The risk of debt defaults has been on the increase among African countries due to decline in economic output, which was triggered by certain policies and measures to curtail the COVID-19 pandemic.
This was disclosed by the African Development Bank, (AfDB), via its Strategy for Economic Governance in Africa document, which was launched on Friday.
According to the document, public debts had exceeded 50% of GDP.
What AfDB is saying about debt default
It stated, “Declining economic output as a result of containment measures against COVID-19 and policy measures to stimulate the economies have heightened debt vulnerabilities.
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“Public debt now exceeds 50% of GDP in nearly half of its regional member countries. Over the last decade, Africa increased its debt at a faster rate than any other region.”
The bank stated that following the increase in public debt stock, there had been a corresponding increase in the risk of debt defaults, adding that at least 24 African countries had applied for the Paris Club–led Debt Service Suspension Initiative.
“The risk of defaults on debt, much of which is now non-concessional, has increased. At least 24 African countries have applied for the Paris Club–led Debt Service Suspension Initiative, which would free up resources to fight the pandemic,” it added.\
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AfDB recommended that countries should focus on developing the capacity for effective debt management, as well as strengthen growth, financing instruments, and effective governance, which would be highly beneficial towards avoiding any debt crisis.
It said, “Building the capacity for debt management becomes important, but there is also a need to revamp the nexus between growth, financing instruments, and effective governance.
“Doing so would ensure that reforms adopted in the context of debt suspension or restructuring are properly timed and tailored towards giving credibility back to governments on their policy actions.
“In other words, the fiscal space that ensues from debt suspension can be put to use towards public investment in strategic sectors and growth-enhancing governance reforms through fiscal consolidation are critical in this context.”
Further in the document, the bank re-affirmed the rising level of debt in Africa, alongside the increasing risk of debt distress.
The bank stated, “The level of debt in Africa has soared, rising from 38% of GDP in 2011 to 61% in 2019.”
What you should know
In 2013, only six African countries were considered at high risk of or in debt distress, according to the debt sustainability analysis of the International Monetary Fund.
In June 2020, the figure reached 20, and it is likely to increase as a result of fiscal pressures compounded by the COVID-19 pandemic.
It added that the composition of debt in Africa had changed from less concessional debt to higher non-concessional borrowing, with more options of debt financing, which increased Africa’s debt stock, and might lead to a negative credit outlook for the continent.
The bank added that the contribution of commercial creditors to Africa’s total external debt rose from 17% in 2000 to 40% by the end of 2019.
It added that Eurobond issuance in Africa soared between 2008 and 2018. Although the change indicated growing investor confidence in debt securities issued by RMCs, it also increased the countries’ debt burden.