In the absence of global leadership, the IMF, World Bank, and African multilaterals are taking the lead in supporting Africa’s response to the coronavirus and the continent’s first economic recession in 25 years. While G-20 nations and Paris Club creditors have agreed to suspend debt service payments for Africa’s poorest countries through the end of the year, pressure is building for further interest suspensions and even complete loan write-offs. EXX Africa delves into the multi-faceted issue of financial support for the world’s most vulnerable continent.
On 17 April, the United Nations Economic Commission for Africa (UNECA) estimated that over 1.2 billion Africans would be infected by the novel coronavirus and that between 300,000 and 3.3 million Africans could die from COVID-19. The World Health Organisation warned on 16 April that Africa could see as many as 10 million cases in three to six months, up from around 20,000 confirmed cases today. EXX Africa monitors the infections across Africa on its COVID-19 Insight dashboard (See COVID-19 COUNTRY RISK VULNERABILITY).
United Nations Secretary-General Antonio Guterres addressed the Spring Meetings of the International Monetary Fund (IMF) and the World Bank on 17 April, stating that the continent needed more than USD 200 billion to respond to the pandemic and mitigate its economic impact. UNECA says that USD 100 billion is needed to immediately resource a health and social safety net response. UNECA is also backing a call by African finance ministers for an additional USD 100 billion in stimulus, which would include a halt to all external debt service.
The UN supports calls for the IMF to allocate new Special Drawing Rights (SDRs), a step that has been opposed by countries such as the United States and India. Many commercial creditors are also resisting calls for debt relief or restructuring, leaving many African countries with a stark choice between defaulting on debt obligations or foregoing the additional funding required to manage the virus outbreak. However, the UN and other multilateral groupings have failed to create consensus in their decision-making. Instead, multilateral financial institutions like the IMF and the World Bank are taking a central role in the economic response to the pandemic with important implications for the continent’s economies, debt profile, and geo-political diplomacy.
Multilaterals to the rescue in Africa
The International Monetary Fund (IMF) has doubled its rapid financing facility for developing economies to USD 100 billion which many warn will not be sufficient to meet growing demands for IMF assistance from across the world. Many countries are calling for between USD 500 billion and USD 1 trillion in Special Drawing Rights to boost the reserves of member states, a proposal which remains opposed by other countries led by the US. In the meantime, the IMF Executive Board has approved immediate debt service relief to 25 poor and vulnerable countries of which 19 African countries will receive immediate debt service relief.
Moreover, the IMF is set to provide USD 11 billion to USD 32 African countries that have requested assistance from the Fund. Together with the World Bank, the Fund has also backed a call by African leaders for USD 100 billion in emergency aid, including USD 44 billion earmarked for immediate debt relief. The main question is whether the IMF’s members states will agree on issuing SDRs and if African countries will have to accept the Fund’s usual economic restructuring conditions. Both Nigeria and South Africa have flatly rejected any IMF-imposed reforms.
The World Bank has supported calls for African debt relief and is calling for a capital increase to provide funding for healthcare responses to the virus. The Bank’s president David Malpass appears to have pulled back from his initial insistence on policy conditions on emergency lending which could have held up funds for months. Yet Malpass still favours tougher conditions on credits or debt moratoriums. Together with the IMF, the World Bank has mobilised up to USD 57 billion in loans and grants for Africa in 2020 to aid the continent’s response and recovery from the coronavirus pandemic.
The World Bank expects to deploy up to USD 160 billion over the next 15 months to help mostly developing countries, with a focus on Africa. This allocation includes USD 6 billion for expedited loan guarantees from the Multilateral Investment Guarantee Agency (MIGA) to enable the purchase of urgent medical equipment and provide working capital for companies. Special provisions for fast-track financing are also allowing an initial group of World Bank projects totalling USD 1.9 billion to get underway quickly in 25 countries including African countries like Ethiopia. The Bank is also providing expert advice in countries like Democratic Republic of Congo to contain the virus and build on experience in dealing with other infectious diseases.
The African Development Bank (AfDB) is the continent’s biggest financial institution and has taken a leading role in the African battle against the coronavirus after massively increasing its capitalisation last year. In October 2019, the AfDB secured a 125 percent increase in its capital to USD 208 billion, the highest level in its history. In December 2019, the Bank also secured USD 7 billion for a replenishment of the soft-loan African Development Fund. Much of these funds will go towards supporting African countries in their battle against the coronavirus and mitigating the economic impact of the continent’s first recession in 25 years. The Bank has already announced the creation of a US$10 billion fund to help African economies manage the pandemic.
In an innovative and ambitious scheme, the institution has also issued the world’s biggest social bond yet by selling USD 3 billion of notes to fight the impact of the coronavirus on the continent. The Fight COVID-19 Social Bond garnered interest from central banks and official institutions, bank treasuries, and asset managers mostly in Europe and the US. The AfDB will play a crucial role in Africa’s response to the virus on the continent, although the Bank’s leadership has recently come into question. AfDB president Adesina Akinwumi has been accused by internal whistle-blowers of favouritism in recruitment and tolerating fraudulent procurement, which may result in his executive authority being curtailed at bank presidency elections in May.
The World Health Organisation (WHO) is not a multilateral financial institution but is a specialised agency of the UN responsible for international public health with an approved budget funded mostly by the US (until recently) and the Bill and Melinda Gates Foundation. However, the agency will play a crucial role alongside the IMF, World Bank, and AfDB in managing the coronavirus in Africa. Its current director-general, Tedros Adhanom Ghebreyesus, is Ethiopia’s former health minister. The African Regional Office in Brazzaville, which is led by Botswana’s Matshidiso Moeti, is getting direct funding from donors after years of transparency issues.
