Prioritize bankruptcy law for international debt
African Development Bank’s report ‘From Debt Resolution to Growth: The Road Ahead for Africa’ focuses on debt resolution, governance and growth:
African Development Bank President Akinwumi Adesina, recipient of the 2017 World Food Prize, and Professor Joseph E. Stiglitz, recipient of the 2001 Nobel Memorial Prize in Economic Sciences, have called for a quick and comprehensive plan for debt restructuring in Africa.
At the recent launch of the African Development Bank’s 2021 edition of the annual African Economic Outlook, Adesina urged African governments to consider collectively establishing an African financial stabilization mechanism, which would give Africa the fiscal space it needs to deal with debt. Africa’s collective debt now stands at 70% of the continent’s GDP.
“It is high time that we set up a homegrown financial stability mechanism where we work together to mutualize our funds and ensure we avoid the spill-over effects that come from global pandemics or any external shocks,” the head of AFD said.
The idea was backed by Stiglitz, who proposed an international debt framework. “That’s a question I’ve been very concerned with for a long time,” said Stiglitz. “And that needs to be really high on the international agenda. Every country has bankruptcy laws but there’s no bankruptcy law for international debt. When there’s too much debt, it’s as much the creditor’s problem as the debtor’s problem,” he said.
Stiglitz added: “What needs to be done with debt is comprehensive and quick restructuring.”
AFRICAN ECONOMIC OUTLOOK
According to the African Economic Outlook, the share of commercial creditors in Africa’s external debt stock has more than doubled in the last 2 decades, from 17% in 2000 to 40% by the end of 2019.
Africa’s GDP contracted 2.1% in 2020, the continent’s first recession in half a century. GDP is projected to grow by 3.4% in 2021. The report estimates that African governments will require additional gross financing of about $154 billion in 2020/21 to respond to the covid crisis.
Some hope has come in the form of new special drawing rights, potentially $500 billion, that the International Monetary Fund could issue, in accordance with the G20’s recommendation. Adesina said these funds will go a long way to stabilizing foreign reserves and the exchange rate, allowing countries to handle debt and re-engage in massive pro-growth investments that will help them to quickly recover from the covid pandemic.
Adesina proposed a mechanism, saying: “This will allow us to deal with the cause of the illness and not always the symptoms.”
Adesina decried the l ack of covid vaccines reaching Africa. “We need global solidarity and vaccine justice for Africa. COVAX is doing a great job but still, we need more, quickly and at an affordable price,” AFD chief said.
Some 39 million Africans could be pushed into extreme poverty this year because of the pandemic. Stiglitz said: “One of the things that some of us have been campaigning for is the suspension of the intellectual property rights related to covid because the supply constraint is at least, to some extent, artificial.”
The projected recovery from the worst recession in more than half a century will be underpinned by a resumption of tourism, a rebound in commodity prices, and the rollback of pandemic-induced restrictions. The outlook is, however, subject to great uncertainty from both external and domestic risks.
FISCAL STIMULUS
Since the pandemic began in early 2020, governments have announced f i s cal stimulus packages ranging in cost from about 0.02% of GDP in South Sudan to about 10.4% of GDP in South Africa. The bank estimates that African governments need additional gross financing of about $154 billion in 2020-21 to respond to the crisis. These fiscal stimulus packages have largely had immediate, direct implications for budgetary balances, borrowing needs, and debt levels.
Debt resolution in Africa has often been disorderly and protracted, with costly economic consequences. The economic consequences of sovereign debt restructuring are less severe in countries that act pre-emptively and collaboratively as well as in those countries, where economic governance is stronger. However, the heavily indebted poor countries initiative took more than a decade to be implemented, and recent debt resolution in Africa has been delayed by long-lasting litigation with private and official creditors.