Amidst the COVID-19 crisis, creditor countries are working on the next steps in dealing with African debt burdens. This time, however, they insist that the private sector will have to get involved.
“To date, 28 countries, including 20 in sub-Saharan Africa,* are benefitting from the Debt Service Suspension Initiative (DSSI) set up by the Paris Club, for a cumulative amount of $2.1bn, and 11 other applications are still being processed,” said the president of the informal organisation, Odile Renaud-Basso, director of the French Treasury, on 1 September.
At the same time, according to data from the G20 group of developed countries on 18 July – the latest to date – 42 governments had made a similar request to this organisation, for a total of $5.3bn.
Three conditions for renegotiation
However, in both cases, the debt payment moratorium measures only run until the end of the year 2020. As the deadline approaches, policy-makers are wondering about the future of these measures.
“Everything is still under discussion, and will be debated at the next G20 meeting in mid-September, at the IMF and World Bank annual meetings [October 16-18],” added Renaud-Basso.
She explained the position defended by France, as secretary of the Paris Club: that of a general extension of the repayment moratorium, followed by debt forgiveness negotiations for the countries that will need it most.
The institution says this measure will be decided on a “case-by-case” basis and will depend on three conditions being met: that debt levels remain sustainable, that the forgiveness is accompanied by an IMF programme and, finally, that the private sector participates in the effort.
No operationalised rescheduling of private debt
This is a major change from the moratorium that has been in effect for several months, but it is in line with the general policy of the Paris Club, which until recently had conditioned debt renegotiations on similar efforts from the private sector.
“When we signed the DSSI, we took a very pragmatic approach: we were aware that for a moratorium measure, which is, after all, very light, the cost in terms of ratings and therefore future market access of a similar measure granted by the private sector could be too high for governments to see it as beneficial,” explained Renaud-Basso.
However, in the longer term, institutional creditors no longer intend to suspend the collection of debts when those of the private sector continue to be honoured. “Private sector representatives had indicated the willingness of private creditors to participate in the DSSI on a voluntary and case-by-case basis, but to my knowledge, no such agreement has been finalised or operationalised,” said the Paris Club president.
Looking at the costs and benefits
Between now and the second half of the year or the end of 2021 – depending on the duration of the extension that will be decided for the repayment moratorium – the governments eligible for renegotiation will have to decide whether they wish to benefit from this breath of fresh air for their finances, bearing in mind that private-sector participation will almost automatically lead to a downgrading of their sovereign ratings.
“If bond debt is restructured, it is quite likely that this will affect the rating of the debtor countries, given the methodology of the rating agencies,” argued Renaud-Basso.
Asked about China’s participation – the government had indicated its willingness to join the debt initiative before ceasing to communicate on the issue – the president of the Paris Club said that Beijing “participates” in the multilateral process. “There are of course implementation issues that arise, particularly on the field of public debt, as China is asserting that some banks with 100% public capital act as private actors,” she said.
Bamako’s weakened negotiating position
The coup should not change the moratorium that currently benefits Mali. It was one of the first countries to sign up to the DSSI. On the other hand, the new authorities, which have not yet been recognised by the entire international community, may struggle to gain the IMF’s backing, a necessary condition for debt relief.
*The African DSSI beneficiary countries are Angola, Burkina Faso, Cabo Verde, Cameroon, Chad, Comoros, Democratic Republic of Congo, Djibouti, Ethiopia, Guinea, Côte d’Ivoire, Mali, Mauritania, Niger, Republic of Congo, São Tomé and Principe, Senegal, Sierra Leone, Togo and Zambia.*