Such concerns have led to the creation of a parallel string of African operations led by the US-based Centers for Disease Control’s (CDC). It was the African Centre for Disease Control and Prevention headquartered in Ethiopia that distributed Alibaba chief executive Jack Ma’s donations of Personal Protective Equipment (PPE), rather than the WHO. The Africa CDC is also due to launch its own epidemic modelling unit which will rival the WHO’s prevailing model. However, the US has threatened to withdraw CDC funding if the body accepts financing from China in a move that the US administration has already implemented at the WHO.
The case for African debt relief
Ahead of the IMF and World Bank Spring Meetings, on 15 April, the Group of 20 (G-20) economies and Paris Club creditors agreed to suspend debt service payments for the world’s poorest countries through the end of the year. The move has been matched by a group of hundreds of private creditors. However, Africa’s finance ministers are calling for broader debt relief. The IMF and World Bank support proposals from African leaders for USD 100 billion in emergency aid, including USD 44 billion earmarked for immediate debt relief which is the amount of interest on African debt that is due this year. African finance ministers reckon that the debt write-offs may have to be extended to two or three years to have any impact.
Africa’s biggest spike in Eurobond redemptions is not due until 2024-25, although several substantial principal payments on African sovereign debt fall due between 2020 and 2022. Debt-service obligations range from dollar-denominated Eurobonds and Chinese countertrade deals to bilateral project loans and trade credits, as well as obligations to the IMF and World Bank. Although the bulk of Africa’s debt is now owed to governments and multilateral institutions, the IMF will play a key arbiter role in the negotiations.
The US opposes the idea of a new round of debt relief, noting that G8 nations wrote off billions in developing country debt in 2005. Africa has since gone through several rounds of unsustainable borrowing. The continent’s external debt payments doubled from 2015 to 2017 to 11.8 percent. Some countries like Mozambique, Zambia, and Republic of Congo have purposefully not disclosed massive opaque borrowings which has tarnished their creditor reputation. The US also opposes any debt relief for countries that have borrowed heavily from China, with US Secretary of State Mike Pompeo accusing Beijing of using loans for political control in Africa.
There is also little appetite in China to write off Africa’s debt, although the Chinese government did endorse the G-20 temporary freeze on debt payments. The management of China’s loans is done through state agencies such as its national development bank or the Belt and Road Initiative (BRI), rather than the IMF forum, which undermines the consistency of a unified platform on debt relief. China’s government, banks and companies lent some USD 143 billion to Africa between 2000-2017, much of it for large-scale infrastructure projects. Lending from China makes up 33 percent of external debt service in Kenya, 17 percent in Ethiopia and 10 percent in Nigeria. Debt forgiveness has been infrequent and only amounted to small amounts.
Moreover, in contrast to 2005, when the issue was public debt, today 32 percent of total external debt and 55 percent of external debt service payments are estimated to be commercial. Also, unlike during global financial crisis in 2008-09, when Africa’s economies had larger buffers than now to protect against a downturn, this time round Africa has a more complex set of debt liabilities, including a higher proportion of commercial debt, less concessional debt, as well as substantial amounts of hidden or under-counted domestic obligations.
Africa is facing a perfect storm of high debt levels, the coronavirus pandemic, plummeting oil and commodity prices, and mounting budget deficits. UNECA estimates that up to 29 million people will be pushed below the extreme poverty line of USD 1.90 per day owing to the impact of the disease. The EXX Africa COVID-19 country risk vulnerability model, which assesses the impact of COVID-19 on each African country’s political, security, and economic risk profile in the one-year outlook, forecasts that oil producers such as Equatorial Guinea, Nigeria, and Angola, as well as already fragile states will suffer the greatest shock to their country risk outlook (See COVID-19 COUNTRY RISK VULNERABILITY).
The World Bank’s latest biannual report, Africa’s Pulse, predicts that Africa’s economies will be tipped into recession for the first time in 25 years. The report reckons that the real GDP of sub-Saharan Africa will reduce to -2.1 percent under a baseline scenario or to -5.1 percent under a catastrophic scenario – compared with its earlier forecasts of 2.9 percent for 2020. The World Bank predicts that Nigeria’s 2020 real GDP growth best case could fall to -3.4 percent, with the worst case a severe -8.8 percent. South Africa’s best case could be a -2.1 percent contraction, and worst a severe, -8.3 percent negative real GDP growth.
The Bank assumes four main ways in which Africa’s economies will be impacted:
- Disruption of trade and value chains
- Disruption of financing flows and remittances
- Public health emergency threat to the workforce
- Effects of coercive economic lockdowns
Africa is a high priority for the IMF and the World Bank, with IMF chief Kristalina Georgieva last week noting that many countries on the continent had been growing at rates of 6 percent or more, before the pandemic, providing a boost for a generally sluggish global economy. However, the World Bank warns that African government budgets are much tighter than during the 2008-2009 global financial crisis. African governments therefore have fewer options, including lowering interest rates, depreciating currencies, tax credits, and payment deferrals, as well as limited income support and cash transfers to protect workers.
The main concern over time will be shortages of food and other essential commodities, particularly in landlocked countries. There are further concerns over mounting insecurity and the impact of the pandemic on existing conflicts and insurgencies. With Europe and North America turning inwards and Asia’s recovering from the pandemic at an uncertain pace, the role of the multilaterals will significantly increase in Africa in coming months and years.