Managing COVID-19’s Impact on Africa’s Sovereign Debt: An Interview with Danny Leipziger
COVID-19 Africa Watch talks to Danny Leipziger, Professor of International Business at the George Washington University, about debt and debt relief amid the ongoing coronavirus pandemic.
More analysis from Prof. Leipziger:
Below are a few of the main takeaways from COVID-19 Africa Watch’s conversation with Danny Leipziger, Professor of International Business at The George Washington University and Managing Director ofThe Growth Dialogue.
- African countries have limited options to handle the economic impact of the pandemic. In theory, governments should prepare fiscally in good times so as to have wider fiscal space during crises, but in practice it is very difficult for politicians to do so.
- A doubling or tripling of fiscal deficits in Sub-Saharan African countries is likely coming.
- Most emerging market debt was issued by middle- and lower-middle income countries, and these countries do not benefit from the G20 Debt Service Suspension Initiative.
- As happened with the Brady Plan, debt re-profiling should be designed in such a way that encourages more responsible debt management. Likely, the World Bank and the IMF will need to be involved to ensure that the new debt re-profiling is consistent with a development and financing plan that has some merit and success possibilities.
- Political leadership and getting China involved more multilaterally will be essential, but governments and their partners will also need to convince the private sector that this newly re-profiled debt will have a higher probability of being repaid.
The interview was conducted by Walter Pacheco, the Head of the Debt Management Office at the Ministry of Finance of Angola and an IFC-Milken Institute Capital Market Scholar. A transcript is available below.
Hello, I am Walter Pacheco, head of the Debt Management Office at the Ministry of Finance of Angola and alumnus of the IFC-Milken Institute Capital Markets Program. Today. It is my honor and privilege to welcome Dr. Danny Leipziger, who has worked extensively at the World Bank and is currently the Managing Director of the Growth Dialogue and Professor of the practice of international business at The George Washington University.
Dear Professor, this is it. COVID-19 is the unexpected major shock to the global economy that we will be talking about for quite a long time. Let’s start our conversation to discuss your view on the impact of the pandemic on African economies. In the short term and then the long term, how do you see this impact playing out?
Thank you, Walter. It’s good to see you again. You were in the initiating class of the Capital Markets Program, and one of the stars of our class on how to manage a financial crisis. We didn’t expect COVID.
For Sub-Saharan Africa in the immediate crisis of 2020 we know that GDP has fallen by at least 3% (and in per capita terms more than 5%) and poverty rates have risen. And that is in addition to the hit to exports and tourism a reduction in remittances, and a slowdown in FDI.
There was this outflow of short-term capital in the first quarter of the year, which was somewhat reversed in the second, but still a lot of the buffers that countries used to rely on for dealing with crises proved somewhat inadequate. When we look at the top three countries (Angola being one of them), at least according to the IMF, your GDP is going to go down by 4% (or did in 2020, more or less). In South Africa, more than double that: an 8% drop. And in Nigeria, about 4.3%. Big, big hits.
“Countries have limited options… We’re going to see a doubling or tripling of the fiscal deficits in Sub-Saharan Africa.”
Countries have limited options. And so some have used reserves, some have tried to borrow more, others have let their exchange rates depreciate to deal with the balance of payments problems. But of course that makes the debt more onerous as you move into the future.
And as the International Monetary Fund has always advised, you should create fiscal space in good times so that you have it for bad times, but it’s very difficult for politicians to do. And so in addition, we’re going to see a doubling or tripling of the fiscal deficits in Sub-Saharan Africa.
So in the short term, a big hit, and we’re not talking now about the health aspect, just the economic aspects. As we go to the medium term, there are certain things that countries should have been doing before that they need to do more of now. Because to deal with this fiscal problem, there obviously needs to be a better use of public expenditure. I think countries sometimes accept these public expenditure reviews or PEFA assessments, and they say nice things to the IMF or the World Bank, but at the end of the day, there are many points of GDP that are lost in poor investment projects, in poor public spending. This was unaffordable before for countries that need to deal with poverty, but becomes even more unaffordable in current circumstances, especially when the debt levels in many countries are quite high and need to be repaid in foreign exchange, which means basically it’s either exports or investment coming in.
So in either case, although countries don’t like to hear it, they have to become more efficient in the use of resources because they’re going to have this new, additional debt burden, which multiplies where they were before, which was pretty highly indebted to begin with.
