Kamal Ramburuth | Examining SA’s readiness to host the G20 in 2025 and tackle Africa’s debt crisis

A version of this opinion piece, by IEJ Debt and Development Finance Researcher Kamal Ramburuth , was first published in Business Day on 25 March 2024.

Despite common goals for development finance in multilateral fora, Brazil, South Africa, and the African Union (AU) are in danger of missing a historic opportunity to create a fairer, coherent, and effective International Financial Architecture (IFA) through the G20 processes in 2024 and 2025.?

South Africa’s Department of International Relations and Cooperation (DIRCO) Minister Naledi Pandor and Director-General Zane Dangor have shown determination to make South Africa an activist state on global issues. They challenged vaccine apartheid at the World Trade Organisation and took Israel to the International Court of Justice on charges of genocide. Their activism could take up another vital cause – African debt justice – by mounting a campaign to prevent a repeat of Africa’s devastating debt crisis that happened in the 1980s and 1990s and which led to massive political instability, low growth, and rising rates of poverty.?

South Africa will host the G20 in 2025. This will be the first time the G20 will be held on African soil with the inclusion of the AU. This offers the potential for South Africa to join forces with the AU, the newest G20 member, on common objectives – especially over the continent’s debt crisis.?

Half of Africa’s low-income countries are debt distressed, or at high risk of debt distress. The ratio of interest payments to government revenue in Africa is four times that of advanced economies. This ratio more than doubled over the past decade, creating a fragility that – unless there is a meaningful and sustainable intervention – could rapidly result in an even greater crisis. Any deeper debt crisis would be catastrophic for African economies through contagion, financial fragility, and loss of productive capacity rippling across the continent. Climate change – which has already bitten sharply with droughts and floods – and geopolitical conflicts make the debt positions of African states even more precarious.

The G20 Common Framework for Debt Treatment is the sovereign debt restructuring framework established in the wake of the Covid-19 pandemic. Unfortunately, the Framework is an outdated model that has proven insufficient. It has failed for a number of reasons. As a start, the framework has a completely ineffective process to ensure debt service payment standstill for the duration of the restructuring negotiations.?

Second, as the International Monetary Fund has noted, the framework does not generate broad creditors’ participation because it fails to provide incentives for timely debt restructuring. There is no incentive for private sector participation which allows non-participating creditors to benefit from potential regained financial strength of the government at the expense of participating creditors. Simply put, no incentive structure compels private creditors to participate or that compels timeous action from states such as China that are hesitant due to this ‘first-mover problem’.?

Third, the framework delivers too slowly, with steps and timelines that are unclear. Because the process of restructuring must be initiated at the request of a debtor country - insolvent countries remain exposed to the risk of being locked out of international capital markets if they seek to restructure their debt through the Common Framework. This is a serious concern because restructuring through the framework can take more than three years, as was the case for Zambia, making the effect of being locked out of capital markets incredibly painful. This prolonged process ultimately deters insolvent states from seeking required restructuring.

Fourth, the framework takes a piecemeal approach by offering limited coverage with too little relief, too late, and for too few countries. The eligibility model of the framework needs to be revised because it does not extend to highly-indebted middle-income countries.

The Common Framework also fails to offer a vision for a more sustainable IFA. This is because it does not solicit creditors’ and debtors’ commitment to use any new fiscal space created by the debt restructuring for their development and climate transitions. Determining exactly how much debt is restructured depends on Debt Sustainability Analyses (DSAs). Existing DSAs that the G20, World Bank, and IMF use ignore climate vulnerabilities and climate financing needs. This underestimation creates what UNCTAD described in a 2023 report as “a vicious cycle between rising investment requirements for a climate-resilient structural transformation and heavy reliance on increasingly costly debt financing”.

As a consequence, many developing countries that are debt distressed, such as Kenya, have opted to self-impose austerity measures as a strategy to avoid creditors’ wrath. Austerity has had a crippling effect on economic growth and the realisation of social and economic rights. South Africa is forced to pay attention to this issue both for human rights implications and because collapsing economies of trade partners in the newly established African Free Trade Agreement are unlikely to benefit development or regional integration. This default trend looks to continue unless the framework is urgently and completely overhauled. Not reviewed, not “stepped-up”, nor tinkered with around the edges. It has failed to provide adequate and timely restructuring processes in Zambia, Ghana, and Ethiopia.? Who is next??

A good starting place

A good place to initiate solutions to the shaky global debt architecture would be to establish a dedicated debt office that combines the efforts of the Brazilian and South African ministries of finance and international relations in a joint policy forum. By setting a common agenda through a joint debt office, the strong political alignment in foreign policy, and the geopolitical positioning of these two BRICS countries could bear fruit through global reforms of the IFA.?

The strong political alignment of both administrations is yet to find traction in making an impact on the G20. Opportunities abound, with the potential to co-create a shared agenda that can thread through the G20 in Brazil (2024), the G20 in South Africa (2025), BRICS meetings (2024–2025), the UN Financing for Development process, and then finally at the COP30 in Brazil (2025). This line-up of events is a rare occurrence and must be leveraged as a matter of urgency.

Lots to be done – and quickly

It will require a massive effort to mobilise the international community to urgently scale up green industrial policy financing, reform the IFA, and fix the debt resolution system for insolvent countries. Hosting the G20 is an administratively, time, and resource-intensive process that demands large-scale political mobilisation in the international circuit. It requires years of planning to have a meaningful impact on the debt crisis. South Africa’s presidency starts in nine months.

Kamal Ramburuth is a debt and development finance researcher at the Institute for Economic Justice (IEJ).