Memo to Leaders: Three ‘no regret’ decisions for financing Africa’s post-COVID-19 future
To contain the economic damage of the pandemic and capitalize on the region’s underlying strengths, national and international leaders need to pursue urgent action.
In January 2021, Africa hit a new milestone: with over three million COVID-19 infections, the disease is spreading faster now than during Spring 2020. The fact is, though, that case numbers remain much lower than other world regions, leading to a perception that the disease has largely bypassed Africa. But the economic and social aftershocks have not. Now is the time for world leaders to act, both to contain the economic damage before it gets worse and to help the continent get back on track toward a more democratic and more prosperous future.
COVID-19 has wreaked economic and fiscal havoc
As Africa’s regional output contracted by 3.7% last year, government revenues have dwindled, particularly for economies relying on tourism and commodities. On the expense side, the fiscal challenges include debt servicing obligations amounting to $56 billion, a situation exacerbated by exchange rate deterioration. While advanced economies ripped up the rulebook to pump money into their economies, African leaders are being forced to make impossible choices.
The G20 Debt Service Suspension Initiative (DSSI) has offered temporary suspension of bilateral debt payments, while the IMF has also taken steps to offer debt relief and expand its support. But by November 2020, the DSSI had saved only $5 billion in payments, whilst the IMF forgave about $500m. This eased immediate liquidity challenges for some countries, but amounted to just 5 percent of the $100bn stimulus package requested by African finance ministers. Moreover, many countries refused to participate in DSSI due to the fear of increasing the cost of future borrowing.
In the meantime, for many countries, liquidity challenges are exacerbating existing solvency problems and creating new ones. Zambia, already struggling before the pandemic, was the first country to default on its debt payment during the COVID-19 era, and a number of African countries including Nigeria, Ethiopia, and Djibouti may need to restructure their loans within the next few years to avoid a similar fate. Default can cause severe economic turmoil, often taking years to resolve, and making future borrowing more expensive, as Mozambique’s 2016 hidden debt scandal has shown.
The real impact though is on citizens, who now have both bleaker economic opportunities and fewer services provided by the government to help compensate. The closing of schools and other educational reversals caused by COVID-19 are likely to have a lifelong impact.
Africa has underlying strengths that could help the region bounce back
Despite this hellish year, several factors could help accelerate a regional economic rebound in Africa.
For one, on the January 1, 2021 the African Continental Free Trade Agreement (AfCFTA) quietly came into effect, creating the largest free trade area in the world.. There are still wrinkles to iron out, but AfCFTA could help catalyze greater productivity, cheaper goods, more jobs, and even greater gender empowerment — resulting in $450 billion in potential income gains for the continent, by some estimates. Some are also predicting a commodity boom this year, driven by the demand for green infrastructure which could provide much needed revenues for resource-rich African countries and could help shore up national finances. And of course, Africa has the youngest population on the planet. With the necessary financial resources, including much needed support from development partners, countries could make investments in skills and infrastructure to harness this demographic dividend. These investments could result in a rapid escalation in growth and prosperity on the continent—and increased investment and trading opportunities globally.
World leaders should focus on three top priorities
To capitalize on these opportunities, the continent will need urgent action from national and international leaders. Here are three ‘no regret’ decisions that leaders should make in 2021:
First, IMF shareholders should heed growing calls from finance ministers, economists, and civil society to issue 500 billion in ‘SDR’, or Special Drawing Rights, the IMF’s reserve asset, and reallocate these funds to the countries that need them most. New allocation has happened before in response to crises and is urgently needed now to solve the liquidity crisis.
Second, leaders must take steps to prevent debt default—and, in some cases, safeguard citizens in those countries that do default. Debt service will be $55 billion for Africa in 2021. The DSSI must be extended beyond June 2021 and expanded to include multilateral and private creditors. G20 leaders should expand their Common Framework, which sees common terms for bilateral debt restructuring. All relevant creditors should join, and the framework should apply to all vulnerable countries, not just those in the DSSI. China, as Africa’s largest bilateral creditor, having provided at least $148 billion in loans, has forgiven significant debts in the past and must play an active role in the solution.
Finally, African governments and their partners must play their part in maximizing the impact of the SDR allocation by targeting spending on priority sectors such as healthcare, green growth, and quality education. They should also take steps now to avoid repeating the fiscal errors that will inevitably lead to debt challenges in the future. This means concrete commitments to transparency, accountability and fiscal responsibility. The International Budget Partnership and Open Contracting Partnership have tested methodologies ready for implementation. And leadership on the continent is already emerging, such as the Conference of Speakers and Heads of African Parliamentarians (CoSAP), which commits to monitor the accountability of funds received through debt relief through African governance systems.
These priorities, vigorously pursued, could avert a potential lost decade for African countries, with all the suffering and potential instability that would bring. And they could open up new opportunities to fuel the global economy for the next decade and beyond.
About the Author
David McNair is Executive Director for Policy at The ONE Campaign
– – –
The views and opinions expressed in this publication are solely those of the author. They do not purport to reflect the opinions or views of COVID-19 Africa Watch or any affiliated organization.