The African Development Bank (AfDB) estimates that the debt-to-GDP ratio of African nations will reach 75% this year, arguing that financing should be directed to the most productive projects.
“One of the key recommendations for debt sustainability is to strengthen the link between debt financing and profit growth, primarily by ensuring that debt is used to finance the most productive projects, those that generate sufficient returns to repay debt in the future,” the bank argues in the report
According to the “Economic Outlook for Africa 2021” report, which is titled “From debt resolution to growth: Africa’s path,” the Covid-19 pandemic “caused a sharp rise in financing needs in Africa, which needed an additional $154 billion last year to respond to the crisis, causing the debt-to-GDP ratio, which had stabilized at 60 percent between 2017 and 2019, to rise by 10 to 15 percentage points in 2021.”
The concerns about debt, which run through the entire report released a few days ago in Abidjan, also focus on “the shift from traditional multilateral and bilateral Paris Club creditors to commercial and private creditors,” resulting in “significant vulnerabilities such as problem debt risk, erosion of safety margins, and downgrading of ratings.”
The ADB said it estimates 3.2% growth for this year on the continent, following last year’s 2.1% recession due to the Covid-19 pandemic.
The continent “should recover from its worst economic recession in half a century due to the pandemic, growing 3.4% in 2021, which follows a 2.1% contraction last year,” reads the report quoted by Lusa.
The document stresses that, although the economic impact will be differentiated according to regions, “the anticipated recovery is generic.
The DSSI is an initiative launched by the G20 in April last year that guaranteed a moratorium on debt payments from the most indebted countries to the most developed countries and multilateral financial institutions, with an initial period until December 2020, which was then extended to June this year, with the possibility of a further six-month extension.
This initiative only suggested that countries seek private sector debt relief, whereas the Common Framework, approved by the G20 in November, states that private creditors must be approached, although it does not say explicitly what happens if there is no agreement between the debtor and the creditor.
Ethiopia’s application to join this framework in late January rattled investors, who saw the country as the first of several countries in sub-Saharan Africa to ask for debt relief.
The proposal put forward by the G20 and Paris Club in November is the second phase of the DSSI, which was launched in April and was widely criticized for not forcing private parties to participate in the effort, as it would pave the way for indebted countries to default on official and bilateral creditors (countries and multilateral financial institutions) and continue to service private debt.
This framework aims to bring all the debt actors on board, including China’s private and public banks, which have become the largest creditors of developing country governments, particularly those in Africa.
