The COVID pandemic has had a profoundly negative impact on Africa’s sovereign debt situation. Currently, 22 countries are either in debt distress or at high risk of debt distress. This means that African governments are struggling to pay the debts they have incurred on behalf of their states. For example, Mozambique and Zimbabwe are already over-indebted. Other high-risk countries are Malawi, Zambia and Comoros.
This situation risks being exacerbated by the war between Russia and Ukraine. The conflict is driving up the prices of basic commodities, especially food and gasoline. It also disrupts supply chains for essential goods like fertilizers.
The ability of countries to manage their debt is complicated by the changing composition of debt. They now owe more money to a wider range of creditors.
In 2020, Sub-Saharan Africa had a total stock of external debt of $702.4 billion, up from $380.9 billion in 2012. The amount owed to official creditors, including multilateral lenders, governments and agencies government, went from about $119 billion to $258 billion.
In the past, the official creditors of African countries were mainly wealthy 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 amount of bonds issued by African states in international markets has tripled over the past 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 address the challenges these changes have created for sovereign debt management in the 16 countries of the Southern African Development Community.
We hope the book will stimulate debate among scholars, activists, policy makers and practitioners on how the Southern African Development Community should manage its debt. Five recommendations emerge from the contribution. These include the need for increased debt transparency and an approach to debt management that considers a host of factors beyond simple finance.
The book contains a series of essays originally presented in several virtual workshops held in 2020. Participants sought to understand the debt challenges facing countries in the Southern African Development Community. They also offered policy-oriented recommendations to address them.
The book includes contributions from a multidisciplinary group of international experts as well as African scholars. In their contributions, they discuss the complexities of debt management and debt restructuring – in general and in member states of the Southern African Development Community.
They pay attention to the impact of the COVID-19 pandemic on the debt situation, but also recognize that this is only one contributing factor to the difficult debt situation in the region. Thus, they also focus on the broader domestic and international factors that shape debt management in the region.
In an effort to chart the way forward, the contributing authors addressed the following four themes:
The impact of structural changes in the global economy on the debt landscape of the Southern African Development Community. The growing importance of finance in the global economy is one example.
The challenges of sovereign debt management and restructuring in the region;
The implications of the lack of transparency on the accumulation and use of sovereign debt;
Options for integrating human rights and social considerations into sovereign debt renegotiations and restructuring.
Contributors make five key recommendations:
The first concerns debt transparency. The recommendation is that countries in the region adopt comprehensive debt data disclosure requirements and government borrowing procedures that are transparent and participatory. The objective would be to facilitate the accountability of the decision-makers concerned.
Debt transparency is the cornerstone of debt management reform. Sovereign debtors must follow well-known, predictable and binding legal procedures to incur new financial obligations. In addition, they must disclose the amount and contractual terms of their loans. This should include any provisions to enhance the security of the loan. One example is resource-backed loans. In these loans, the repayment is either made in natural resources or guaranteed by the income generated by the sale of the natural resource.
Sovereign debtors should disclose this information to their creditors, the multilateral financial institutions of which they are member states. They should also make information publicly available through national platforms.
Good governance. This involves strengthening national debt management policies to address governance issues.
Transparency alone will not guarantee responsible borrowing. Debt management frameworks and practices should comply with all principles of good governance. The list includes transparency, participation, accountability, reasoned decision-making and effective institutional arrangements.
Legal predictability. This is to reinforce 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 must fairly distribute the risks between the parties. This would include, for example, accommodating who is most able and willing to accept risk. In addition, contracts should provide the parties with clear answers to issues that may arise between them.
This would require policymakers to provide guidance to their debt managers on the terms and conditions they can agree to in contract negotiations.
Comparability of treatment during a restructuring. This means that, if necessary, all creditors should participate on comparable terms in any sovereign debt restructuring. Sovereign debtors in the Southern African Development Community can improve creditor confidence by offering all creditors comparable treatment. This would assure them that any relief they provide would benefit the debtor rather than other creditors.
This should facilitate the debtor’s efforts to reach an agreement with all his creditors.
A global approach. Sovereign debt is not just a financial issue. It has implications for the social, political, economic, cultural and environmental situation of the debtor country. This requires a holistic approach to debt restructuring that incorporates all relevant stakeholders. This includes citizens of debtor states, multilateral creditors, bilateral creditors and private creditors such as bondholders, institutional investors of all kinds and commercial banks.
It also requires all necessary issues to be resolved. These range from financial viability to the social, environmental and human rights impacts of restructuring.
The sovereign debtor and its creditors must therefore seek to engage effectively with each of these actors and with all of these issues.
These recommendations show the need for more innovative approaches to sovereign debt. One possible approach is the DOVE (Debt of Vulnerable Economies) Fund. It will use funds raised from all sovereign debt players to buy the bonds of distressed African debtors and will commit to only accept debt restructuring in accordance with a set of published principles based on international standards. that support a comprehensive approach to debt. restructuring.