You mentioned that that distress is a major issue facing the continent. What kind of measures should countries put in place to avoid the worst-case scenario?
I think it depends, of course, on the country. It comes down also to levels of reserves and how much flexibility countries want to have in the exchange rate. I think for a number of countries, to be honest the G20 action to put a debt moratorium for the low-income countries (for 2020 and which may be extended to 2021) is okay. Some countries actually don’t want to accept it because they think it will hurt their position in the markets, but that’s for the low-income group.
And the reality is if you look at the data, most of the emerging market debt (and it’s considerable, some estimates have it at over USD 10 trillion total) is mostly from middle- and lower-middle income countries. Those countries don’t benefit from this G20 action.
So if that’s the case we’re down to a few options. You know, there’s been a lot of interest in a new Special Drawing Rights (SDR) allocation (maybe half a trillion or maybe even a trillion) which is a way to create international reserves. The difficulty is of course that normally it’s distributed according to IMF quotas, so the actual recipients would include Belgium as well as Angola, and Belgium doesn’t need it.
I think, to be realistic, one has to talk about a debt re-profiling for countries. I think it’s important to do that before they get into such distress that default is on the horizon, as in the case of Zambia, Ecuador, or Argentina.
And I think with reasonable assumptions, one knows which countries are facing unaffordable and unsustainable debt. And so I’d like to see international community get ahead of the curve. The last time we had something along these lines, it was the Brady Plan, which was aimed at a middle-income countries that were overly indebted. But that requires leadership. We haven’t had that leadership, certainly not in the U.S., and we don’t have a general understanding of the severity of the problem or how to deal with it.
And we have now to be frank: the big player in much of this is China as the creditor, and they’re not members of the Paris Club, they don’t participate multilaterally there. There are two big banks that have done the big lending, and they prefer to do it one country at a time. Well, you know, one at a time is not so good. And also, I think you have to bring the World Bank and the IMF into this to ensure that the new debt re-profiling is consistent with a development and financing plan that has some merit and some success possibilities.
One of the major issues that you pointed out quite well, is that there is a lack of leadership in this process. The second issue is the role of the private sector. There is a lot of reluctance from the private sector to join any sort of initiative. How do you think we will be able to bring the private sector and bring about multilateral coordination? It sounds like a huge and endeavor.
I come back to the idea of the Brady plan because Brady, U.S. Secretary of the Treasury in a Republican administration, came up with a proposal which re-profiled debt, but also allowed the private sector to feel more comfortable that with that re-profiling they would actually get paid. And so essentially, there was a guarantee behind the re-profiling and that guarantee, of course, had to be based on some sort of program of adjustment and reform. One doesn’t want to use the word ‘conditionality’ because it’s a dirty word now, but basically if countries go along doing exactly what they did before the crisis, they’re not going to be able to repay the re-profiled debt easily. So we have to have some adjustments.
So I would say apart from the political leadership, which is the sine qua non for doing anything of this sort, and getting the Chinese involved more multilaterally, the real issue is to convince the private sector that this new re-profiled debt has a higher probability of being repaid.
The issue of debt in Africa is also related to the ability to build infrastructure. Some of the debt (or say, most of the debt) is related to the process of building the necessary infrastructure for our countries, for the continent. So given this scenario, how do you see the continent financing this infrastructure is in the future?
There are adequate savings out there in the world that could be marshaled to do the kinds of investments that Africa needs. They could be related to the African Continental Free Trade Agreement, but a Free Trade Agreement forces countries to specialize in what they’re best at. We have a lot of regional free trade agreements that failed. For instance, the Andean group, there were many of these agreements in central America, many of them. But it doesn’t always work because the countries are rather similar at some level (when you take the resources, like oil that you have, out of the equation). Everybody can’t have a steel plant. In fact, probably no one should have a steel plant.
But that doesn’t mean there are not investments that can be undertaken. And it also is a function of the situation of the private sector in these various countries. So I think it’s a big challenge to development ministers and finance ministers to try and find new domestic sources of growth, increase regional trade, and try to get the right kind of foreign investment in the country.
Dr. Leipziger, the Milken Institute and I thank you for these insights please keep up the good work. Good bye. And stay safe. Adeus!
Thank you, Walter. I look forward to seeing you again, and I wish you luck in your difficult and challenging job. I’m going to be watching that Angola debt profile very carefully now, too, to see how you’re doing. Thank you very much.