An urgent plan to avert the debt crisis
Explore how debt poses a significant challenge for African countries. African debt remains at high levels, and the COVID-19 pandemic and the Russian invasion of Ukraine made the situation much worse. The G20’s Debt Service Suspension Initiative (DSSI) expired in December 2021 and its successor, the Common Framework for Debt Treatments, has been slow to help. Showing that the Common Framework can work –and making the changes needed so that it does so faster– will be critical over the coming months.
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Twenty-two African countries are now either bankrupt or at high risk of debt distress. Africa’s debt remains at its highest level in over a decade. With debt service sucking up increasingly large proportions of budgets and revenues, a wave of defaults in the world’s most vulnerable countries is likely to occur even faster than expected.
As a result of COVID-19 and the Russian invasion of Ukraine, the situation has gotten much worse. With international attention elsewhere, we ignore debt issues at our peril.
The reality is that international efforts have failed to deliver a solution. The G20’s Debt Service Suspension Initiative (DSSI) offered some limited breathing room for select countries struggling with the aftershocks of the pandemic, but expired last December.
Its successor, the G20 Common Framework for Debt Treatments, is yet to prove it can help. Four countries have applied, yet only Chad has a deal, which does not reduce its current debt level. Zambia still struggles to reach a deal with its private creditors and Ethiopia is failing to meet conditions for the requisite IMF programme. The most recent applicant, Ghana, is hoping for an expedited treatment. Whilst leaders blame each other for the Common Framework’s failure, we must also consider different solutions for the countries facing the hardest decisions.
What You Need to Know
- 17 million additional people are at risk of extreme poverty if Africa’s 14 riskiest countries fall into debt distress.
- US$69 billion in African debt payments due in 2023 (more than all aid to Africa in 2021).
- 56% of African countries assessed are bankrupt or at high risk of debt distress.
- 59% of the 2023 Nigerian’s revenue is meant to be spent on debt service; over twice as much as will be spent on health and education combined.
- 9 percentage points increase in debt to GDP for low and middle-income countries in 2020 (which was just 1.9% the decade before).
- 8% of GDP paid in interest payments by emerging markets in 2020 (1% in advanced economies).
- 5 years to recover from a debt default, which can wipe out a decade of economic and social progress.
- 41% of African countries received a downgraded credit rating during the pandemic (6% in advanced economies).
Why are we facing another debt crisis?
Even before the pandemic, African finances were tight and debt was high. It had made sense for countries to borrow in this period as they were receiving a good price for commodity exports, and interest rates and repayment cost were low- and financing for development needs high. Covid-19 marked the beginning of global events that have caused economic hardship, with an enormous need to secure financing to lessen the impact of health, food, fuel and inflation crises on citizens and the economy, whilst investing in climate adaptation and mitigation, but few options to do so.