Coronavirus: African debt freeze may hurt future access to markets
The fact of the matter is African countries will need some form of sizeable fiscal expansion in order to address the most pressing issues emanating from the COVID-19 pandemic, which for the time being, has yet to take hold with the same severity as witnessed in other parts of the world.
These measures must primarily target infrastructure: first, to bolster critical healthcare services; and second, in the form of government assistance in the primary utility sector to ensure unrestricted access to water and electricity following implementation of requisite lockdown protocols.
Furthermore, funding should also be made available to the private sector as a backstop to the inevitable economic contraction driven by a freeze in real economic activity.
Moratorium on debt repayments “is not as critical”
The issue of a moratorium or a ‘standstill’ on debt repayments as suggested is not as critical in relation to the aforementioned needs, and more importantly, would greatly compromise the future access of African economies to international markets.
Such a standstill would be perceived as a default, and no matter the severity of the current shock, it would inflict great damage over the long run. Private markets themselves ought to be the ultimate provider of productivity enhancing capital that is so critical for the continued development on the continent.
As an example, the ability for countries such as Benin and Ghana to access capital markets over the past year at 5.75% for seven years (EUR500m), and 8.875% for 40 years (US$750m), respectively, is a testament to the favourable conditions from which African nations have benefited. It would be wise not to jeopardize such a milestone at this juncture.
The issue of Eurobond debt repayment could instead be addressed as part of a comprehensive package that includes, most importantly, a fiscal backstop aimed at addressing the current and incoming economic challenges facing Sub-Saharan African countries as outlined above.
Such funds could be disbursed to the countries in need by multilateral institutions in the form of a 10-year zero coupon debt at a cost of say 1% (as merely one possibility).
Nigeria is a case in point, which recently requested $6.9bn of multilateral financing from the IMF, World Bank and African Development Bank to combat the brewing coronavirus crisis. Part of the request would be used to establish a $1.2bn COVID-19 crisis intervention fund to upgrade healthcare facilities and provide intervention funds to states. Such an amount needs to be compared to its external debt servicing commitments which will average less than $750m over the next 48 months.
If Africa is to wean itself from its long-standing dependency on donors and multilateral funds to finance its economic development, it needs to evolve towards market-based financing.
With principal and interest commitments on all outstanding Sub-Saharan Africa Eurobonds tallying approximately $5bn per year over the next 48 months, such “relief” as proposed would be a high price to pay to compromise the region’s hard-earned access to international capital markets and unhindered future development.