Sub-Saharan Africa’s Debt Problem, the Pandemic, And What Must Happen Next

In the first year of the pandemic, sub-Saharan Africa had a relatively low case count, accounting for just 3% of the world’s cases and 4% of its deaths. Nonetheless COVID-19 would have a sizable impact on the region. The economies were devastated even before the virus showed up in the shores because of the region’s external economic linkages.

In a new article for the Brookings Institution, Maryland Smith’s Lemma Senbet, along with Brookings co-authors, explores how the pandemic and the swift and preemptive lockdowns implemented around the world in March of 2020, “left significant scars on the fiscal position of sub-Saharan Africa and the market condition it faces.”

Using new data, the authors examined the impact of the pandemic on sub-Saharan Africa’s debt sustainability and vulnerability. Senbet, Chris Heitzig, a research analyst with Brookings’ Africa Growth Initiative, and Aloysius Uche Ordu, director and senior fellow with Brookings’ Africa Growth Initiative, together reveal that debt levels climbed substantially in sub-Saharan Africa since the onset of the pandemic.

In their article, the authors used IMF projections as a comparison to analyze the impacts on the pandemic on debt levels and how they vary in correlation to key determinants of growth and fiscal space. And they offer a roadmap for governments as they seek to chart a path forward.

Senbet is the William E. Mayer Chair Professor of Finance at the University of Maryland’s Robert H. Smith School of Business and a former executive director and CEO of the African Economic Research Consortium. He is a member of the Brookings Institution’s AGI Distinguished Advisory Group and a member of the Advisory Panel of G20 Compact with Africa. A founder of Maryland Smith’s Center for Financial Policy, Senbet, in April of 2020, organized a webinar about the pandemic, still in its early stages, and its potential impact on African economies, bringing together high level policy officials from the World Bank and the International Monetary Fund (IMF) for the discussion.

Debt was already an increasing problem across all income groups of African countries before the pandemic, Senbet says, but COVID-19 made the problem far worse.

The sharp contraction in global trade in 2020 hit African economies hard, forcing governments to turn to the World Bank, the International Monetary Fund, the African Development Bank and certain EU countries for debt-relief measures and restructurings. Many borrowed to finance stimulus packages to support at-risk populations, struggling businesses, education solutions and health-related infrastructure.

“In fact, African countries had been borrowing heavily in the global credit markets in recent years, particularly through Eurobond issuance and syndicated bank loans. On the bright side, the increased access to international markets was accompanied by an African growth renaissance, with seven of the fastest growing countries in the world being from that region –Senbet says. “On the dark side, rising debt levels have corresponded with rising debt service costs while the fiscal space for meeting debt obligations has shrunk due to economic shocks attributable to COVID-19.”

And that’s worrisome, Senbet says. The failure to meet debt service obligations, he warns, will have devastating impacts, including downgrading of credit ratings (which results in increased future debt costs), heightened pressure on foreign exchange reserves and domestic currency depreciation, the possibility of being squeezed out of the market and “negative reputational consequences.”

Among the authors’ findings:

• Debt levels in sub-Saharan Africa in 2020 were 4.5% higher than projected. The increase was particularly acute in heavily indebted poor countries (HIPC), whose debt had mirrored non-HIPC countries the decade prior.
• Non-HIPC countries and especially upper-middle-income countries retained access to credit markets and used a mixture of private and official creditors to finance increases in debt (which were largely in line with projections).
• HIPC countries were largely shut out of private debt markets, instead relying on unplanned borrowing from official creditors.
• Domestic bond markets played a relatively important role in private borrowing.
• Some resource-rich countries saw sharp increases in bond yields, even in cases where they had comparatively low yields before the pandemic.
• Metal prices showed more stability and higher growth than oil prices, leading metal-exporting countries to take on less debt than their oil-exporting peers.

The authors’ recommendations:

• In sub-Saharan Africa’s hard-hit economies, policymakers and international partners must urge full participation of all creditors, including private ones, in debt restructuring.
• Development of the financial sector must be accelerated.
• Public financial management and internal resource mobilization must be enhanced.
• Financial leakages and illicit flows must be mitigated.
• Opportunities afforded by the African Continental Free Trade Area (AfCFTA) must be harnessed and grown.
• Incentive-compatible and state-contingent contracts must be designed.
• Existing institutional mechanisms for debt resolution must be revisited.

Read more: Tadias magazine interviewed Senbet about the pandemic and its potential impact on African economies. To learn more about the issue, read: The Tadias Q&A With Prof. Lemma Senbet.