Africa: The pandemic’s debt legacy

Money begets money. That is the logical justification for debt accumulation. The pursuit of economic prosperity or at least survival amidst limited economic growth explains why countries borrow. Debt is considered a stimulant – borrow, invest in productive activities, and reap the benefits of growth. However, as countries emerge from the troughs of the pandemic-induced spending spree, an enormous debt overhang threatens the economic health of countries for years to come.

The International Debt Statistics report recently published by the World Bank report underscored the significant increase in debt levels across all geographical regions in 2020. The report which covered data from 123 low and middle-income countries showed that net financial (debt and equity) flows to low-and middle-income countries fell for the second consecutive year in 2020 to $909mn, with China accounting for over half.

Over the past decade, almost 60% of net aggregate financial flows to low- and middle-income countries from external creditors and investors have gone to China. China has become not only low- and middle-income countries’ largest borrower, but also the group’s largest creditor as the country’s rapid economic growth over the past two decades has propelled overseas lending. China extends loans to low- and middle-income countries on concessional and non-concessional terms.

Many LDCs have become increasingly dependent on non-concessional loans extended by Chinese policy banks – the China Development Bank, and the Agricultural Development Bank of China – through bond issuance in the domestic (CIBM) and international capital markets. Low- and middle-income countries’ combined debt to China was $170bn at the end-2020 – more than three times the comparable level in 2011 -, just shy of $177bn owed to the IDA.

Most of the debt owed to China relates to large infrastructure projects and operations in the extractive industries. Countries in Sub-Saharan Africa accounted for 45% of end-2020 obligations to China. The situation is worsened by concerns that the true size of indebtedness to China remains is questionable in some countries, due to debt transparency problems. Cases of hidden debt in countries like Mozambique, DR Congo, and Zambia, further aggravate the debt crisis facing these countries.

Debt sustainability is out the window, gloomy days lay ahead post-pandemic as a debt crisis looms, and we may not know the true extent of debt burdens due to transparency concerns. The scheduled expiration of the DSSI debt service suspension period at the end of December 2021 increases the urgency for countries to promptly manage their debt levels. However, despite the grim scenario, all hope is not lost for LDCs that rely heavily on debt to sustain the economy. Great economies have been built on debt – case in point, the USA and China. But structural bottlenecks that inhibit the productive use of debt must be eliminated in the short run.

Going forward, strong debt management strategies must be developed and implemented to achieve long-term debt sustainability, as the world grapples with multiple waves of the virus and debt levels remain bloated. Comprehensive, accurate, and clear data are the cornerstone of result-bearing economic policies. As such, holistic data is required to shape the solutions that would taper debt-induced fiscal pressures in the coming years. Transparency scores countries some goodwill points in the international market, improving investors’ trust in the administration and management of funds.