Debt referrals and cancellations: What past debt relief packages brought to Africa
Debt initiatives might not address the main issue - developing countries' reliance on debt.
Debt relief initiatives have been the default paths to alleviate the economic burden a lot of developing countries carry, especially in times of recession. Relief initiatives usually follow the same scenario - first, developing countries encounter difficulties to repay their debt due to a major economic event; and after a series of negotiations, a group of developed nations and multilateral agencies eventually provide streamlined repayment solutions or deferrals to countries in debt based on set criteria. The latest initiative is the Debt Service Suspension Initiative (DSSI), an initiative launched in April 2020 by the World Bank’s Development Committee and G20 Finance Ministers to assist developing countries facing economic repercussions of the COVID19 pandemic. The repetition of this scenario however shows that these initiatives might not address the main issue - developing countries' reliance on debt. We discuss here past debt relief initiatives and their impact on West African economies.
The HIPC initiative was recognized as a permanent solution for the impacted countries' problems
In 1996, the IMF and the World Bank launched the Heavily Indebted Poor Countries (HIPC) Initiative to address the growing need for poverty reduction, and debt sustainability across the world’s poorest countries 1. With a goal to ensure deep and fast debt relief in heavily indebted countries, the initiative was intended to resolve debt problems for 41 countries, mostly in Africa, with a total debt nearing $200 billion 2. The initiative aimed to combine substantial debt reduction with policy reforms in order to affect long term growth and reduce poverty. At the time, the HIPC initiative was recognized as a permanent solution for the impacted countries' problems 3. The IMF was convinced that debt relief paired with policy reforms would end extreme poverty.
A decade later, the same scenario came about. A similar initiative was born; the Multilateral Debt Relief Initiative (MDRI) provided additional support to HIPCs to reach their MDGs 4 by paying off eligible debts to multilateral agencies such as African Development Fund (ADF) and the IMF 5. By March 2011, all 26 regional member countries who had benefited from the HIPC debt relief assistance also received debt cancellations amounting $10.1 billion from the MDRI 6.
Evidently, the debt relief initiatives in the 1990s have in part positively impacted many African economies. Multilateral creditors indicate that countries that benefited from the HIPC spent five times more on social services such as education and health than on debt-service payments, proving that African countries devoted their resources more to social services than debt repayment - a great impact of the initiative. Additionally, debt service for 36 countries who received debt relief declined by 1.5% points of GDP between 2001 and 2015. We have observed that, over time, these positive trends were reversed.
Although debt relief initiatives have been effective at fueling social services on the continent, they have not been effective at addressing the reliance that African countries have on debt 7. For instance, Togo’s debt-to-GDP ratio fell to 46 percent after receiving interim debt cancellation in 2008 8. But while the government has endeavored to keep its debt-to-GDP ratio constant, today its debt has nearly doubled. Similarly, Ivory Coast, another beneficiary of the HIPC decision in 2009, has also progressively experienced a resurgent debt burden as reported in the chart below.
The debt-to-GDP ratios of Ivory Coast and Togo pictured above plunged around the HIPC decision point but resurged years later
Data source: https://countryeconomy.com/national-debt
While GDP is not the only indicator for economic health, the results prove that a lot of African countries have not found a way to effectively control their debt level. It also shows that the initial assessment stating that HIPC would be a permanent solution was inaccurate. To date, half of the IDA (International Debt Association) borrowers are in debt distress or close to it.
As the DSSI is still onboarding countries in need of debt relief due to the COVID-19 pandemic, we are unsure of the impact of this new initiative on African economies. To date, however, we noted a few trends:
1- Countries that signed up for the DSSI are already facing issues with their debt ratings. For instance, Moody’s has placed Cote d'Ivoire, Cameroon and Senegal under rating review for a downgrade and recently downgraded Ethiopia for its participation in the G20 Debt Service Suspension Initiative 9. African governments may lose private sector creditors and run into other complications such as disrupted access to financial markets, which could impair financing opportunities. Other countries like Benin that have relied a lot on private sector alternatives have not signed up for the initiative to protect their debt ratings.
2- An extension of the initiative that currently pauses debt repayments until December 2020 has been requested and granted for an additional period of 6 months.
3- The private sector and China, who are now African countries' most prominent creditors, did not put together a similar initiative. As opposed to previous initiatives like HIPC, the debt crisis now has new actors who decided not to go with the traditional relief path. China has been under a lot of pressure from Multinational agencies to engage in relief efforts. Meanwhile the private sector received fewer calls to relief.
In summary, past relief packages have only temporarily solved African countries’ indebtedness. The current COVID-19 relief package, DSSI, has already had an effect on countries’ credit rating and might impact their ability to raise funds from eurobonds and other private sectors in the near future. Although countries like Ivory Coast that raised over 1 billion euros in Eurobonds this past November might not be concerned by this drop in rating. The absence of the private sector and China from the debt relief efforts signals a shift in the traditional relief approach, as African countries are increasingly diversifying their creditor pools and rely more on these actors. The COVID-19 related debt crisis is however still unfolding, as proven by the DSSI extension, there is still a chance that the private sector and China participates in relief efforts in some capacity.
Marylin Quaidoo, Resident economic expert, TUKA Institute
Levi Kedowide, Founder, TUKA Institute