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The Journal of the American Chamber of Commerce in Egypt

The Journal of the American Chamber of Commerce in Egypt

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Sub-Saharan debt dilemma

November 10, 2021

 

It has been hard to miss the narrative from the government about the importance of economic cooperation with Africa’s Sub-Saharan African nations. Every two years since the current administration came to power in 2015, there has been a forum with African countries to discuss investment opportunities. In 2018, Egypt announced a strategy to facilitate exports on the continent and advocated for merging all three African blocs into the African Continental Free Trade Area.

Industry and Trade Minister Nevine Gamea visited Cameroon and Senegal in June to explore trade and investment opportunities. She stressed to the media in those two countries that Egypt’s government aims to integrate Egypt’s economy with Sub-Saharan economies via trade, investment, and social development.

That goal has moved farther away amid pandemic-related challenges gripping the continent, at least in the short term. The challenges have driven Sub-Saharan nations, in particular, to unprecedented levels of sovereign debt. That is impeding their GDP recovery as well as their ability to import and export. The region also faces additional spending on vaccinations and healthcare today and transitioning to greener economies in the future. That means debts will only increase. Meanwhile, credit rating agencies have been downgrading many, resulting in a higher cost of borrowing.

A Brookings Institution report in October titled “Sub-Saharan Africa’s debt problem: Mapping the pandemic’s effect and the way forward” details the continent’s problems and examines the way out of their current fiscal mess.

Growth via debt

According to the document, “debt was an increasing problem across all income groups of African countries prior to COVID-19, and the pandemic has only exacerbated it.”

A big reason for that trend was that reforms across the entire region led to 25 uninterrupted years of GDP growth until 2020. Additionally, while the continent’s central banks, including Egypt’s, have adopted a low-interest-rate policy to stimulate investment, Sub-Saharan African states preferred higher rates to attract foreign investors. “That has made [those] bonds more appealing,” the Brookings report noted.

Meanwhile, those nations had few revenue-generating investments over the years to repay those obligations. “Countries have not necessarily improved their ability to finance such obligations,” said the Brookings report. That has narrowed their fiscal space and jeopardized macroeconomic stability as debt servicing rose as a percentage of state income. According to Brookings, the overall debt burden has increased nonstop throughout their research period from 2012 through the end of 2020.

Since 2006, Sub-Saharan African governments have increasingly borrowed from commercial banks and issued bonds denominated in dollars and euros. Eurobonds were the most popular tool, rising from $1.7 billion in outstanding debt in 2011 to $47 billion in 2019.

Most of the creditors were Chinese companies that invested heavily in infrastructure throughout the continent. “China holds more African debt than the next 10 creditors combined,” said the Brookings report. However, their investments are disproportionate to their lending, with their contribution accounting for just 16% of investments in Sub-Saharan Africa, according to Statistica.

Pandemic debt

Throughout the pandemic, the region followed a virus containment strategy similar to most developed, wealthy nations. “The relatively low case count in Sub-Saharan Africa [8.5 million as of Oct. 24] is down to the …. swift and preemptive lockdowns … implemented in March 2020,” noted Brookings. “While these lockdowns likely saved lives, they have also left significant scars on the fiscal position of Sub-Saharan Africa and the market conditions [those nations] face.”

Most had to “borrow to finance stimulus packages to support at-risk groups, struggling businesses, creative education solutions and health-related infrastructure,” said the report. Meanwhile, with businesses closed, exports sank while imports dropped at a less dramatic rate. “Dwindling revenues following the fall in global trade met a wave of unemployment among the population that lacks widespread access to safety nets and health infrastructure,” the report explained.

By the end of 2020, debt-to-GDP in Sub-Saharan Africa had gone from 55.4% in 2019 to 63.1%. The projection for 2021 stands at 60.3%. A portion of those increases was to finance healthcare systems to protect against and treat COVID-19. Brookings Institution estimated that Sub-Saharan Africa saw overall debt levels increase by 4.5% in “pandemic debt” incurred above pre-pandemic forecasts for 2020.

The institution’s report noted that High Indebtedness Poor Countries (HIPC) were quick to borrow early in the pandemic, witnessing an 8.5% increase over their projected 2020 debt levels. “They are [now] largely shut out of private credit markets and instead rely on official credit to fund increases in (largely unplanned) debt,” noted the report. Those countries include Ethiopia, Uganda, Tanzania, Mozambique and Ghana.

Kenya, South Africa, Nigeria and South Sudan are witnessing a more gradual rise in debt levels, according to Brookings’ report. As a result, they still have enough access to global credit markets to cover their financing needs, but borrowing is now more expensive.

COVID-19 changed the sources of fresh funds. More countries are relying more on bonds to finance their economies. Bonds accounted for 12% of total issued debt in 2020 compared to 8% on average between 2017 and 2019.

These countries are also looking internally for funding. “The domestic market played a more important role in private borrowing than it has in recent years, and Eurobond issuances were relatively scarce,” noted Brookings.

Domestic bond issuances more than doubled in 2020 to $73 billion, compared to 2019 when it reached $34 billion. Meanwhile, Eurobond issuances declined slightly over the past year from $47 billion to $45 billion. “Only [Cote d’Ivoire and Benin] have accessed international bond markets since the start of the pandemic,” noted the report.

