Debt relief for Sub-Saharan Africa: What now?

• On 15 April, senior G20 finance officials announced the COVID-19 Debt Service Suspension Initiative (DSSI) to provide debt-service postponement on sovereign obligations for the poorest members of the IMF and World Bank. When G20 finance heads meet on 18 July, Europe will again need to lead on the group’s flagship COVID-19 initiative to postpone low-income countries’ debt service payments. For the first time, China has agreed to participate as an official creditor alongside members of the Paris Club.
• This report analyzes the potential relief that may materialize. We argue that, continuing lack of clarity on which Chinese creditors will participate, coupled with resistance from private sector creditors to voluntary participation, suggest that actual relief will be much less than originally planned.
• The first critical issue of China’s contribution is lack of clarity on which Chinese entities are considered official creditors for the purposes of the DSSI. Such information is not easily available, and China’s state-driven economic model makes it harder to distinguish between official and private sector creditors. Our calculation shows that 80% of debt service payments due to China from sub-Saharan Africa from May to December 2020 are declared as official and only 20% as non-official. Such mismatch in classification could carry significant implications for the delivered relief under DSSI.
• The second important issue is the evolving nature of the private sector in cross-border credit. The rise of bond funding raises the issue of increased scrutiny of sub-Saharan Africa countries by credit rating agencies. Countries opting for a debt standstill and seeking private sector involvement face the risk of a downgrade, thereby triggering a wave of defaults and cross-defaults with harmful effects on their capital flows. The G20 recently addressed this issue by releasing a statement indicating that requesting the DSSI for official bilateral creditors does not oblige beneficiary countries to make the same request to private creditors. This statement may encourage some skeptical countries to participate in the DSSI, but also further discourage them from requesting private sector involvement.
• The G20 DSSI initiative was limited to bilateral official debt and aimed to bring new creditors into the fold, notably China. From the specific perspective of countries in sub-Saharan Africa, the initiative has succeeded in providing a greater degree of transparency about the players and magnitudes involved, but it is still too soon to judge whether non-Paris Club official creditors will act consistently with Paris Club terms. Given Europe’s large flows of official development assistance (ODA) to the region, its role as a private creditor and its significant representation in the G20 and on the boards of the IMF and the World Bank, the EU needs to continue to lead to deliver liquidity relief to eligible countries, at least on the scale originally anticipated. To do so, it should support the initiatives proposed by the heads of the international financial institutions, coordinated with China and encourage private creditors to find country-level solutions.

Full report available for NATIXIS clients.