Pandemic debt: On the brink of a debt crisis

As the world copes with the health implications of COVID-19, the turnout of events has resulted into severe implications for the fiscal positions of various emerging and frontier economies. While dollar inflows from commodity exports and remittances have collapsed, the softening of local currencies have raised levels of indebtedness. Thus, emergency financing flows from International Financing Institutions (IFIs) have been crucial in aiding ailing economies. Nonetheless, the increase in emergency financing raises concerns over the debt levels of these countries and their ability to repay if macroeconomic conditions worsen, which adds to expensive commercial debts taken prior to the pandemic.

Announcement of debt-service postponements on sovereign obligations for poor member countries by the G-20 was necessary to reallocate limited FX from servicing debts to responding to pressing needs. 43 countries have benefitted from the Debt Service Suspension Initiative (DSSI) thus far as $5bn worth of debt service payments have been delayed. Amidst a gloomy outlook for commodity prices and coronavirus cases, there are calls for the Paris Club to extend debt relief programs beyond 2020.

In Sub Saharan Africa, COVID-19 is expected to worsen already vulnerable debt levels. 28 sub-Saharan African countries indicated their desire to benefit from the DSSI. In addition, 33 countries within the region received balance of payment support from the International Monetary Fund (IMF) under the Rapid Financing Instrument (RFI), Rapid Credit Facility (RCF) and other country-specific programs. Angola is on course to receive a $6.2bn debt relief over three years as part of a program spearheaded by the IMF.

Calls by the Chadian and Zambian authorities to postpone debt repayment to private creditors has heightened risks of further debt postponement and credit rating downgrades within the region. With the exception of Botswana and Morocco, other African countries are currently in the junk region. South Africa lost its 25-year investment grade status resulting in its exit from the FTSE World Government Bond Index in April due to deterioration in fiscal strength and structurally weak growth, which existed pre-pandemic. Angola’s rating was also downgraded to a triple C region due to increased government debt, reduced external financing flexibility and declining external liquidity as the oil-dependent nation is yet to recover from the oil price crash of 2014.

Over the years, African countries have embraced bilateral loans with China due to the non-existence of conditions, compared to multilateral financial institutions. There are fears that African countries could fall into a debt-diplomacy trap with China, considering the fact China holds 20% of Africa’s external debts and existence of legal clauses that grants the Chinese access to national assets upon default. There were reports of intended strategic takeovers of Kenyan seaports and Zambian mines by the Chinese over non-settlement of debts as earlier implemented in Sri Lanka before the pandemic. In addition, the Chinese allegedly excluded loans owed to some state-owned enterprises such as the Chinese Development Bank from granting reliefs under the DSSI. Nonetheless, the country opted to cancel zero-interest loans which were to mature in 2020, which interestingly comprises the smallest proportion of its loans to the continent.

Thus, there are fresh concerns over the sustainability of debt levels in Africa as payment deferrals could lead to further credit downgrades, and by extension, higher borrowing costs. The possibility of a second wave of the virus could further constrain fiscal position of African sovereigns and may likely cause debt overhangs. The gradual recovery in external demand could cushion these fiscal pressures, but is unlikely to completely absorb it. Historically, debt forgiveness has not translated into better debt management by beneficiaries, extension of debt reliefs would be imminent to nip a debt crisis in the bud as the world unites in its fight against COVID-19.

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