African countries face growing risk of default, AfDB warns

There is an increased risk of default on the African continent due to the COVID-19 pandemic, which has increased the debt burden while exacerbating poverty and deepening inequalities, the African Development Bank has warned.

“The deep scars of the pandemic are really there and will take time to heal,” said bank president Akinwumi Adesina. Speaking at the public opening event of the bank’s annual meetings on Wednesday, he sternly warned that the continent must avoid another “lost decade” for growth and development.

“If there is no debt relief and restructuring, many other countries will fall into debt distress,” he said.

Africa’s average debt-to-gross domestic product ratio is expected increase from 60% in 2019 to 70%, according to the AfDB, and this figure could increase further. The International Monetary Fund estimates that African countries will need $ 285 billion more in funding until 2025 to deal with the fallout from the pandemic.

Speaking to Devex ahead of bank meetings, Kevin Urama, AfDB Senior Director, said there are “risks” of default and the pace of the COVID-19 vaccine rollout, which has taken of the delay so far, will determine the way forward for the continent.

“We do not expect that by the end of this year African countries will resume their development,” he said. A recovery from last year’s pandemic lows will not be enough to justify lifting temporary relief measures, he added.

Last year, rich countries agreed to the Debt Service Suspension Initiative, which allows the world’s lowest-income countries to delay paying their debt. So far this has led to multibillion dollar relief for these countries, according to the World Bank. Of the 73 eligible countries, more than 40 governments received temporary relief from their bilateral loans to members of the G-20 group of countries.

Importantly, the initiative does not include private creditors, who represent an increasing proportion of loans to African countries. Commercial creditors now represent twice as much of the continent’s total external debt as in 2000, according to the ADB.

The DSSI has been extended – twice – until the end of this year. But the G-20 reported in April that another delay is not in the cards. This could lead to a sharp increase in reimbursements over the next few years.

“We could face a much more difficult situation,” David McNair, executive director of global policies for the ONE campaign, told Devex, warning that the debt burden would delay efforts to eradicate poverty.

“We need emergency relief. We need a lot more ambition in terms of putting in place a fiscal stimulus plan for Africa, ”said McNair.

He noted that China is an increasingly important creditor in Africa and called on Beijing to step up its own relief efforts. The lack of transparency on Chinese loans is also a problem.

When Zambia became the first African country to default during the pandemic, Western investors feared that the bailout funds could be used refund china, causing the reluctance of other creditors and bondholders to enter into a relief agreement.

The debt crisis is not limited to the poorest countries. Middle-income countries also face stress as they do not have access to the cheapest loans from development lenders, which increases the cost of their borrowing.

Rising borrowing costs have triggered a “vicious cycle,” Urama said. “The higher the cost of the loan, the higher the risk of default. And once a country is more at risk of default, its credit rating goes down and the price of debt goes up again.

Rating agencies also tend to to fear to signs of debt restructuring, even when it is part of a globally coordinated mechanism. Ethiopia has been affected by downgrades of rating agencies this year, when he requested relief from the G20 Common Framework for Debt Treatments Beyond DSSI.

McNair of the ONE campaign said this means countries are “punished” for using the specially designed international system.

One solution could be in the form of special assets. At Friday, the IMF board is to discuss issuing special drawing rights, which would bolster member states’ reserves, giving them more firepower to deal with the pandemic. Some $ 650 billion in SDRs could be issued, although only a fraction goes to low-income countries, leaving them short of targets.

African officials, including those at AfDB meetings, and anti-poverty activists are calling on rich countries to transfer their SDRs to countries most in need of the cushion.

The idea is gaining ground, with France recently pushed rich countries to agree to participate and allocate $ 100 billion to Africa.

The rating agency S&P Global has mentionned that if rich countries invest and allocate 42% of their SDRs, the reserves of 44 low-income countries it monitors will reach adequate levels.

Longer term, the AfDB says African countries need systemic reforms to strengthen their tax base, improve infrastructure, end corruption and make better use of their debt. These persistent problems plagued many countries even before the pandemic.

“Unless there is good economic governance, debt relief may not lead to growth,” Adesina said.