Debt Distress in Africa: The Way Forward

Debt distress in Africa: biggest problems, and ways forward

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 raising commodity prices, particularly food and gasoline, and disrupting the supply chains of critical goods like fertilizers.

The changing composition of debt complicates countries' ability to manage their debt. They now owe more money to a broader range of creditors.

In 2020, sub-Saharan Africa had a total external debt stock of U.S. $702.4 billion, compared to U.S. $380.9 billion in 2012. The amount owed to official creditors, including multilateral lenders, governments, and government agencies, increased from about U.S. $119 billion to U.S. $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 expanded to include China, India, Turkey, and multilateral institutions like the African Export-Import Bank and the New Development Bank.

In addition, the number of bonds issued by African states on international markets has tripled in the last ten 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 the 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 finance.

The Landscape

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

The book includes contributions from a multidisciplinary group of international experts and 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 debt but recognize that it is only one factor contributing to the region's difficult debt situation. Thus, they also focus on the broader domestic and international factors shaping debt management in the region.

To chart a way forward, the contributing authors addressed the following four themes:

1. 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.
   
   
2. The challenges of sovereign debt management and restructuring in the region;
   
   
3. The implications of the lack of transparency on the accumulation and use of sovereign debt;
   
   
4. Options for incorporating human rights and social considerations into sovereign debt renegotiations and restructuring.

Contributors make five key recommendations:

1. The first concerns debt transparency. The recommendation is that countries in the region adopt comprehensive debt data disclosure requirements and state transparent and participatory borrowing procedures. This would facilitate holding relevant decision-makers accountable.
   
   Debt transparency is the cornerstone of reforming debt management. Sovereign debtors should follow well-publicized, predictable, and binding legal procedures when incurring new financial obligations. In addition, they should disclose the amount and contractual terms of their loans, including any arrangements to enhance the security of the loan. An example is resource-backed loans. In these loans, repayment is either made using 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.
   
   
2. Good governance. This involves strengthening national debt management policies to deal with issues of governance.
   
   Transparency alone will not ensure responsible borrowing. Debt management frameworks and practices should conform to all the principles of good governance, including transparency, participation, accountability, reasoned decision-making, and effective institutional arrangements.
   
   
3. Legal predictability. This involves strengthening contractual provisions in debt contracts.
   
   Debt is a contractual relationship. Therefore, it is 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 those who are 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 to guide their debt managers on the terms and conditions they can accept in contractual negotiations.
   
   
4. 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 comfort them that any relief they provided would benefit the debtor rather than other creditors.
   
   This should facilitate the debtor's efforts to agree with all its creditors.
   
   
5. 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 be addressed. These range from financial sustainability to the restructuring's social, human rights, and environmental impacts.

Therefore, the sovereign debtor and its creditors must seek to effectively engage with each of these actors and with all of these issues.

These recommendations show 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 sovereign debt stakeholders to buy the bonds of African debtors in distress and commit to only agreeing to a debt restructuring that complies with a set of published principles based on international standards that support a comprehensive approach to debt restructuring.

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Source: Danny Bradlow and Magalie Masamba, https://theconversation.com/debt-distress-in-africa-biggest-problems-and-ways-forward-182716
This work is licensed under a Creative Commons Attribution-NoDerivatives 4.0 License.