As the world grapples with the COVID-19 pandemic, countries are putting in place significant fiscal policy measures to counteract the sudden stop in economic activities. These spending plans aim to minimize disruptions to liquidity and ensure the solvency of sectors, businesses and households that are most affected by the pandemic. Understandably, low-income countries with smaller fiscal room would not be in a position to deploy robust spending plans to mitigate the shock. The data from the IMF’s Policy Responses to COVID-19 Tracker supports this hypothesis. So far, the spending plans of countries in sub-Saharan Africa is 0.26 percent of GDP on average, which is considerably lower than the average of countries in the Europe and Central Area region as well as North America at 9 percent and 11.5 percent of GDP, respectively.
On April 2nd, Africa’s Ministers of Finance solicited for debt relief from bilateral, multilateral
and commercial creditors in order to improve their fiscal position. Similarly, a group of senior Africans have called for an immediate debt relief for African countries in order to create the fiscal room required for governments to combat the pandemic. It is, however, noteworthy that African countries were offered about $99 billion in debt relief under the Heavily Indebted Poor Countries (HIPC) initiative and Multilateral Debt Relief Initiative (MDRI) in 1996 and 2005 respectively. However, a coronavirus debt relief will not only be provided to countries with unsustainable debt burdens, as was the case previously, but to the entire continent. This article attempts to make a case for African countries, particularly those in sub-Saharan Africa, to have recourse to debt relief in the face of the COVID-19 pandemic while assessing the practicability based on the experiences from the previous effort at debt relief.
Several African countries stepped into the pandemic under a high debt burden which offers them limited room for fiscal manoeuvre. For sub-Saharan Africa, government debt as a share of GDP has grown from 31.7 percent between 2010-2015 to 50.4 percent in 2020 with countries like Cape Verde, Mozambique and Angola recording debt levels as high as 118.9 percent, 106.8 percent and 90 percent of GDP respectively. Since 2010, more of these countries have gained access to the international capital market and as such, commercial creditors have become key players in providing credit to the continent. The change in the creditor composition will have severe implications for the request for debt relief given the historic low participation of commercial creditors in providing relief under the HIPC initiative.
The growth in debt has also led to rising debt servicing costs as debt service payments for several countries are higher or at par with investments in core human capital sectors. In Nigeria, the 2020 budget allocates N2.43 trillion to debt servicing, meanwhile N706 billion and N464 billion are allocated to the education and health sectors respectively. Similarly, in 2020, Ghana earmarks GHC13.9 billion to debt servicing, while spending GHC10.68 billion and GHC4.24 billion on education and health respectively; and South Africa earmarks similar amounts for debt servicing, basic education and health (R229 billion, R265 billion and R229.7 billion respectively).
Relatedly, Africa has the weakest health systems in the world. In a ranking of health systems across 191 WHO member countries, most of the countries that ranked at the bottom percentile are African. Specifically, out of the bottom 50 countries, 34 are in sub-Saharan Africa. As such, the health systems are not adequately prepared to respond to the needs of the population during the health crisis and will require significant finance.
Another reason why Africa should be considered for debt alleviation is that most of the continent (nine out of ten African countries) is commodity dependent and as such is suffering from the demand shock associated with the pandemic. While 41 percent of countries in sub-Saharan Africa are commodity dependent, the share for other continents is significantly lower as the share for Latin America and the Caribbean, East Asia and Pacific, Middle East and North Africa, and Europe and Central Asia are 17 percent, 16 percent, 13 percent and 12 percent respectively. The reduction in revenue has put pressure on government budgets with spill over effects to the rest of the economy.
Moreover, due to structural issues, larger than normal fiscal spending will be required on the continent. According to the International Labour Organization, 66 percent of total employment in sub-Saharan Africa is in the informal sector which is characterised by low wages. Poverty is another issue. Out of the world’s 28 poorest countries, 27 are in sub-Saharan Africa with the region’s poverty rate standing at 42.3 percent. Considering that a large share of the population does not earn a certain threshold of income sufficient enough to meet their needs, the continent will require large safety nets for its citizens. Furthermore, given the low investment in manufacturing either for local or international markets, many countries have limited amounts of the medical supplies and equipment required to combat the pandemic. In Nigeria with 195.9 million people, less than 500 ventilators are available. Others are in a worse situation as Zimbabwe with 14.4 million people has about 20 ventilators in public hospitals across the country and the Central African Republic with 4.6 million people has only three ventilators. Significant amount of resources will be required to cover up the shortfall in personal protective equipment for health workers, ventilators and other medical supplies.
What kinds of debt relief should be made available and will creditors be willing to participate?
A standstill for debt servicing for an agreed upon time will immediately free up resources for African countries to combat the pandemic. Considering that governments spend a considerable share of their budget to repay the principal and interest payments of their debt, providing the latitude to hold off on these payments in the short term will offer the flexibility required to focus on the crisis. In addition, grants and concessional loans with low interest rates and long grace and maturity period can be made available to the continent. Multilateral creditors and bilateral creditors can play a more proactive role in this area to make funds available to the continent.
While the creditor community has evolved to include a larger group of commercial creditors, multilateral and bilateral creditors continue to provide considerable amount of credit to the continent. Judging from the experience of the HIPC and MDRI, these creditors are likely to participate in a coronavirus debt relief programme. As a matter of fact, multilateral development organizations including the World Bank and International Monetary Fund as well as bilateral development partners such as the G-20 have stated their commitment towards providing support to developing countries.
Despite the urgent need for finance, African government can also achieve quick wins without waiting on the international community. In line with this, the following recommendations are made:
The use of a mix of timely and targeted policies such as temporary tax relief is required considering the shortfall in public finance for cash transfers. Payments on personal and corporate income tax should be waived during the crisis in order to ensure that households and businesses are financially secure.
Now more than ever, African governments need to reprioritise their revenue and spending objectives. Focus should be placed on the core human capital sectors such as health as well as import-substitution sectors like manufacturing in order to build the capacity to weather the effects of the pandemic.
The government and private sector should come together to locally manufacture the medical supplies and equipment required to tackle the pandemic. This is crucial as the entire world is in need of these supplies and importing them may prove difficult. While the government can provide the means, the technical know-how and corporate philanthropy offered by the private sector should be leveraged on to deliver the goods.
The COVID-19 pandemic has required that people, businesses and governments across the world pool resources to tackle the problem. Cuban doctors flew to Italy to provide support as the country became overwhelmed. Jack Ma, the co-Founder of Alibaba, has provided free medical supplies to numerous countries across the world. In the spirit of goodwill and global partnership, Africa should be provided debt relief to enable governments adequately combat the pandemic. This is especially important considering that the COVID-19 pandemic is a social collective bad: until all countries are free of the virus, no single country is truly free.
Chukwuka Onyekwena & Mma Amara Ekeruche
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