Plunged into a severe recession, accentuated by the health crisis and the sharp drop in oil prices, Algeria could be forced to resort to external debt. Anxious to preserve its sovereignty, Algiers has so far excluded all financing from the International Monetary Fund. But it may better to go early, while it still has room to negotiate terms.
Coronavirus: Africa given shortest end of global stimulus stick
The international community has mobilised $9trn in fiscal and monetary stimulus, but Africa’s share will amount to a meagre 2% – and even that is a generous estimate.
The COVID-19 pandemic has necessitated efforts aimed at mitigating economic collapse.
“That [stimulus] amounts to almost 10% of global GDP. When you look at the African context, you struggle to go beyond 2%,” according to Admassu Tadesse, the president and chief executive of the Trade Development Bank.
“Unfortunately, our part of the world is not benefiting in any significant way from the huge global fiscal stimulus that has been announced,” adds Tadesse.
Trade Development Bank is a development finance institution that services the Southern and East African communities.
Africa’s consolation, and best bet for economic recovery, would lie in debt relief.
Tadesse made the remarks on Thursday during a Deloitte digital dialogue about inclusive economic growth in a post-coronavirus world.
Jennifer Blanke, the vice-president of the African Development Bank focusing on agriculture, and human and social development; and Shamina Singh, the founder and president of the Mastercard Centre for Inclusive Growth, were among the other speakers who gave inputs during the digital discussion.
Debt at the end of the tunnel
“The debt relief being discussed will go a long way in adding … [to] that 2%, maybe getting it up to 5% or 6%,” says Tadesse.
Such debt efforts would have to flow from the foreign currency side, where most countries have to contend with higher financing costs because of weakening exchange rates.
That is made worse by the worldwide lockdowns that have placed severe restrictions on the movement of goods. For most countries, this has diminished states’ ability to generate foreign currency earnings through exports.
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The good news for Africa is that the region has come a long way in economic governance.
“If you look at the macroeconomic ratios around fiscal deficits or inflation, and general levels of debt sustainability in terms of external debt as a proportion of GDP. All these ratios are not comfortable, but they are not as bad as we make them out to be,” according to Tadesse.
The median level of fiscal deficits is near 4%. “We know the 6% rule that has been applied historically. From that perspective, there is a little room to manoeuvre.”
Only eight African states have double-digit inflation. “… Maybe one or two have triple [inflation]. You are looking at about forty-something countries sitting with an inflation level of reasonable single digit[s].”
Great scope to negotiate
In the next six months, the debt-to-GDP ratios of Organisation for Economic Co-operation and Development countries are expected to escalate and exceed 100%. African countries are in the 50% range.
About 30 to 40 years ago, debt financing flowing into the region did not materialise in tangible assets. If you cast your gaze to East Africa, there are massive railway projects from Ethiopia and Kenya to Tanzania. Collectively, these infrastructure projects amount to $20bn in investment in these regional economies.
But “we’ve not yet at that level where we’re seeing enough activity come out of those sizeable investments. There’s a strong case to be made for giving time, and that comes into the debt issue,” says Tadesse.
“This is a reasonable time to start looking at some forbearance measures, to look at moratoriums … [and] to look at rescheduling some of the debt in line with where revenues are going to be in the next six to 18 months,” he explains.
Over the years, Africa has gradually been able to tap into international capital markets, including financial markets in the bank syndicated loan space. These are important avenues through which the region can raise resources.
How Ramaphosa’s special envoys can help
Given the importance of these capital markets and funding facilities, debt relief discussions would have to balance those considerations. This is where African Union chair Cyril Ramaphosa’s special envoys will come in handy.
In April, Ramaphosa appointed special envoys Trevor Manuel, the former finance minister of South Africa; Ngozi Okonjo-Iweala, the former finance minister of Nigeria; Donald Kaberuka, a Rwandan economist; and Tidjane Thiam, the former CEO of Credit Suisse.
The special envoys’ mandate is driving efforts to garner economic support for Africa’s fight against COVID-19.
“They’re looking at the whole issue and they’re trying to come up with an approach that is smart, that doesn’t end up hurting the continent in terms of future access.”
“There is no silver bullet here. It’s about engagement, partnership and co-operation to ensure that one can contribute to some recovery,” Tadesse said.