Getting vaccinated

In addition to funding healthcare and the economy to protect against COVID-19, Sub-Saharan nations find themselves paying for vaccines to inoculate their populations. As of September, only 15 African countries had vaccinated more than 10% of their people, according to the World Health Organization.

There also is a massive discrepancy among Sub-Saharan nations. For example, Seychelles and Mauritius vaccinated over 60% of their populations. Meanwhile, half of the Sub-Saharan countries have fully vaccinated less than 2% of their people. “The latest data shows modest gains, but there is still a long way to go to reach the WHO target of fully vaccinating 40% of the population by the end of the year,” said Richard Mihigo, Immunization and Vaccines Development Programme coordinator for the WHO Regional Office for Africa, in September.

According to Brookings, Sub-Saharan countries’ low vaccination rates are because they can’t secure enough free doses from the COVAX initiative or a subsidized supply from the African Union. “COVAX initially proposed to cover injections for 20% of the adult population but has fallen well short of projections,” noted the document. That means that each nation must negotiate with vaccine producers directly or countries that have excess supply.

The report’s analysis forecasts that Africa’s 1.3 billion population will have received “just over 500 million doses by the end of the year.” from COVAX. As a result, Brookings pointed out that “many countries in Sub-Saharan Africa may resort to increasing borrowing to acquire additional doses.”

The underlying challenge for the region remains to decide how to allocate the borrowed funds best. Brookings asks: Will they use more of the borrowed money for vaccinations, or will they spend it on essential social services and safety nets, which would be vital in the coming few years?

Economic fallout

The pandemic only exacerbated Sub-Saharan Africa’s long-standing debt woes, as those countries lost investments and their governments locked down economic activity. Brookings’ report noted the region was hit mainly by shocks to trade volume, tourism, hospitality, airlines, remittances, and commodity prices. Additionally, ongoing virus containment measures worldwide and global supply and logistics disruptions “also adversely affect … debt levels and debt servicing costs,” said the report. “This trend is particularly concerning, given that over a third of African countries derive most other resources from the export of raw materials.”

Overall, the region collected 13.6% less revenue in 2020 than what governments projected. “In 2021, revenue loss is expected to be 9.3%,” noted the document. “The downward pressure on fiscal balance unequips economies with the most important tool to pay off debt: revenue.”

Brookings argued that the repercussions of rising debt would hit resource-rich countries such as Mauritania, Chad and Angola, and wealthier nations that started the pandemic with less debt, such as Gabon and Mauritius.

Another fallout will be in the informal sector, which consists mainly of one-man-show companies and other micro-enterprises. They comprise 55% of the continent’s GDP, and more significantly, 85% of employment in Sub-Saharan Africa across almost all economic sectors, according to Brookings. “Informal workers are, unfortunately, concentrated in sectors hit hardest by COVID-19, including hospitality, retail, tourism and transport.”

As a result, poverty levels would likely rise along with unemployment as economic conditions become more dire. This economic structure exacerbates the region’s debt crises, as governments spend more on social safety nets and stimulus packages to save struggling companies.

“The plight of the informal economy, [and] micro-enterprises, is matched by the plight of the government fiscal status, which has been dwindling,” noted Brookings.

Those rising debt levels would have severe repercussions, crippling GDP growth. The IMF estimates the increased borrowing caused the region’s economy to contract 1.9% in 2020, compared to earlier estimates that it would shrink by 1.1%.

Reprieve ahead?

One significant problem with resolving Sub-Saharan countries’ debt situation is the variety of creditors, “as it requires buy-in from diverse parties, each with different budget lines, incentives and legal standing,” said the report.

Those countries also are under pressure as most of their pre-pandemic outstanding debt is in dollars and euros, according to Brookings. That “poses a risk to debt sustainability … Consequently, particularly strained economies in the region are much more susceptible to defaulting, as they lack practical ways to relieve or postpone debt should payments become impossible to make,” said Brookings.

The solution for Sub-Saharan African nations partially lies with increasing GDP growth to generate revenues to cover the debt financing. Brookings believes the success of the African Continental Free Trade Agreement and debt restructuring could be the way forward.

Another factor is that commodities prices, particularly oil and gold, should rise globally, improving the balance of payments for many of those nations. Oil prices shot from $68.59 in September 2020 a barrel to $85 a year later, according to Oil Price. “The bump in prices provided these countries with sorely needed revenue and sustained domestic demand, which in turn provided support for other industries,” said Brookings. On the flip side, gold fell 12.53% during the same time frame, according to Gold Hub.

The report said that remittances and tourism revenue would also come into play in the coming few years, as they have historically been vital sources of foreign currency incomes. The former has “surprisingly … remained robust.” However, the latter has seen massive losses, with the African Union estimating that travel and tourism revenue will drop by $50 billion this year.

That Brookings Institution report also highlighted another way forward: debt relief programs. The IMF, World Bank, African Bank for Development, and the African Union have offered Sub-Saharan African nations relief packages, citing the pandemic. “On the whole, these global responses are short-term, but they provide breathing space,” noted Brookings.

However, private creditors haven’t been as responsive. “Some private creditors [are participating] on a voluntary, case-by-case basis in debt suspension,” the report said.

The short-term future looks precarious for the region, as each country needs to deal with its exposure and the fragility of its debt situation. “The path is treacherous,” concluded the Brookings report. “The prediction is that the region will not get back to the pre-COVID-19 level of economy (GDP) until 2022 or even 2023.”

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