0908 GMT July 07, 2020
Sub-Saharan Africa has a debt problem. According to the most recent World Bank debt statistics, in 2018 the region had about $493 billion in long term external debt.
About one third, $117 billion, was in the form of tradeable bonds. About half of the $17 billion in interest payments Africa made in 2018 was to these bondholders.
To put this debt in perspective: In 2018, the region’s total external debt was equal to 36 percent of its gross national income. Debt service payments that year contributed to the region’s 3.6 percent of GDP budget deficit.
A year later, in 2019, many African countries spent more money servicing their debts than they did on health.
Needless to say, Africa’s debt problem is complicating its efforts to deal with the profound social, health, and economic impacts of the COVID-19 pandemic.
The international community has taken some steps to help Africa deal with this issue. The G20 countries have agreed to a debt payment standstill on all debts owed to official creditors based in their countries.
Some of these countries are also contributing to a fund to help the poorest countries meet their obligations to the IMF. Unfortunately, the international community has not convinced bondholders to contribute to this effort.
There are several reasons for this failure. First, the bondholders are a large and diverse group. They each have their own investment strategies and view of their responsibilities to their clients, which include both individuals and companies.
Second, there is variation in the terms and conditions of the different bonds that need to be reconciled and incorporated into one regional relief package.
Third, different African countries have different views on what they need to deal with the crisis in their country. Some want maximum debt relief. Others, more confident in their ability to service their debts and weather the crisis, want to avoid the “guilt by association” that would attach if they are too closely associated with those countries seeking debt relief.
Finally, there is a risk that speculators will buy these bonds, which trade on an open market, at their current discounted prices and seek to enforce their original terms against the debtor countries.
History teaches that this last risk is very real. In the 1990 many African countries had unsustainable debts. They owed $255 billion to their official creditors and $28 billion (17 percent of the total) to private creditors.
Bilateral and multilateral creditors launched the HIPC initiative in 1996 to help highly indebted poor countries. Thirty-one African countries benefited from this debt forgiveness. Private creditors did not participate.
Unfortunately, this created an opportunity for speculators, now more accurately called vulture funds. They bought the debts of countries like Zambia, the Democratic Republic of Congo, Ethiopia and Uganda very cheaply.
They demanded that the countries meet their contractual obligations and pay them in full. They sued any country that refused. This strategy earned them returns of between 300 percent and 2,000 percent.
To date, they have used this strategy — or are using it — against approximately 15 African countries.
Any effort to help Africa deal with its bondholder problem must satisfy three objectives. First, it must offer immediate debt relief to those African countries that need it in order to deal with the COVID induced crisis that they are currently experiencing.
This means that Africa cannot wait for the inevitably time-consuming and laborious negotiating process with a reluctant group of bondholders to produce a result.
Second, it should mitigate the risk that the benefits of the debt relief will be captured by the vulture funds.
Third, it needs to ensure that after the crisis abates African states will not either be saddled with undue debt burdens or denied access to the financing they need to restart their economies and promote the sustainable development of their populations.
Fortunately, there is a way for Africa to meet all three objectives. It should create a special purpose vehicle — the Debts of Vulnerable Economies (DOVE) fund — that will demonstrate to the financial markets how a responsible creditor treats African debtors in crisis.
The DOVE fund will do three things. First, it will buy African bonds on the open market at the prevailing discounted prices. It will then notify all other bondholders that it expects to participate in all future bondholder discussions about the management of African bonds.
Second, it will inform both the debtor country and the financial markets that it commits to hold its bonds and to implement a standstill on any payments due on them until the global health crisis abates. The fund will also pledge that once the global economy begins to grow again it will work with African debtors to ensure that the debt does not become an unreasonable burden on their efforts to rebuild their economies.
It will stipulate that any future debt renegotiations will be consistent with all applicable international standards such as the UN Guiding Principles on Business and Human Rights, the Principles on Responsible Investment, and the UNCTAD Principles on Promoting Responsible Sovereign Lending and Borrowing.
Third, the DOVE fund will advocate that all private sector creditors should participate in a comparable standstill, both on debt payments and bond trading, and should applying the same principles as the DOVE fund in determining what to do with the debt of the participating countries after the crisis ends.
It can remind them that most of the leading financial institutions in the world are signatories to the Principles on Responsible Investment, and many of them have policies that require them to be socially and environmentally responsible in all their operations. Many of them also have human rights policies that confirm that they respect international human rights.
Africa is facing a profound crisis that could set its development back a generation. It needs a solution to its debt problems that makes sure that no future African leader is forced to ask, as did former Tanzanian president Julius Nyerere: Should we really let our people starve so we can pay our debts?
*Danny Bradlow is SARCHI professor of International Development Law and African Economic Relations, Center for Human Rights, University of Pretoria, South Africa.
The above article was taken from IPS.