The issue of debt restructuring needs to be assessed, both in terms of its feasibility and the fiscal space thus freed up, in a context of economic slowdown and depletion of funding sources.
Given the relatively large share that debt servicing represents in the States’ national budget, a total debt relief would free up much-needed resources to be devoted towards containing the Covid-19 pandemic and the ensuing decline in economic activity. However, it should be noted that the indebtedness of African countries varies widely: in the case of certain countries the debts have already exceeded the Gross Domestic Product, while others have better managed their level of indebtedness.
The level of improvement in fiscal space will depend mainly on two parameters:
Firstly, the duration of the relief. If it is for a duration of one year, the fiscal room for manoeuvre would increase by the debt service amount. If the duration is extended, the room for manoeuvre would multiply accordingly. Under the current arrangement, the duration considered by the donors is one year.
Secondly, the share of the debt that is covered. Under the current arrangement, private debt is not covered. This implies that the room for manoeuvre gained by the States would be reduced to the bi/multilateral debt service amount alone, whereas private debt has increased considerably in recent years. On average, the sub-Saharan African countries are 40% indebted to private donors, albeit widely varied across countries.
However, on 30 April 2020 the Paris Club and the Institute of International Finance, a grouping of private creditors, organised a virtual meeting to discuss a debt service suspension initiative (ISSD/DSSI). Despite certain reservations, the private creditors supported the initiative. The ISSD aims to grant moratoria to borrowers who request them. It is encouraging to note that China, which holds 40% of Africa's debt, had declared its intent to join the bi/multilateral financial institutions in this effort.
While a moratorium on private debt would be a huge breath of relief for our States, its implementation, though likely, is not guaranteed. Moreover, the costs to African economies would have to be assessed. An important cost to be considered is linked to the financial rating of our economies. A credit rating agency is a body responsible for assessing the risk of non-repayment of debt or loan by a government, company or local authority. There are three major credit rating agencies in the world, namely Standard and Poor's (S&P Global), Moody's, and Fitch. The reaction of S&P Global Rating to the concerns of private creditors of African States speaks volumes. Out of the 22 States assessed in Africa, 19 are classified in the speculative category (BB+ and below) and four of them are in the CCC category, i.e. extremely vulnerable to changes in the business environment and the economic situation marked by the Covid effect.
In detail: The countries whose debts do not pose any risk in the short term are Botswana (BBB+), Morocco (BBB-) and the District of St. Helena (BBB-); the countries whose debts pose less risk in the short term owing to the debt strategy in place (multilateral creditors 31%, bilateral creditors 30% and private creditors 39%) are South Africa (BB), Senegal, Côte d'Ivoire, Rwanda, Benin and Kenya (B+) ; Burkina Faso, Togo, Cape Verde, Cameroon, Egypt, Ethiopia, Ghana and Uganda (B); Congo Brazzaville and Nigeria (B-); and countries whose debts pose a risk and concern to all donors are Angola, Mozambique, Zambia and DR Congo (CCC).
In summary, whatever the scenario that will arise in relation to debt relief for African States, the risk is high and shall invariably affect their international debt capacity, in the medium/long term. This would further reduce their fiscal space, which has already suffered severe dent. In order to be able to finance the post-Covid recovery, in a probable context of global recession, the African States need external debt relief.
Cheikh Ahmed Bamba Diagne is the Scientific Director of the Economic and Monetary Research Laboratory (LAREM), Université Cheikh Anta Diop de Dakar.