Eighteen African and European leaders, stating that “only a global victory that fully includes Africa can bring this pandemic to an end” (https://www.ft.com/content/8f76a4c6-7d7a-11ea-82f6-150830b3b99a), are calling for a $100 billion economic support package for Africa. They are also supporting an “immediate moratorium on all bilateral and multilateral debt payments, both public and private” until the pandemic has passed.
While these actions would certainly help Africa, they would only be a partial solution to Africa’s current debt challenges. African countries owe about $130bn in long-term debt to private creditors. This is about one third of Africa’s total debt but it accounts for about 55% of the annual interest payments owed by Africa to its creditors.
Most of this debt is in the form of bonds. Their price has fallen on financial markets. For example, Angolan and Zambian debts are trading at around 35c on the dollar.
Given that the IMF is projecting that the global economy will shrink about 3% this year and that the WTO predicts that global trade in 2020 could decline by between 13 and 30%, it is likely that the price of African bonds will remain depressed. Unfortunately, these discounted prices do not affect Africa’s debt service obligations.
This creates a situation ripe for exploitation by speculators. They can buy the cheap bonds with the expectation that they will be able to demand full repayment from the debtor governments — and to sue any debtor that demurs. They have earned exorbitant profits with this strategy in the past. They have used it against approximately 12 African countries and a number of other countries around the world, most famously Argentina.
Some states have passed laws to discourage these vultures. But they are adept at using their debt holdings to browbeat debtor countries into prioritising their debt over other obligations, including to their own citizens.
To mitigate the risk of speculation, I have proposed (https://theconversation.com/the-big-asks-africa-needs-to-table-with-the-imf-and-world-bank-heres-the-list-135768) that the international community should create a “Debts of Vulnerable Economies Fund” (a “DOVE” fund) to help African countries deal with their private sector debt. This fund, managed by an independent board representing all stakeholders, could be financed by governments, foundations, financial institutions, companies and individuals. It would do two things.
First, it would buy the debt of qualifying African states on financial markets at the market price (i.e. with the current steep discounts) and promise to implement a debt standstill on the debt it holds. It would also commit that once the global economy begins to grow again it will work with African debtors to ensure that the debt is not an undue burden on their efforts to rebuild their economies. These actions and their possible impact on the price of the debt should help deter the speculators.
Second, the DOVE fund would advocate that all other private sector creditors commit to a debt standstill for as long as the crisis lasts and, on a case by case basis, to consider renegotiating the debt after the crisis ends. It should remind them that leading financial institutions, such as Blackrock, and business groupings, such as the US Business Roundtable have recently argued that companies, including financial institutions, should serve the interests of all their stakeholders and should not prioritise the interests of their shareholders. Their stakeholders include their borrowers and those innocent third parties – such as citizens – affected by their actions and decisions.
Moreover, many of the financial institutions that hold African country debt have environmental, social and human rights policies that require them to comply with all applicable international standards in their operations.
This crisis is an opportunity for them to show that these public statements are not mere rhetoric but represent a meaningful change in their way of doing business.
Danny Bradlow is SARCHI Professor of International Development Law and African Economic Relations, Centre for Human Rights, University of Pretoria, South Africa, Email: email@example.com