Covid awakens 'old debt spirits' in Africa

The region account for the largest part of the new loans amid low revenue collection

In Summary
  • Some like Kenya are now spending close to 70 per cent of their domestic revenue to pay debt and it's worsening by the year. 
  • This in turn saw the low-income countries debt hit a record $860 billion.

When most Sub-Saharan Africa countries attained independence in the late 50s and mid-60s, they embarked on a debt binge, hoping to grow but the reverse is taking shape. 

According to the latest report by Brookings, chickens are coming home to roost and the debt situation has been worsened.

Some like Kenya are now spending close to 70 per cent of their domestic revenue to pay debt and it's worsening by the year. 

According to World Bank, the debt burden of the world’s low-income countries rose to Sh$860 billion(Sh95.3trillion) in 2020 as they subscribed to massive fiscal stimulus packages.

Sub-Saharan countries account for the largest part of the new loans amid low revenue collection as businesses struggle to recover from the Covid-19 crisis. 

But when did the rains started beating the continent?

According to Brookings, the events that led to Heavily Indebted Poor Countries (HIPC) and the Multilateral Debt Relief Initiative (MDRI) started in the 1960s from a public spending spree by recently independent countries to stimulate their economies through rapid investment in industry and infrastructure projects.

Commodity booms and heavy use of external debt supported this spending as policy leaders relied on future export earnings and economic growth to improve the capacity to service the debt.

Notably, those countries did not reduce expenditures during negative commodity shocks and instead took on more loans.

As a result, the external debt-to-gross national income (GNI) ratio for the continent rose from 49 percent in 1980 to 104 percent in 1987.

Although the World Bank’s Structural Adjustment Program attempted to tackle the problems by reducing fiscal deficits through expenditure cuts,  these austerity measures have had severe, adverse impacts on social spending, and resulted in large current account deficits, astronomical inflation, and depressed currencies.

This situation led the World Bank and the IMF to establish the HIPC initiative in 1996 to provide debt relief and reduce debt service payments of up to 80 percent for eligible countries.

 Under HIPC and MDRI, 36 countries, including 30 African ones, reached the completion point resulting in debt relief of $99 billion by the end of 2017.

Between 1999 and 2008 alone, HIPC and MDRI reduced the external debt-to-GNI ratio for the region from 119 per cent to 45 per cent.

Is Africa heading back to the HIPC era?

Although Brookings is not sure about this, it states that the present composition of debt in the region is worrisome.

The research agency says the drivers of the present rising debt situation are similar to, but not the same as, that of the HIPC era.

For instance, in the wake of the 2007-2008 global financial crisis, governments deployed countercyclical spending to compensate for depressed private sector spending.

Another key driver was the huge rise in public expenditure on infrastructure—an effort to close the huge infrastructure gap.

Of greatest magnitude was the 2014 negative commodity price shock, which dramatically reduced government revenues.

According to the International Debt Statistics 2022 report, the countries borrowed largely to address the Covid-19  health emergency and also cushion the impact of the pandemic on the poor.

Despite the necessity of borrowing, the loans have in turn exacerbated the vulnerable debt positions of the countries.

The report noted that even prior to the pandemic, most low- and middle-income countries were in a vulnerable position, with slowing economic growth and public and external debt at elevated levels.

The pandemic therefore just accelerated this, with the report noting that the external debt stocks of low- and middle-income countries combined rose 5.3 per cent in 2020 to $8.7 trillion(Sh964trilion).

According to the report, an encompassing approach to managing debt is needed to help the low- and middle-income countries especially in Sub-Saharan Africa assess and curtail risks and achieve sustainable debt levels.

“We need a comprehensive approach to the debt problem, including debt reduction, swifter restructuring and improved transparency,” said World Bank Group President David Malpass.

The report added that the deterioration in debt indicators was widespread and impacted countries in all regions.

For instance, bond issuance by low- and middle-income countries, excluding China, fell 11 per cent in 2020 to $239 billion.

Most of the downturn was accounted for by countries in Sub-Saharan Africa, which fell almost 74 per cent in 2020 to $6.5 billion.

According to the report,t several countries in Africa, including Côte d’Ivoire, Gabon, Ghana Kenya, Nigeria, and South Africa, had signaled an intent to tap international markets in 2020, but only Gabon and Ghana managed to issue bonds prior to the pandemic.

“After the global lockdown in March 2020, the market effectively closed to Sub-Saharan African borrowers with investor reluctance in regard to the region heightened by the worsening outlook for growth and public finance caused by the pandemic,” said the report.

Across all low- and middle-income countries, the rise in external indebtedness outpaced Gross National Income (GNI) and export growth, the report noted.

Low- and middle-income countries’ external debt-to-GNI ratio (excluding China) rose to 42 per cent in 2020 from 37 per cent in 2019 while their debt-to-export ratio increased to 154 per cent in 2020 from 126% in 2019.

Overall, in 2020, net inflows from multilateral creditors to low- and middle-income countries rose to $117 billion, the highest level in a decade.

Net debt inflows of external public debt to low-income countries rose 25 per cent to $71 billion, also the highest level in a decade.

Multilateral creditors, including the IMF, provided $42 billion in net inflows while bilateral creditors accounted for an additional $10 billion.

“Economies across the globe face a daunting challenge posed by high and rapidly rising debt levels,” said Carmen Reinhart, Senior Vice President and Chief Economist of the World Bank Group.

“Policymakers need to prepare for the possibility of debt distress when financial market conditions turn less benign, particularly in emerging market and developing economies.”