Underwhelming debt servicing capacity points to imminent distress
Global public debt levels have risen to as much as the world’s total economic output, albeit developed economies account for much of it at 120% of their GDP compared to 63% for developing countries.
In the case of developing countries, the ratio of external debt servicing to revenue is probably a more reliable metric for determining imminent debt distress (see Figure 1), albeit a juxtaposition with the debt-to-GDP ratio will still be necessary. What is unique about this recent round of emerging markets (EM) and African debt distress is that China has surpassed Western lenders and development financial institutions in lending to developing countries and has done so with opaque documentation and terms.
Almost all African countries that will require IMF support in this latest round of debt crisis will involve creditor committees with China at the head of the table, complicating negotiations, being as about half of Chinese international lending is not recorded in official global debt statistics.
Africa has been here before. Debt relief of about $100 billion for highly indebted poor countries since more than two decades ago provided breathing room for a lot of poor economies
Ghana and Nigeria provide a useful contrast in the West African case. Because even as both Ghana and Nigeria are troubled, the degree and circumstances vary.
For instance, Ghana’s debt-to-GDP ratio is about 80%, which could be as high as 85% in 2022, according to the IMF, whereas Nigeria’s is about 23%, albeit if you add monetary financing, it is much higher.
In any case, the IMF is already calling on the Nigerian government to restructure its debt to avoid potential default. Economic populism in both countries is a common factor for their ongoing fiscal troubles, although forced Covid-19 spending, and the other global headwinds that followed, from the Russia-Ukraine war, the supply shocks in tandem, to the global monetary tightening in response, are making what were increasingly bad situations much worse.
Ghana has already begun to implement austerity measures ahead of an IMF deal, revising its 2022 budget deficit downwards in late July 2022 and cutting its economic growth projection for the year to 3.7% from 5.8%.
Nigeria may very well have to as well, but upcoming elections in February 2023 point to likely continued deterioration until a new government is installed in May 2023.
In East Africa, Kenya, Tanzania, Ethiopia have either clinched IMF deals or are negotiating one.
In Southern Africa, the story is the same. South Africa turned to the IMF in mid-2020 during the height of the Covid-19 pandemic. Zambia is negotiating with international creditors on a debt restructuring and has already secured IMF credit support. Judging from the trend, almost all key African economies will have credit programmes by the IMF before end-2022.
Debt restructurings must reduce moral hazard
Africa has been here before. Debt relief of about $100 billion for highly indebted poor countries since more than two decades ago provided breathing room for a lot of poor economies, allowing them to deploy revenue to more productive purposes. But the discipline did not last.
Cheap credit from China for ego-boosting elephant projects were taken without care for proper costing, and under terms that are increasingly now leaving countries cornered, with the prospect of default increasingly high.
Zambia, which has already defaulted on its Chinese loans, is an archetypal example. Chinese loans have been very helpful to build new infrastructure, ranging from a new international airport, to additional power generation capacity.
With a power surplus of at least 1,000MW, Zambia has something to show for its debt binge. Still, Zambia can no longer fulfill its debt service obligations under the original terms.
As China is new to this all too frequent complication with African lending, the Zambian case is also an opportunity for China to demonstrate its capacity to manage the unique vagaries that come with lending to African economies that typically like to bite more than they can chew.
An edited version was originally published by the Italian Institute for International
Political Studies in Milan, Italy. See link viz. https://www.ispionline.it/en/pubblicazione/crisi-del-debito-ci-risiamo-36083
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