As the impact of the Covid-19 economic crisis begins to be felt in Africa, many poor countries are already suffering from a debt crisis, a research study by the Jubilee Debt Campaign (JDC) shows.
Angola, Mozambique and Cape Verde are all among the most highly indebted African countries.
The JDC’s study shows that, since late-February, interest rates on new government borrowing have increased by an average of 3.5 percentage points for low- and lower-middle-income countries. The average yield for these governments, which is an indication of the cost of new borrowing, is now 10%.
Meanwhile, it adds, commodity prices have plunged. The Bloomberg commodity price index has fallen 27% since the start of 2020 and now at its lowest level since 1986. Since the start of 2020 the price of copper has fallen 21%, oil 61%, and coffee 15%.
Furthermore, many countries will be hit by falling tourism revenues, with small island states being particularly affected because of their size and economic reliance on tourism.
“Borrowing costs for poor countries have increased substantially, and their income from commodities is falling, in the wake of the coronavirus outbreaks across the world”, the JDC says.
The high indebtedness of many African countries limits their ability to respond with stimulus. Angola´s debt is estimated by the UN´Economic Commission for Africa (UNECA) at 95%, and Mozambique´s at 108.8%, the two highest among the largest economies.
While Mozambique has a projected fiscal deficit of 6,1% this year, Angola has a 0.7% surplus, thus additional ability to partly manage the impact of a revenue loss.
UNECA recommends that as a safety net, countries provide incentives for food importers to quickly forward purchase to ensure sufficient food reserves in key basic foods items.
The government should also fund virus preparedness, prevention and curative facilities including logistics, and use the crisis to improve health systems.
But, according to the JDC, “many poor countries are already suffering from debt crisis” and “emerging markets are experiencing their worst period of short-term capital outflows on record”.
According to the IMF, 34 out of 70 countries it assesses are now in debt default or at high risk of being so, up from 17 in 2013.
Zambia is expected by financial markets to default soon.
In Zambia, debt payments are taking up more than 30% of the government’s revenue, and public spending fell by 18% since 2015.
The price of copper, Zambia’s main export, has fallen by 21% since the start of the year with the global economic slowdown following coronavirus. Speculators have been selling the government’s debt, expecting a default soon.
Tim Jones, Head of Policy at Jubilee Debt Campaign, is calling for urgent action to support poor countries being hit by the economic impacts of coronavirus, “including a complete moratorium on debt payments for those most affected”.
“Where economic shocks have pushed countries into a debt crisis, the IMF needs to help restructure debt with previous lenders. Otherwise, its loans will just be used to pay off reckless lenders and maintain the debt crises. And the IMF itself needs to cancel debts owed to it by countries suffering the impact of the pandemic”, says Jones.
In the Global Economic Outlook 2020 report, released in January, the World Bank estimates that the debt of governments in the sub-Saharan Africa region will reach 62% of Gross Domestic Product (GDP), on average, in 2020, 22 percentage points higher than the level recorded in 2011.
Among the countries with high debt burdens are Angola, Ghana, Mozambique, Namibia, South Africa and Zambia, and they are considered, “susceptible to sudden increases in risk aversion of the investor,” the report said.
“This could lead to a considerable exchange rate depreciation, capital outflows and increases in the costs of loans because the risk premiums increase dramatically. Where the debt is largely denominated in foreign currency, strong devaluations of the currency may make debt servicing more complicated,” said the World Bank.
The Angolan Minister of State for the Economy, Manuel Nunes Júnior, recently said that more than half of the Angolan 2020 State Budget, in the amount of approximately 15 billion kwanzas (more than €27 billion), is earmarked to pay public debt, with a weight of 90% of GDP.
In the case of Mozambique, the International Monetary Fund (IMF) estimates that public debt in 2019 rose to 108.8% of GDP and that it will reach 106.8% in 2020, remaining above Gross Domestic Product until 2023.
The Global Economic Outlook 2020 report also identified Mozambique as one of the countries where the current account deficit grew most, due to “imports of capital related to major infrastructure projects.”
The price of a barrel of Brent oil, which is the benchmark for the oil exported by Angola, has been around US$30, while Angola´s budget for this year is based on a price of US$55.
Angola’s Finance Minister, Vera Daves, said at the beginning of the month it was still, “too soon to consider any scenario to revise the State Budget for 2020,” despite the volatility of the price of oil extracted in the country on the international markets.
Quoted by the State-owned Jornal de Angola newspaper last week, economist Precioso Domingos, professor at the Catholic University of Angola, argued last week that a debt renegotiation would be necessary for Angola, even though the time is not appropriate, given that with low oil prices the margin for negotiation is reduced.