Over the past year, debt sustainability ratings using the Debt Sustainability Analysis (DSA) framework show that many African countries have fallen into debt distress, and have financially downgraded as a result of COVID-19. Out of the 38 countries with DSA ratings available, 14 were rated as being in high-risk of debt distress at the end of December 2020. As for spending rises and revenue declines, safety margins are eroded by COVID-19, even so for countries with comfortable margins.
Since the beginning of the COVID-19 pandemic, in early 2020 many African governments undertook a range of steps to try to mitigate the economic disruptions caused by COVID-19, which had a significant impact on debt sustainability. One of the steps that governments took was fiscal stimulus packages which ranged from about 0.02% of Gross Domestic Product (GDP) in South Sudan to about 10.4% of GDP in South Africa. Other measures also included increased health expenditures, direct transfers to vulnerable community members, and basic needs such as water and food. This government financing caused a surge as countries had to mitigate directly from their own pockets, which ran the risk of future debt obligations that they would not manage.
The World Bank estimates that African governments need gross financing estimated at $154 billion to respond to the direct implications on government expenditure, borrowing capacity, and debt levels. Government financing needs have increased as a result of COVID-19 and will result in fast-paced debt accumulation in the medium to long term. One of the biggest challenges is that countries expected to account for the significant increase in Africa’s overall average debt levels are those that have non-oil resource-intensive economies. Global financing conditions are currently too tight, and that makes it more costly for governments to get the financing they need to recover from the pandemic and refinance increasing debt. Countries are exposed to higher exchange rates and rollout risks. The recent increase in interest expenses has made it extremely difficult for countries to meet maturing debt obligations. A major vulnerability to the debt outlook in Africa is the interest burdens, which are rising fast while government revenue is declining. The composition of Africa’s debt toward market-financed external debt, primarily dominated by foreign currency (the US dollar and the Euro), means that African countries are becoming increasingly vulnerable to higher real interest rate risks, most importantly to exchange rate depreciation risks.
Exposure of the local currency to the dominating foreign currencies causes an upward revaluation of the countries’ debt, also makes debt service in the foreign currency more expensive. This currency-mismatch allows the debt ratios in these countries to worsen, because of the depreciation of their currencies. These issues could be lessened for countries that rely on the domestic capital market for borrowing with low-interest rates. Factors driving the debt, include; mismanagement of funds, lack of good governance, and corruption. Lack of good governance and mismanagement of funds have been some factors that have been responsible for the recent debt accumulation in some countries. Certain countries even had “hidden debt,” which was not available in the public books, for instance, Mozambique, Cameroon, and Chad. When the hidden debt was discovered, the countries reported an unexpected increase in debt burdens. Issues with lack of economic governance, mismanagement of funds, and corruption have been identified as the problem in the debt distress, which has recently occurred in countries such as The Gambia, Democratic Republic of Congo, Republic of Congo, and South Africa.
A recent on-ongoing corruption case in South Africa involves the Minister of Health, Dr. Zweli Mkhize. One of South Africa’s first National Health Insurance (NHI) contacts was allegedly looted by a digital company, named Digital Vibes, which was controlled by the Minister’s close associates. Digital Vibes ultimately looted a total of R150 million from the Department of Health. According to documents obtained by an investigative journalism unit, the Daily maverick, Digital Vibes attributed only R23 million to billings to the National Health Insurance communications work.
In addition, the mismanagement of State-owned enterprises (SOE) has contributed to the most recent surge in the debt that is accumulated. Increased defense-related expenditures contain rising conflict in the Sahel, as well as some terrorism cases, which have also contributed to rising debt levels. The COVID-19 pandemic has reinforced the already worsened situation in African countries. The conflict-related events that unfolded, including political violence, protests are higher in more than 40 countries than before the pandemic.
African countries can mitigate these debt vulnerabilities through the International Monetary Fund (IMF). Even though debt vulnerabilities are rising, African countries could make the necessary policy choices to reduce debt distress through IMF. The International Monetary Fund can play a significant role in fostering recovery from debt distress. IMF can ensure a favorable interaction between domestic policy and external conditions, to speed up the recovery from debt distress to more trade, and foreign exchange. The presence of the IMF-supported program can contribute to reducing debt-distress, which analyzes private capital flow. The intervention of IMF in financial crises also plays a significant role in making it easier for countries to exit debt crises.
The consequences of the COVID-19 pandemic have resulted in the surge of African countries’ spending. Which has significantly lowered the governments’ economic activities, as well as governments’ revenue. The pandemic has elevated the continent’s already existing problems, and also created significant challenges to recover from the debts, especially the countries with unsustainable debt burdens. However, through the intervention of IMF, these countries can mitigate these vulnerabilities, improve debt resolutions, and allow favorable conditions to borrow money, foreign exchange, and improve policy reforms of the global economy
