Several African countries have communicated their intentions about and sought for debt funding from international financial institutions, like the International Monetary Fund (IMF), and developed countries to assist with the multifaceted effects of the novel coronavirus (COVID-19).
Chair of the African Union and South Africa’s president, Cyril Ramaphosa, called upon developed countries, particularly those of the G20, to assist African states in dealing with the economic impact of the virus.
Ramaphosa further voiced a need for the IMF and World Bank debt relief. Similarly, Ghana requested for a rapid-disbursing emergency fund from the IMF.
According to Unmask Africa’s tally, there is a total of 720,060 COVID-19 cases globally. Of this figure, 537,168 (74.6%) are pending cases; 33,969 (4.7%) fatalities and 148,923 (20.7%) recoveries have been recorded. These fatalities are from 126 of the 203 countries, dependencies and other territories with cases.
Africa has registered an overall of 5,049 cases, 271 (5.4%) recoveries and 155 (3.1%) fatalities. 47 of the continent’s 58 countries, dependencies and other territories have confirmed infections.
In a proposal to the G-20 (which consists of major creditor countries), Ethiopia said the continent needs $150 billion in stimulus measures. The IMF has availed $50 billion in debt funding to aid 80 nations: twenty of these countries are African states. The World Bank has approved a $14 billion COVID-19 response package.
However, G-20 countries have disagreed to the proposal by the IMF and World Bank to put a pause to their bilateral debt payments. According to a news report by Reuters, “That leaves some African governments now facing a potentially unsavoury choice between satisfying creditors or spending money on hospitals and bailing out their economies.”
Some have argued that more needs to be done by international financial institutions such as the IMF.
“If their proposal is just to lend a lot of money without a moratorium on debt payments, it’s not going to stay in [the] country. It’s going to be used to pay back various creditors,” said Tim Jones from Jubilee Debt Campaign, as quoted by Reuters.
Several African countries are already in high debt distress. Based on data from the Jubilee Debt Campaign, an overall of 38% of the Gambia’s total revenue in 2019 was directed at servicing debt, Angola 43% and Ghana 39%.
Cairo-based bank African Export Import Bank is establishing a $3 billion credit facility to help African countries in the wake of the outbreak. Multilateral and public lender African Development Bank sold its biggest dollar issue to date, a three-year bond worth $3 billion, to raise funding for the region’s countries.
IMF debt to African counties doesn’t come cheap
Although the loans are necessary, they raise a certain area of concern: servicing costs (interest payments). According to Misheck Mutize, who is from the University of Cape Town’s Graduate School of Business, “The problem is not that African countries are borrowing too much, but rather they are paying too much interest.”
Mutize added, “There are a number of reasons for this, including badly informed ratings by rating agencies, as well as the behaviour of issuers.”
Additionally, most of the existing loans are foreign currency dominated debt in Eurobond and often issued at the London Stock Exchange as well as the Irish Stock Exchange. “The total value of Eurobonds issued between 2018 and 2019 was more than the value of all bonds sold between 2003 to 2016,” he said.
The main reason is that “domestic bond markets [are not] active and liquid . . . [B]esides South Africa, African bond markets are largely underdeveloped with inactive and illiquid secondary markets,” said Mutize. “This makes it difficult to attract international investor participation locally.”
The devaluation of local currencies, therefore, makes it more expensive to repay such debt from the IMF (or other institutions). Africa’s biggest economy, Nigeria, last week devalued its currency’s official rate by 15%. The continent’s most advanced economy, South Africa, witnessed its currency continue to trade at the lowest level it has ever been.
Knock-on effects of COVID-19 on African economies
Due to the knock-on effects of COVID-19 on commodity prices, tourism and agricultural exports, servicing such debt is a greater challenge as governments’ revenues have declined with the decrease in proceeds generated from such sectors.
Evidently, Nigeria’s 2020 budget has experienced a deficit. Oil forms more than 50% of its income. The income it previously factored in the budget from oil exports is less than what it is currently earning.
In Angola’s case, the finance minister said the economy will contract by 1.21% in 2020, resulting to a fifth consecutive recession. Angola will further freeze 30% of the country’s goods and services budget and adjust spending based on the current oil price of around $35-$20 a barrel. These prices are lower than those in the initial budget.
A decrease in demand for certain metals from factories and national lockdowns implemented to curb the spread of the virus are further worsening the economic stance of numerous African countries.
Mining and refinery companies in South Africa and Namibia have scaled down or completely put an end to their operations for a period of three weeks, which is the duration of the lockdowns in these countries.
Africa’s biggest copper producers, Democratic Republic of Congo and Zambia, have seen a fall in demand for this mineral as factories, especially in China, have cut down on their productions. The decrease in supply has affected their foreign exchange.
With the grounding of flights and an increase in cost of flying agricultural goods to Europe, the main supply chain of Kenya’s horticulture products has been disrupted. Europe is the country’s biggest market for such produce. The disruption has resulted to the loss of hard currency and led to half of the sector’s workers being place on mandatory leave.
While African leaders are put on crossroads to decide between their economies or the health of their people, lockdowns are impractical in African countries where most of the citizens depend on daily incomes, work in the informal sector and there are no social safety nets, such as grants, to rely on.
Africa’s economic week: 30th March to 5th April
- Monday, 30th March: South Africa money supply and private credit; South Africa monthly budget balance
- Tuesday, 31st March: South Africa trade balance; South Africa non-farm payroll; Uganda inflation; Kenya inflation; Kenya GDP; Botswana GDP
- Wednesday, 1st April: South Africa manufacturing PMI (Purchasing Managers’ Index); South Africa vehicle sales
- Friday, 3rd April: Uganda, Mozambique, South Africa, Kenya, Zambia, Nigeria and Ghana PMI
- Non-farm payroll: “a summation of payroll jobs available within the non-farm payrolls classification”, according to Investopedia.
- PMI: “an index of the prevailing direction of economic trends in the manufacturing and service sectors”, according to Investopedia.
- Trade balance (also referred to as balance of trade): “the difference between the value of a country’s imports and exports for a given period”, according to Investopedia.
Reporting by Gaby Ndongo. Editing by Kupa Kambasha. Feature image from Pexels.