DSSI ran from May 2020 to December 2021 and suspended $12.9 billion in debt-service payments for 48 participating countries.
In May 2020, 300 parliamentarians from two dozen countries on all six continents, urged the World Bank and International Monetary Fund to cancel debt obligations of the poorest countries outright, and not simply suspend them. The call came in the face of the COVID-19 pandemic as poor countries struggled to proactively protect their populations from the destruction of the disease. Lawmakers argued that the debts were unsustainable, and cancellation was the only way of preventing increased poverty, hunger, and disease threatening the lives of millions of people around the world.
IMF made a lengthy response on the question of 100 percent debt cancellation, arguing against the call by stating that they are a “a unique source of concessional finance for the world’s neediest countries which operates on the principle that developing countries borrow from and pay back into the same sources of financing” and they intended to retain their creditor status and would “continue to provide financial support to their members on a sustainable basis, even in very difficult circumstances.”
A 100% debt cancellation could be a bold approach for alleviating the debilitating debt burden facing poor countries, but while there have been instances of debt relief, total debt cancellation remains a dream. For instance, Development Reimagined found out that China wrote off US$3.8 billion in debt between 2000-2018, of which US$1.7 billion was owed heavily indebted poor countries (HIPCs). The United Kingdom and United States provided US$800 million and US$2.3 billion of debt relief to HIPCs over the same period.
The debt relief though laudable remains insignificant relative to annual debt-service payments by poor countries. They are a drop in the ocean. An Oxfam analysis showed that most poor countries are faced with an impossible choice: to pay their debts or invest in improving the condition of their countries and citizens.
Without debt cancellation, these countries will soon be forced to use all or nearly all their domestic tax revenues to service debt repayments. This will effectively trap hundreds of millions in a cycle of abject poverty and underdevelopment. Debt cancellation is a justifiable poverty alleviation strategy. Poor countries can use the freed resources to improve health, education, HIV/AIDS programs, and basic infrastructure, while instituting governance reforms.