The COVID pandemic has had a profound negative impact on Africa’s sovereign debt situation. Currently, 22 countries are either in a debt crisis or at high risk of a debt crisis. This means that African governments are struggling to pay the debts they have incurred on behalf of their states. Mozambique and Zimbabwe, for example, are already in a debt crisis. Others at high risk are Malawi, Zambia and the Comoros.
This situation is likely to be exacerbated by the war between Russia and Ukraine. The conflict is driving up commodity prices, particularly food and gasoline. It also disrupts the supply chains of critical goods like fertilizers.
Countries’ ability to manage their debt is complicated by the changing composition of debt. You now owe more money to a wider range of creditors.
In 2020, sub-Saharan Africa had a total stock of external debt 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 , rose from about $119 billion to the US $258 billion.
In the past, official creditors of African countries were primarily the rich western states and multilateral institutions such as the World Bank and the International Monetary Fund. This group has now expanded to include China, India, Turkey and multilateral institutions such as the African Export-Import Bank and the New Development Bank.
In addition, the number of bonds issued by African governments on the international markets has tripled in the last 10 years. These bonds are held by a wide range of investors such as insurance companies, pension funds, hedge funds, investment banks and individuals.
In our new book, we look at the challenges these changes have created for the sovereign debt management of the 16 countries that make up the Southern African Development Community.
We hope the book will stimulate debate among academics, activists, policymakers and practitioners on how the Southern African development community should manage its debt. Five recommendations emerge from the article. These include the need for improved debt transparency and an approach to debt management that addresses a variety of factors beyond funding.
The book contains a series of essays originally presented in several virtual workshops in 2020. Participants sought to understand the debt challenges faced by countries in the Southern African Development Community. They also offered policy-oriented recommendations for dealing with them.
The book contains contributions from a multidisciplinary group of international experts as well as African researchers. In their contributions, they discuss the complexities of debt management and restructuring – in general and in the member states of the Southern African Development Community.
They are mindful of the impact of the COVID-19 pandemic on the debt situation, but also recognize that this is only one factor contributing to the region’s difficult debt situation. As such, they also focus on the broader domestic and international factors shaping debt management in the region.
In an effort to show a way forward, the contributing authors have addressed the following four themes:
The impact of structural changes in the global economy on the debt landscape of the Southern African Development Community. One example is the increasing importance of finance in the global economy.
The challenges of sovereign debt management and restructuring in the region;
The impact of the lack of transparency on the accumulation and use of government debt;
Options for incorporating human rights and social considerations into sovereign debt renegotiations and restructurings.
The contributors make five main recommendations:
The first concerns debt transparency. The recommendation is that countries in the region should adopt comprehensive debt data disclosure requirements and government borrowing practices that are transparent and participatory. The aim would be to facilitate accountability of relevant decision-makers.
Debt transparency is the cornerstone of debt management reform. Sovereign debtors should follow well-publicized, predictable, and binding legal procedures when entering into new financial commitments. In addition, they should disclose the amount and terms of their loans. This should include any precautions to increase the security of the loan. One example is resource-backed loans. With these loans, repayment is either made in natural resources or guaranteed by proceeds from the sale of the natural resource.
Sovereign debtors should disclose this information to their creditors, the multilateral financial institutions of which they are a member. They should also make the information publicly available through national platforms.
Good leadership. This includes strengthening national debt management policies to address governance issues.
Transparency alone does not guarantee responsible borrowing. Debt management frameworks and practices should conform to all principles of good governance. The list includes transparency, participation, accountability, reasoned decision-making and effective institutional arrangements.
Legal predictability. The aim is to strengthen contractual provisions in debt contracts.
Debt is a contractual relationship. It is therefore important for debtors and creditors to conclude contracts that are as comprehensive as possible. This means that contracts should share risks fairly between the parties. This includes, for example, who is better able and more willing to take risks. In addition, contracts should give the parties clear answers to questions that might arise between them.
This would require policymakers to provide their debt managers with guidance on the terms they can accept in contract negotiations.
Comparability of treatment during restructuring. This means that all creditors should participate in a sovereign debt restructuring on comparable terms if needed. Sovereign debtors of the Southern African Development Community can increase creditor confidence by offering comparable treatment to all creditors. This would give them peace of mind that any relief they grant will benefit the debtor rather than other creditors.
This should facilitate the debtor’s efforts to reach an agreement with all of its creditors.
A comprehensive approach. National debt is not just a financial problem. It affects the social, political, economic, cultural and ecological situation in the debtor country. It requires a comprehensive approach to debt restructuring that involves all relevant stakeholders. These include citizens of debtor countries, multilateral creditors, bilateral creditors and private creditors such as bondholders, institutional investors of various types and commercial banks.
It also requires that any necessary issues be addressed. These range from financial sustainability to the social, human rights and environmental impacts of restructuring.
The sovereign debtor and its creditors must therefore seek to work effectively with each of these actors and with all of these issues.
These recommendations show that more innovative approaches to sovereign debt are needed. One possible approach is the DOVE (Debts of Vulnerable Economies) Fund. It will use the funds raised from all stakeholders in sovereign debt to buy the bonds of distressed African debtors and will commit to only agreeing to a debt restructuring that conforms to a set of published principles based on international standards that provide a comprehensive approach to debt restructuring the debt support restructuring.