WILLIAM GUMEDE: African countries heading for debt default in coming months

Though some postcolonial debt of African countries was written off by leading Western creditors in the mid-1990s, it has again increased to Cold War levels. This is due to a combination of the negative effects of the Covid-19 pandemic, the Russia-Ukraine war and chronic poor governance. 

Several African countries are highly likely to default on sovereign debt repayments in the coming months, as Zambia did in 2020 when it could not repay a $42.5m Eurobond coupon. The country has a $3bn Eurobond debt and owes $2.9bn to private creditors, $3.5bn to bilateral creditors and $2.1bn to multilateral lenders. 

A quarter of African countries now spend at least 20% of their national budgets on servicing foreign debt, the highest average among developing countries. Unlike in the past, when African countries were mainly indebted to the global multilateral development finance organisations, such as the IMF and World Bank, as well as the former colonial powers, they now also owe large amounts to private lenders, the development banks of industrialised countries, and to China.

More than 40% of African debt is owed to private creditors, 33% to multilateral creditors and 27% to bilateral creditors. Mauritius and Zambia both owe more than 40% of their sovereign debt to private lenders.

Before Covid and the Russia-Ukraine war African countries such as Angola, Zimbabwe, Zambia and Mozambique already had unmanageable debt obligations to China. At $20.1bn Angola is China’s biggest debtor, accounting for 34% of all funds owned to China by the globe’s 72 least-developed countries.  

African country debt is largely bilateral, commercial and non-concessionary. In bilateral debt the creditors are states or their agencies. Non-concessionary debts are those owned to multilateral development banks, whether owned by one or more countries. Multilateral debt is owed to international financial institutions such as the IMF and World Bank. Commercial debts are owed to non-state commercial entities.

Many African countries have high debt-to-GDP ratios, a measure of a country’s gross national debt in relation to its GDP, or how much a country owes compared with what it produces. Mozambique has a debt-to-GDP ratio of 133.6%, Angola 103.7%, Zambia 101%, Ghana 83.5% and Rwanda 74.8%.  

The heavy debts of African countries, with their high debt-servicing commitments, are increasingly straining public finances, leaving countries without financial buffers for emergencies and undermining economic growth. Due to high debt they have less access to international capital, and face higher borrowing costs and currency instability. Add persistent corruption, misgovernance and populist policies to the mix and it is no surprise that the average debt-service ratio for African countries is back to highs last seen in 2011.  

Much of Africa’s postcolonial debt was restructured or partially forgiven through the IMF and World Bank’s Heavily Indebted Poor Countries (HIPC) initiative in 1996. In 2005 it was supplemented by the Multilateral Debt Relief Initiative, which gave qualifying countries 100% relief on selected debts owed to the IMF, World Bank and African Development Bank.  

Many of the African leaders and governing parties that caused their countries to become heavily indebted in the 1970s to mid-1990s, before some of that debt was written off or rescheduled, are still in power, governing in the same corrupt, incompetent and ideologically outdated way. However, new governing parties and leaders who came to power after the mid-1990s debt relief initiatives aren’t doing much better.

More expensive

Sadly, African voters tend to continue to support parties and individuals based on their past “struggle credentials”, ethnicity or religious affiliation. 

Of course, Covid and Russia’s invasion of Ukraine had a negative effect on Western economies too. And funds that may in the past have gone to African debt relief are now being channelled to Ukraine. Western central banks have also tightened monetary policies to tackle inflation, pushing up interest rates and making it more expensive for African countries to borrow abroad. 

In 2020 international multilateral institutions launched a new initiative to tackle Africa’s post-Covid debt. The World Bank’s development committee and the Group of 20 (G20) finance ministers agreed on a new Debt Service Suspension Initiative, which covered 40 African least-developed countries. This initiative did not reduce the new debt of African countries but suspended repayments for more than a year until June 2021. In total 73 countries, including the 40 African countries, were eligible for this benefit, which was supported by the IMF and the Group of Seven countries.  

The Debt Service Suspension Initiative agreement only covered debt owed by African countries to members of the 22-member Paris Club of bilateral creditors, which was set up in 1956 and comprises mainly Western creditor countries such as the US, UK and Germany. Russia joined in the post-Soviet era but is now suspended because of its invasion of Ukraine. China is not a member, having rejected the Paris Club’s debt payment rescheduling for African countries that owe it money.

A number of global private sector lenders supported the Debt Service Suspension Initiative, and now that it has run its course the Paris Club, in partnership with the G20, has introduced a new debt relief strategy, the Common Framework, which will consider debt restructuring requests by African highly indebted countries case by case. Unfortunately, most global private lenders have been less keen on the Common Framework than they were on the Debt Service Suspension Initiative, so only creditor governments are participating in the process. Ethiopia, Zambia and Chad have approached the Paris Club to have their debt restructured through this route.  

Some African countries also have another new option to help ease their debt obligations. In August 2021 the IMF released a $650bn special drawing rights (SDR) injection to help stabilise the international financial system. Most of the SDR was allocated to high-income countries, but many highly indebted African countries have now applied for SDR allocations to ease their economic difficulties. About $34bn has been allocated to Africa, compared with $40bn to China. China has promised to share some of its SDR allocation with African countries. This is expected to amount to an extra $10bn.  

The post-Covid and Russia-Ukraine war world is likely to usher in tremendous instability across the African continent. It heralds an era of rising African country debt, economic crises and hunger. This is likely to lead to high levels of political instability across the continent that will fuel coups and the rise of terrorism and street protests. The only way to escape the repeated cycle of postcolonial chaos is for African citizens to start taking more responsibility for who they entrust with power. 

• Gumede is associate professor at the University of the Witwatersrand School of Governance and author of ‘South Africa in Brics’.