Why African countries are shying away from debt relief
The Bretton Woods institutions, Group of 20 (G20), African Development Bank, Inter-American Development Bank and all Paris Club creditors have approved debt service relief for more than 25 African countries for at least the next six months.
The goal is to free up more than $20bn that governments could use to buttress their health services. There have also been calls for outright debt cancellation to lessen the debt burden as African countries use all available lines of credit to secure resources to fight the Covid-19 pandemic.
Private creditors that hold commercial debt have not been willing to participate in debt relief and have criticised the G20’s call for the freezing of all debt repayments. Countries have also been priced out of the Eurobond market due to high interest rates. Bond yields have spiked to more than double the cost for most countries intending to issue Eurobonds. Yet of the 25 countries eligible for debt relief only six have requested assistance — Cameroon, Democratic Republic of the Congo (DRC), Mali, Republic of the Congo, Mauritania and Ethiopia. The majority have either refused or have not yet requested a debt moratorium.
While the others have not openly rejected the offer to participate in the debt moratorium, Kenya, Nigeria and Togo have indicated their lack of interest. This may be because they would be in breach of the terms of the Eurobond contracts they hold. Eurobond prospectuses and contracts terms have restrictive clauses that prohibit countries from seeking a suspension of debt payments under multilateral initiatives. Eurobond terms of default clauses indicate that non-payment of external debt, including seeking moratoriums, will be considered default. This would automatically trigger an immediate demand for countries to pay the entire value of outstanding Eurobonds.
There are also fears that the relief would lead to credit rating downgrades because of the Eurobond terms of default. Moody’s Investors Service has already placed Cameroon under rating review for downgrade and has downgraded Ethiopia, precisely because of their participation in the G20 Debt Service Suspension Initiative. A ratings downgrade would erode the benefits accrued from the debt relief as countries would have to pay more interest on the same volume of debt.
The debt relief was expected to free up about $20bn, equivalent to the interest and principal repayment within six months to private creditors. It would further hinder countries’ ability to finance budget deficits in the medium term through access to global capital markets. Given that the pandemic will increase public spending when tax collection and revenue generation are being foregone, budget deficits will swell to proportionately high levels. Access to global capital will be key in financing the post-Covid economic recovery of African countries.
Lastly, there are concerns that the terms of the multilateral debt relief and loan packages are substantially restrictive to future policy direction. The debt moratorium is being granted on condition that the funds are spent only on critical public services. Other conditions include adhering to existing policies, reporting requirements, multilateral oversight and transparency. Countries under debt relief are not allowed to incur debt from other creditors during this time and should only use savings to address shocks from the pandemic.
The World Bank has devised customised fiscal policy responses that support weathering the crisis in the short term and economic recovery in the medium term for countries receiving the relief. The IMF loans and G20 debt suspension funds will not be used to pay high interest to private lenders. These conditions constrain both a country’s fiscal space and policy flexibility.
The main purpose of maintaining a good credit rating is to access the international funds market at relatively low interest rates. For African countries, Eurobond issuance is a more attractive option than the traditional multilateral borrowing whose conditionalities are usually restrictive. In all current Eurobond contract terms, countries are deemed to have defaulted if they cease to be members of the IMF or are no longer eligible to use resources of the Bretton Woods institutions. When terms of Eurobond contracts become equally restrictive and bond yields more expensive, it defeats the purpose of diversifying from multilateral loans. This is what African countries should do.
With regard to participating in the debt moratorium, countries that have the capacity to forgo debt relief should do so to avoid losing investor confidence. The net benefit of low borrowing costs will accrue in the long term. Private creditors should not be pressured into accepting the blanket debt relief agreement for commercial debt. Current Eurobond covenants should be honoured to maintain the credibility and integrity of African sovereign borrowers. Countries that are facing challenges to fund their repayments should take a cautious approach to negotiating terms of debt relief with commercial creditors to safeguard their sovereign credit ratings and avoid defaulting.
This episode should provide lessons for African governments to bargain for competitive interest rates and accept only favourable bids during Eurobond issues. The over-subscription of African Eurobonds is not an absolute sign of attractiveness — it also reflects the pricing of issued instruments. Governments should not entrust the bond issuance process entirely to syndicates of investment bankers that have a profit motive and get huge bonuses for over-subscriptions. This will lessen the policy restrictive terms and high interest burden in future.
• Tefera is an economist working with the African Peer Review Mechanism in Johannesburg. Mutize is a postdoctoral researcher at the University of Cape Town’s Graduate School of Business.
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