Evolution of the debt landscape over the past 10

Global Courant

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Excellencies, ladies and gentlemen.

Thank you for inviting me to speak at this important session on the evolution of the debt landscape over the last 10 years.

Africa’s total external debt was estimated at $1.1 trillion by 2022. This is expected to rise to $1.13 trillion by 2023. This is due to several factors: the spillover effects of the Covid-19 pandemic on economies and their fiscal space leading to downgrades of several countries; the rising cost of energy and food prices from the Russo-Ukrainian war; and the rising costs of adapting to climate change.

With the tightening of monetary policy in the US and Europe, interest rates have risen, leading to rising debt servicing costs. These combined effects have left 25 countries in Africa at risk of being highly indebted or in a debt crisis. As a result, foreign debt service payments for 16 African countries will rise from $21.2 billion in 2022 to $22.3 billion in 2023.

The structure of Africa’s debt has changed dramatically over the past decade, accentuating a trend that began in the mid-2000s.

I want to discuss five trends.

First, non-Paris Club bilateral and commercial creditors are increasingly important sources of African sovereign debt. While bilateral debt was 52% in 2000, it will fall to 25% in 2021; the share of commercial debt in total debt increased from 17% in 2000 to 43% in 2021. Annual bond issuance in Africa increased from an average of $10 billion per year in the early 2000s to about $80 billion per year year in 2016–2020. This trend was driven by very low global interest rates, with investors looking for yield in emerging markets.

Second, there is a very rapid growth of debt to China. The share of China’s debt has risen from just 1% of total debt in the mid-2000s to 14% of total foreign debt in 2021. Most of this debt is for infrastructure.

Third, average interest rates on debt have varied significantly over time, with multilateral debt at 1%; bilateral debt at 1.2%; Chinese debt at 3.2%; and private debt of more than 6.2%. The term of debt has also broadened between creditors.

Fourth, while the maturity of the official debt was 30 years (for 62% of the debt), the average maturity of bonds is 10 years. So we now have more shorter term debt with higher interest rates.

Fifth, an increasing percentage of debt is now in the form of asset-backed loans. Between 2004 and 2018, 30 natural resource-backed loans worth USD 66 billion were signed by African countries. Most loans were backed by oil, minerals and commodities. The commodity price crash of 2014 left 10 of the 14 countries using natural resource-backed loans with serious debt problems.

What needs to be done to tackle Africa’s debt?

First, given the diverse nature of creditors, most of whom are now outside the Paris Club, it has become more complex to address debt treatment, debt restructuring and debt resolution. The process has become more complicated as creditors’ interests diverge. Need to expand the Paris Club to include the commercial and other non-Paris club creditors. We need to ensure that the G20 common framework works and is finalized quickly for Zambia, Chad, Ethiopia and Ghana, to build momentum for debt treatment for all creditors.

Second, there is a need for greater debt transparency for all creditors.

Third, given their opaque nature, asymmetry of power in negotiations and compromises over countries’ futures, loans backed by natural resources should no longer be used.

Fourth, we must expand concessional financing obtained from the market to support countries. This will make countries less dependent on expensive short-term debt. The African Development Bank Group’s ADF market option could help mobilize $27 billion for low-income countries.

Fifth, greater use of partial credit guarantees can help countries access capital markets and issue bonds at lower coupon rates and longer maturities. For example, the African Development Bank used partial credit guarantees of $375 million to support Egypt’s issuance of a $500 million Panda bond. We also used a EUR 195 million partial credit guarantee to hedge the risk of a EUR 350 million sustainable development loan from Deutsche Bank to Benin.

Sixth, the SDR channeled to the African Development Bank can be used 3 to 4 times by the bank to provide more funding for African countries. The SDR rechannelization financial model developed by the Bank and the Inter-American Development Bank, with a liquidity support agreement, now meets the IMF reserve asset status. What is needed is that 5 countries provide SDRs to the Bank. A $5 billion allocation will translate into $20 billion in funding for Africa. An allocation of $50 billion to multilateral development banks will generate $200 billion in new loans to countries.

Finally, efforts must be made to address systemic risks in Africa. Africa is the only region without liquidity buffers to protect against shocks. To change this, the African Development Bank and the African Union are working together to create an African financial stability mechanism. Such a home-grown mechanism will allocate our funds and ensure that we avoid spillovers from global shocks.

Let’s make sustainable debt work well for countries.

Let’s support greater mobilization of domestic resources for countries.

Let’s coordinate better and reduce the time and cost of debt settlements that are too long. The debt treatment of the 1990s took more than a decade to complete, leading to the lost decade in Africa’s development.

Hope postponed is hope denied.

Thank you.

Distributed by APO Group on behalf of African Development Bank Group (AfDB).

This press release is issued by APO. The content is not checked by the African Business editors and none of the content has been checked or validated by our editors, proofreaders or fact-checkers. The publisher is solely responsible for the content of this announcement.

Evolution of the debt landscape over the past 10

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