Africa Needs Debt Relief to Recover From Covid-19 Toll on Economies

The economic and health costs to Africa from the Covid-19 pandemic are unprecedented by any measure. With the death toll rising above 60,000 and more than two million confirmed infections so far, the continent has many reasons to be worried.

So far, Covid-19 lockdowns have triggered the first continent-wide recession in 25 years, costing Africa an estimated $115 billion in lost output and pushing up to 40 million additional people into extreme poverty, according to the World Bank.

Even before the coronavirus struck, Africa was in trouble, with most countries struggling to repay an accumulated $547 billion in debt owed to other countries, multilateral banks and private lenders.

Now Africa faces a cash crunch: most national treasuries do not have money to cover the costs of dealing with the pandemic, worsening the continent’s socio-economic challenges.

While richer countries have been able to deploy more than $11 trillion to cushion themselves from the impact of Covid-19, African nations are badly in need of resources to provide a robust response and recovery.

To recover from the economic damage, the IMF estimates that African governments face a financing gap between now and the end of 2023 of about $345 billion — the amount that would be needed to cover emergency stimulus packages to jump-start economies, to strengthen national health care systems and to set up social safety nets to cushion vulnerable communities.

Such funding could also finance the “liquidity and sustainability facility” which the UN Economic Commission for Africa has proposed to lower borrowing costs by ensuring that short-term commercial debt obligations can be met and to provide extra liquidity for the private sector.

The lack of fiscal space by African countries to tackle the pandemic and its aftermath can be attributed to four challenges, according to the IMF.

First, the high debt-to-GDP levels, which the IMF considers unsustainable, since countries are near or at distressed levels while still borrowing without evaluating exchange rate risks and the real costs of repaying the debts.

Second, the huge gaps between spending and revenue mean that African countries are forced to explore alternative financing for development projects. Consequently, loans become a recourse, further exacerbating the debt burden.

Third, the high cost of borrowing, with crippling interest rates between five and 16 percent on 10-year government bonds, compared to near-zero to negative rates in Europe and America. For sub-Saharan African economies, interest repayments constitute the highest and fastest growing portion of expenditure.