According to the Economist Intelligence Unit’s (EIU) Global Outlook for May, Ethiopia, Ghana, Zambia and Malawi are the four countries currently in default whose sovereign debt restructuring inspires the most concern. In North Africa, Egypt and Tunisia are also at high risk of over-indebtedness.
During the presentation of the May Global Outlook, Benedict Craven, chief economist at The Economist Intelligence Unit (EIU), discussed the current situation and outlook for African debt. The expert recalled that there are currently four countries that are proceeding with the restructuring of their sovereign debt under the G20’s Common Framework, an initiative created during the pandemic by the World Bank, the Debt Service Suspension Initiative, which brings together institutional and private creditors.
According to Benedict Craven, “negotiations are still ongoing with three of these countries, Ethiopia, Ghana and Zambia, which remain in default (i.e. have missed their debt repayment deadlines) and are using the Common Framework to get out of this situation. Outside this framework is Malawi, which is trying to negotiate the restructuring of its debt directly with bilateral creditors, and also Chad, since it has already obtained limited relief (debt rescheduling) in 2022 under this mechanism.”
The EIU’s chief economist believes that one of the reasons for the ineffectiveness of this initiative is that no deadline has been set for finalising the negotiations. “This has affected Zambia and Ghana, two commodity exporting countries whose rising export prices have improved their repayment capacity. As a result, the creditors want to include this contingency in the debt relief agreements with these countries, which has caused delays in the process that accentuate the deterioration of public finances.”
Zambia is the country that has been in default the longest
Benedict Craven singles out Zambia as the country that requires the most attention, as it has been in default for the longest time (the government defaulted on its external debt in 2020). Although it managed to restructure a Eurobond debt worth 3 billion dollars in March, the EIU predicts that a final agreement on the Common Framework will not be reached until the second half of 2024. “The good news is that this urgency has increased in recent weeks due to the drought, which jeopardises the application of the contingency clauses demanded by the creditors. Zambia’s restructuring process has been so long and painful that there is a risk that other over-indebted African countries will no longer even attempt a clean exit from their default processes.”
The EIU analysts seem to be more optimistic about Kenya, despite the fact that the country has a debt of 35 billion dollars, more than any country in default today (by way of comparison, Ghana has 30 billion dollars in debt and Zambia 13 billion dollars). This is because Kenya managed to return to the markets at the beginning of 2024, when it issued Eurobonds which, although with a considerable risk premium, covered most of a 2 billion dollar repayment due in June. In Benedict Craven’s opinion, “today the African countries with the greatest risk of over-indebtedness are, paradoxically, those with the smallest external debts, between 500 million and 2 billion dollars. According to our data, of the seven low-income countries in this situation, five are already protected by aid programmes with the International Monetary Fund (IMF).”
He adds that the downside is that if these countries were to default, the way out would be much more difficult, given that around half of the aggregate debt of Africa’s low-income, high-risk countries is multilateral and therefore non-negotiable. “Isolating such a large part of the debt creates the risk that other creditors, such as development banks, will resist participating in the relief of these debts, as they would have to absorb steeper losses.”
There are currently four countries that are pursuing the restructuring of their sovereign debt under the G20’s Common Framework, an initiative created during the pandemic by the World Bank, the Debt Service Suspension Initiative, which brings together institutional and private creditors.
Egypt and Tunisia are the two new concerns
Among middle-income African countries, the EIU considers that Egypt and Tunisia have the highest risk of over-indebtedness. “In Egypt, the risk of external debt default has decreased with the increase in the IMF programme that followed the March monetary reform and a massive foreign direct investment agreement with the United Arab Emirates. Although Egypt has proved time and again that it can rely on international bailouts when absolutely necessary, the EIU maintains its view on the need to restructure domestic debt.”
Tunisia, too, according to the EIU, is at high risk of default as it does not have the lines of financial support that Egypt has managed to secure. “We believe that restructuring Tunisia’s external debt would be the most difficult of any country with a high risk of default. This is because President Kaïs Saïed, who has an authoritarian profile, rejected an IMF programme worth 1.9 billion dollars in 2023 and is unwilling to resume discussions with the Fund, including annual reviews under Article 4, while he concentrates on securing re-election this year,” he explains.
Text: Jaime Fidalgo
