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Meeting Africa’s urgent liquidity needs while protecting its access to international markets

This Opinion is co-signed by the ministers of finance and / or ministers of development of the following countries: Angola, Cameroun, Djibouti, Egypt, Ethiopia, Gambia, Ghana, Kenya, Mali, Namibia, Niger, Rwanda, Senegal, Seychelles, Sierra Leone and Tunisia.

As the Coronavirus pandemic storm sweeps through the world, in Africa it is leaving many economies that have been performing very well for several years, in a free fall.  The IMF predicts that global growth will contract by -3.0 percent with developed countries bearing the brunt of this contracting at double the global average at -6.1 percent. The global economy is in a depression and bold measures across the board are required to support a return to growth. 

African economies are not only hit by the consequences of the pandemic, all productive sectors, including tourism which provides tax revenues and hard currency to many countries and employs millions, are suffering. The collapse of commodity prices and remittances have further worsened the situation for many countries with reserves rapidly depleting.

The UN Economic Commission for Africa predicts that growth in all of Africa in 2020 will contract by -1.8 percent and about an additional 28 million more people will fall into poverty while unemployment will rise by an additional forty percent.  The consequences on economies will be severe, livelihoods across the continent will be destroyed and social cohesion threatened if enough means and policies are not urgently put in place to plan and respond to these pressures in a coordinated manner. The challenge for policy makers on the continent today is to minimize the immediate impact of depression and begin to sow the seeds for growth. This will require rapid domestic actions complemented by support from the international community.

Addressing the African countries liquidity needs

Governments need liquidity and they need it now. African countries have launched self-help policies to manage the crisis. Measures include addressing the healthcare challenges, lessening the impact on vulnerable families with additional social safety nets, tax holidays or exemptions for businesses, as well as cheap financing facilities for impacted companies including SMEs. African central banks have taken measures to increase liquidity and facilitate moratoriums or restructuring on corporate and personal loans.  

Abundant stimulus packages have already been launched by governments, averaging 2-10 percent of GDP in many countries, from Egypt to South Africa, from Senegal to Djibouti.  These fiscal stimuli measures, in an economic lockdown environment – where no additional revenues are being collected – are exerting undue pressure on already extended budgets. Consequently, governments need to raise massive new and additional resources from multilateral, bilateral and commercial partners. Hence the need for a debt service standstill for two years until the full extent of the pandemic and depression is fully understood. No countries must be made to choose between saving lives or reimbursing debts.

Prior to the crisis many governments were focused on critical actions to build prosperous societies by improving infrastructure services, energy, connectivity, technology and education. In the prior decade access to energy has increased from about 30 percent to 70 percent in Kenya, Senegal and Ivory Coast, for example. The Djibouti – Ethiopia rail has improved connectivity in the Horn of Africa as has the Senegambia Bridge.  From the Mombasa port in Kenya to Lomé port in Benin and Tema port in Ghana, port activity doubled as economic activity across the continent was picking up.

The bilateral debt standstill is a first step, more will be needed

African finance ministers called for $US 100 billion fiscal stimuli, the IMF has already extended debt relief to the 17 low income countries on the continent, and through other mechanisms has disbursed over $US17 billion in emergency funding to countries to address the Covid-19 pandemic. The G20 has approved a 9-month standstill on the bilateral debt of some emerging market countries to the end of 2020, and this is a good start. But we need to go further, as demanded by the ministers, and include 2021 into the standstill as it is unlikely that the economies will be fully back on track next year.  To be fully effective, this standstill offer must be specified and improved in many respects. To echo the calls of several African and international leaders, some public debt cancellation for certain countries will be necessary. There is need for negotiations to be opened without delay bilaterally and on a case by case basis.  

The case of the international commercial debt

On the commercial debt front, action is needed as well since a large portion of Africa’s sovereign debt service pertains to commercial debts secured by our countries through the Eurobond and international loan markets. For Africa this represents a debt service of about US17 billion in 2020. Africa needs to preserve its hard-earned access to international financial market by avoiding any payment default on the continent, voluntary or otherwise.

To date over 21 African countries, have issued Eurobonds. The bond issuances have grown from US$2.5 billion in 2010 to over US$50 billion in 2020. Thanks to the massive public investments made possible by the funds raised and reforms that attracted more private investments, including FDIs, we created more jobs, lifted millions out of poverty and made progress on the human development index. Access to these international markets’ resources must be protected. African countries, like their developed country counterparts, need the financial markets to develop. Through discipline and strong macroeconomic policy stances Africa has made great steps but more remains to be done. The crisis should not threaten all these gains neither should it shake market confidence in Africa.

The financial sector has been a beacon of innovation in times of crisis, this time is no different. An instrument that allows African countries to service their debt in a timely manner, avoid defaults, meet their full obligations to commercial creditors while having access to some liquidity would be the best option for all. We encourage the development community, the IMF, the World Bank and other financial institutions to work with Africa and the markets to implement this plan.  One or more appropriately structured bridge vehicles (Special Purpose Vehicles) could be funded appropriately and guaranteed by multilateral and bilateral partners with the main objective of buying out the 2020 and 2021 debt service obligations and converting them into concessional or semi-concessional debt with longer term maturities to free-up much needed fiscal space over the next two years. The vehicles can be adequately credit enhanced to achieve a low cost of funding. We could also envisage the use of Special Drawing Rights (SDRs) combined with the guarantees to achieve an optimal structure.  There is no doubt we can accommodate all relevant constraints and achieve this vision if our bilateral and multilateral partners work with us.

A solution to finance Africa’s commercial debt service could free up over $44 billion of fiscal space for Africa in 2020, providing immediate liquidity to governments – a much needed immediate bridge to renewed growth for Africa and the global economy. 

Providing Africa with the means to cushion the impact of the crisis and to sow robust seeds for a recovery is as much an emergency as working to eradicate the corona virus.

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