Debt distress in Africa

The COVID pandemic has had a profoundly negative impact on Africa’s sovereign debt situation. Currently, 22 countries are either in debt distress or at high risk of debt distress. This means that African governments are struggling to pay the debts that they incurred on behalf of their states. For example, Mozambique and Zimbabwe are already in debt distress. Others at high risk include Malawi, Zambia and Comoros.

This situation is likely to be exacerbated by the war between Russia and Ukraine. The conflict is causing commodity prices, particularly food and gasoline, to rise. It is also disrupting the supply chains of critical goods like fertilisers.

The ability of countries to manage their debt is complicated by the changing composition of the debt. They now owe more money to a broader range of creditors.

In 2020, sub-Saharan Africa had a total external debt stock of US$702.4 billion, compared to US$380.9 billion in 2012. The amount owed to official creditors, including multilateral lenders, governments and government agencies, increased from about US$119 billion to US$258 billion.

In the past, official creditors of African countries were primarily the rich Western states and multilateral institutions like the World Bank and the International Monetary Fund. This group has now expanded to include China, India, Turkey and multilateral institutions like the African Export-Import Bank and the New Development Bank.

In addition, the amount of bonds issued by African states on international markets has tripled in the last 10 years. These bonds are held by a broad range of investors such as insurance companies, pension funds, hedge funds, investment banks and individuals.

In our new book we address the challenges that these changes have created for sovereign debt management for the 16 countries in the Southern Africa Development Community.

We hope the book will stimulate debate among academics, activists, policymakers and practitioners on how Southern Africa Development Community should manage its debt. Five recommendations emerge from the contribution. These include the need for enhanced debt transparency and an approach to debt management that takes into account a host of factors beyond just finance.

The landscape

The book contains a series of essays initially presented in several virtual workshops held in 2020. The participants sought to understand the debt challenges facing countries in the Southern Africa Development Community. They also offered policy-oriented recommendations for dealing with them.

The book includes contributions from a multi-disciplinary group of international experts as well as African researchers. In their contributions they discuss the complexities of debt management and restructuring – generally and in the Southern Africa Development Community member states.

They pay attention to the impact of the COVID-19 pandemic on the debt situation but also recognise that it is only one factor contributing to the difficult debt situation in the region. Thus, they also focus on the broader domestic and international factors that are shaping debt management in the region.

In an effort to chart a way forward, the contributing authors addressed the following four themes:

The impact of structural changes in the global economy on the Southern Africa Development Community debt landscape. An example is the increasing importance of finance in the global economy.

The challenges of sovereign debt management and restructuring in the region;

The implications of the lack of transparency on the accumulation and use of sovereign debt;

Options for incorporating human rights and social considerations into sovereign debt renegotiations and restructuring.

Contributors make five key recommendations:

The first concerns debt transparency. The recommendation is that countries in the region should adopt comprehensive debt data disclosure requirements and state borrowing procedures that are transparent and participatory. The aim would be to facilitate holding relevant decision makers accountable.

Debt transparency is the cornerstone of reforming debt management. Sovereign debtors should follow well publicised, predictable and binding legal procedures in incurring new financial obligations. In addition, they should disclose the amount and contractual terms of their loans. This should include any arrangements for enhancing the security of the loan. An example is resource-backed loans. In these loans repayment is either made in natural resources or is guaranteed by the revenues generated by the sale of the natural resource.

Sovereign debtors should disclose this information to their creditors, the multilateral financial institutions of which they are member states. They should also make the information publicly available through national platforms.

Good governance. This involves strengthening national debt management policies to deal with issues of governance.

Transparency on its own won’t ensure responsible borrowing. Debt management frameworks and practices should conform to all the principles of good governance. The list includes transparency, participation, accountability, reasoned decision-making and effective institutional arrangements.

Legal predictability. This involves strengthening contractual provisions in debt contracts.

Debt is a contractual relationship. It is therefore important – for debtors and creditors – to enter into contracts that are as comprehensive as possible. This means contracts should fairly allocate risks between the parties. This would include, for example, accommodating who is better able and more willing to accept the risks. In addition, contracts should provide the parties with clear answers to issues that could arise between them.

This would require policymakers providing guidance to their debt managers on the terms and conditions they can accept in contractual negotiations.

Comparability of treatment during restructuring. This means that, when needed, all creditors should participate on comparable terms in any sovereign debt restructuring. Southern Africa Development Community sovereign debtors can improve creditor confidence by offering all creditors comparable treatment. This would give them comfort that any relief they provided would benefit the debtor rather than other creditors.

This should facilitate the debtor’s efforts to reach agreement with all its creditors.

A comprehensive approach. Sovereign debt is not just a financial issue. It has implications for the social, political, economic, cultural and environmental situation in the debtor country. It requires a comprehensive approach to debt restructuring that incorporates all relevant stakeholders. This includes citizens of the debtor states, multilateral creditors, bilateral creditors, and private creditors such as bondholders, institutional investors of various sorts and commercial banks.

It also requires that all necessary issues are addressed. These range from financial sustainability to the social, human rights and environmental impacts of the restructuring.

The sovereign debtor and its creditors must therefore seek to effectively engage with each of these actors and with all of these issues.

These recommendations show that there is a need for more innovative approaches to sovereign debt. One possible approach is the DOVE (Debts of Vulnerable Economies) Fund. It will use funds raised from all the stakeholders in sovereign debt to buy the bonds of African debtors in distress and commit to only agree to a debt restructuring that complies with a set of published principles based on international standards that support a comprehensive approach to the debt restructuring.

by Danny Bradlow & Magalie Masamba

(Danny is SARCHI Professor of International Development Law and African Economic Relations, University of Pretoria; Magalie is Post-doctoral Fellow, Centre for Human Rights, University of Pretoria)