The era of loose monetary policy and low inflation – with the cheap money it brought – is over. Around the globe, interest rates are rapidly rising, which in turn increases the cost of borrowing by governments.
Africa doubled borrowing in the last decade. Now, its ability to repay – and to continue accessing finance for development and climate action – is being hampered by the surge in interest costs and in oil and food prices.
If the gains of the last decade are not to be lost, a new and more effective approach to debt restructuring is urgently needed.
Global capital market exclusion
Since 2010, public debt has doubled in Africa. It reached 65% of GDP in 2022 compared to 32.7% in 2010.
Creditors have diversified. By 2022, Paris Club members and non-members (notably China) made up 37% and 17% of total external debt respectively. But the most notable change was witnessed in Eurobonds. By 2022, they reached $140 billion (or 30%) of the region’s external debt – all of which has been issued since 2007 (with the exception of the Seychelles and South Africa).
Taking on this debt looked like a smart and sustainable choice for most countries until interest rates started to rise in 2020.
Although the pandemic strained sustainability, the G20’s Debt Service Suspension Initiative led by the World Bank and the International Monetary Fund (IMF) assisted countries in managing their fiscal situation.
However, the war in Ukraine in 2022 has delivered an economic shock. Surging energy and food prices have led to sharply increasing interest rates as, globally, central banks struggle to contain inflation.
For Africa, this means that the cost of borrowing is rapidly increasing. International markets are already giving a flavour of what this will mean. In 2022, all but two countries (Nigeria and South Africa) have been unable to issue Eurobonds. Yields in secondary markets – which indicate what refinancing costs will be – have approximately doubled, with an average increase of 600 basis points (6%) and some countries seeing increases of up to 1800 basis points (18%).
With $140 billion of Eurobonds and an average maturity of 10 years, this increase of 6% in interest costs amounts to $8.4 billion annually, or $84 billion in total over the life of the bonds. This represents 0.3% of Africa’s annual GDP and, given that Eurobonds average 30% of total debt, the overall cost of increased debt servicing will be a painful 1% of GDP each year.
Take Ghana as an example. Before the pandemic, the country’s heavy borrowing included $13.2 billion in Eurobonds – representing 17% of its GDP. International investors piled in, with a 2020 Eurobond issue being five times oversubscribed. By August 2022, however, inflation was at 31% and the Ghanian cedi had lost 36% of its value. The rating agencies Moody’s and Fitch downgraded its Eurobonds to ‘junk’ – effectively shutting Ghana out of international credit markets. The Central Bank responded by hiking interest rates by more than 850 basis points (8.5%) between November 2021 and August 2022, resulting in Ghana requesting an IMF bailout (still pending at the time of writing). Yields on its Eurobonds are now over 21%.
Domestic government debt in Africa is also a concern. It has increased from a regional average of 15% of GDP in 2010 to 30% in 2020 and now makes up an average of 20% of banking sector assets and 200% of their regulatory capital. However, as this debt is typically denominated in local currency, this has avoided foreign exchange risks. With many currencies sharply devaluing, this is good news. But it also means that domestic banks are exposed to sovereign credit risk that could easily lead to domestic financial crises. Furthermore, as this debt is short-term – often repayable in less than a year – the cost of refinancing will soon increase sharply as domestic central banks raise interest rates.
Of course, there are ‘winners’ from the oil and gas price shock. Commodity exporters have enjoyed a windfall from fossil fuel revenues, averaging 2.1% of GDP in the first half of 2022. Countries with gas reserves such as Mozambique, Tanzania and Uganda anticipate a boom in natural gas exports. Angola has had its credit rating upgraded, while Nigeria's Bank of Industry and Federal Government issued Eurobonds in 2022 at only moderately increased interest rates.
For commodity importers, however, fiscal balances now average -6.1% of GDP and have led to credit downgrades and collapsing currencies. External debt servicing costs have surged from an average of 4% of exports before the pandemic to 11% by mid-2022.
Today, seven countries in the region have fallen into debt distress and a further 15 are at high risk of distress. Some of the leading economies, such as Kenya, are now on the ‘high risk’ list.
An effective solution?
Countries at medium or high risk of debt distress require additional financial support. The $23 billion of IMF special drawing rights (SDRs) issued in 2021 and a G20 pledge of a further $100 billion in SDRs to vulnerable countries are providing critical support. But more is needed – and on a medium-term basis, not a short-term one.
In addition, those countries that are already in, or are very close to, debt distress need help with debt restructuring.
But the diversity of creditors means comprehensive debt restructuring is complex. Private investors are focused on self-interest. In countries where Chinese lending is concentrated – such as Angola, Ethiopia, Kenya and Zambia, which together account for half of China's total exposure in the region – China’s negotiating stance is unpredictable.
The G20 Common Framework, a forum to negotiate debt restructuring on a ‘comparability of treatment’ principle for all creditors, was a welcome initiative in 2020. But to date, only three countries have applied for debt restructuring under it (Chad, Ethiopia and Zambia) and none have completed the process. Private creditors have been unenthusiastic because they are not included in the negotiations.
Zambia demonstrates these challenges. After borrowing heavily for infrastructure development over the past decade, debts rose to 131% of GDP during the pandemic and in 2020 the country defaulted on $17 billion of external debt, including $3 billion in Eurobonds. In February 2021, it requested debt restructuring under the Common Framework. But its debts are held by no fewer than 44 creditors: multiple Chinese lenders (China International Development Cooperation Agency, Eximbank of China and China Development Bank) hold $14 billion (or 33% of the total), while $3 billion in Eurobonds are in the hands of multiple private investors.
It took until December 2021 for the IMF to agree a $1.4 billion credit facility for Zambia, while China only joined the Common Framework committee in July 2022. By September 2022 – more than a year and a half after Common Framework help was requested – very little had been achieved other than a vague ‘statement’ in July 2022 from the Creditor Committee. Meanwhile, there has been widespread dissatisfaction among bondholders relating to the lack of representation in the discussions.
Better and faster approaches are needed. China ought to be a more explicit part of the Common Framework’s leadership. Furthermore, private investors should be at the negotiating table and their comparability of treatment needs to be defined and made effective. Interim financial support from official creditors and a further debt servicing mortarium are required (although they should be linked to outcomes to avoid any ‘moral hazard’ that might slow agreements).
Basics are also important. Some countries in debt distress, such as the Republic of the Congo, Mozambique and Zimbabwe, suffer from chronic public financial mismanagement and corruption. In others, such as Chad, Somalia and Sudan, there is conflict. It is vital not to lose sight of addressing these fundamental problems.
Overall, the situation is critical. Allowing another debt crisis will benefit no-one and will threaten a reversal of progress on sustainable development goals. The international community must act urgently to prevent this outcome.