Sovereign Debt Relief Back on the Agenda
Posted on 22nd April, 2020 in Corporate News
Image Credit: Ben Schumin
Since our last column in mid-March many African governments have introduced lockdowns or other social measures to confront coronavirus. One (Ghana) has this week announced part relaxation of its controls. Rather than join the army of experts in circulation and offer tentative country comparisons, we will comment on the stance of the international community.
There has been a swift response, helped by the fact that the spring meetings of the IMF and World Bank were held last week. As many as 24 African governments have already received support from the Fund in at least one form, mostly from the rapid credit facility for low-income members and/or the rapid financing instrument. When multinationals face a global crisis and there is no conditionality attached to its financing, then they are able to react with speed.
The Fund has temporarily raised the ceiling on drawing under these facilities from 50 to 100 per cent of a member’s quota. Disbursements of about US$890m already made to Côte d’Ivoire and US$1bn to Ghana are in line with the higher ceiling. Nigeria’s request for US$3.4bn from the Fund appears to have been submitted on the same basis.
For these new borrowers, the final payment is due after ten years and, depending on the facility, the period of grace runs to 5.5 years. This is cheap money, as it should be, but the borrowing still adds to the debt burden. The Fund’s statement for the Ghana disbursement noted that gross central government debt at end-2019 amounted to 63 per cent of GDP. The country’s debt stock/GDP ratio is higher than when it secured HIPC debt relief more than 20 years ago. The same is true of Mozambique and Zambia.
Debt alleviation is again on the table. The Fund has made US$500m available from its catastrophe containment and relief trust for immediate debt relief for 25 members, all but six of which are in sub-Saharan Africa. More contentious is the G20 programme to defer bilateral debt service due until the end of this year for governments eligible to borrow at the World Bank’s concessional window. Borrowers have to request the deferment and the private sector is expected to match the bilateral offering.
This is contentious because many governments have taken syndicated loans and issued Eurobonds in the current low interest-rate environment whereas in the era of HIPC virtually all borrowing by low-income governments was from official creditors (bilateral and multilateral).
These new creditors will not warm to the idea that they should match bilateral debt relief. In extreme cases they bear the risk of default, the recent experience of the governments of Argentina and Lebanon. They invest in loans and bonds with strict terms covering coupon payments, final maturities and much more. Failure to pay a coupon would likely amount to default in the view of ratings agencies. An additional challenge, more for bondholders, is that hundreds of investors are involved. Agreements with the borrower therefore become difficult to reach, and “holdout” investors will favour international court action. The dreaded “vulture funds” have their day.
The permutations are numerous. We think therefore that many governments eligible for debt relief under the programme will not apply for it because they will not want to sour relations with private creditors. Nigeria is an example. It paid US$180m in bilateral debt service in 2019. It regularly produces +/- 2.0 million b/d in crude oil and is not heavily indebted. In normal times (in contrast to the current said “new normal”) it is not stretched by these debt payments and it will want to maintain access to the Eurobond market.
Our final point is that the story is changing rapidly and that the invisible threat from the virus undermines credible forecasting. The support from the multilateral agencies and G20 might prove inadequate for some countries within one month. It would then be increased: how much and on what basis we cannot say but not on the basis of figures (such as US$100bn for Africa’s needs this year) seemingly drawn from the ether by prominent opinion-formers and widely publicized.
23 April 2020