How the G20 can address debt distress in Sub-Saharan Africa
The COVID-19: How can the G20 Address Debt Distress in sub-Saharan Africa? report from Task Force 9 (International Finance) of the Italian Institute for International Political Studies highlights the need for G20 countries to change strategy when it comes to managing sovereign debt from sub-Saharan Africa. While debt stress from sub-Saharan African states had already begun to grow due to changes in concessional loan conditions, the advent of COVID-19 has created further stress through a need for more public sector spending. This was shown in growth of government debt to GDP for debtor countries from 51.5% in 2019 to 57.8% in 2020. Despite these debt challenges, the International Monetary Fund (IMF) estimates that a shortfall of US$890 billion remains in finance needed for the region between 2020 and 2023. This highlights the need to not only ensure that sub-Saharan African states do not languish from debt, but are also supported with further funds to bolster economic growth.
The report recommends that G20 states act to support sub-Saharan African countries in reducing their debt stress. The World Bank and the IMF has kicked off reforms by advocating the Debt Service Suspension Initiative (DSSI), where G20 creditor states are requested to temporarily halt debt-service payments from debtor countries. While the DSSI is a step in the right direction, the mechanism creates pitfalls for landlocked and small island countries and middle-income countries, with South Africa, Botswana, eSwatini and Mauritius counting as examples. Such pitfalls in the mechanism means that these countries are not eligible for DSSI discounts.
The report notes that more can be done through reforms beyond the current DSSI mechanism. Opportunities for change are found through the implementation of the Common Framework for Debt Treatments beyond the parameters of the DSSI, where a needs-based approach to debt restructuring and relief is adopted to support debtor countries. Capacity building for debtor states can also be expanded on by supporting the International Development Association and Africa Development Fund by providing them with further liquidity through the issuance of Special Drawing Rights (SDR), with new SDRs of up to US$650 billion advocated by the IMF to fund global initiatives. The development of local financial markets and the need for better public financial management can also be a cornerstone in improved outcomes for African states, where lax regulation, a reliance on foreign loans and poor asset management have prevented domestic economies from developing the financial and institutional infrastructure required to grow their economy. Lastly, rating agencies should reform the methodology in which sovereign risk ratings are reported, with care taken to understand both the institutional makeup of individual African states and a need to avoid treating African states as a monolithic entity.
The noted changes as outlined by the report highlights the need for donor states to provide further assistance to sub-Saharan African countries currently in need of further economic support. By implementing the reforms, there is a strong opportunity for countries on the continent to become more self-sufficient and to become even further integrated in the global economic community, thus expanding trade opportunities between countries like Australia and the African continent.