Low Vaccination Rates and High Debt Threaten Africa’s Recovery
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African countries will recover from the pandemic at three different speeds. Meanwhile, debt sustainability risks will rise again from early 2022 onward, according to the International Monetary Fund and World Bank.
The debt of low- and middle-income countries in Sub-Saharan Africa increased to a record $702 billion in 2020, more than double the level in 2010, according to a World Bank report released at its October meeting. Most of this debt, $589 billion, consists of long-term external debt, mostly denominated in foreign currency.
The World Bank also specifically issued warnings of debt distress for four countries: Angola, Mozambique, Zambia, and Cape Verde, based on a debt-to-gross-national-income (GNI) ratio of above 100%. Both Zambia and Mozambique’s sovereign debt have already fallen into default and there’s reason to be cautious about Angola and Cape Verde going forward as well.
At the annual meeting, World Bank President David Malpass said, “We need a comprehensive approach to the debt problem, including debt reduction, swifter restructuring, and improved transparency.” He also warned that the debt situation for poor countries could worsen due to volatile commodity prices and higher interest rates as countries globally recover. Malpass urged countries to begin a gradual fiscal consolidation to maintain investor confidence.
Recovery Threatened by Lack of Vaccination
Sub-Saharan Africa this year is set to emerge from its 2020 recession, which is the first time that Africa as a whole fell into a recession in 50 years and was indeed sparked by the pandemic. Growth is expected to expand by 3.3% in 2022. But this rebound will be fueled by elevated commodity prices, a relaxation of stringent pandemic or lockdown measures, and, of course, a hope for recovery and global trade.
The World Bank said that the region remains vulnerable, given the low rates of COVID-19 vaccination on the continent (Africa Centres for Disease Control and Prevention data showed that Africa is the world’s least inoculated region, with only about 4.3% to 5% of its 1.2 billion people fully immunized against the disease), protracted economic damage after more than a year of recession, and a slow pace of recovery.
Fiscal constraints that predated the pandemic have left many African countries unable to provide adequate stimulus measures to engineer their own sustained recovery. It’s estimated that a funding gap last year for African sovereigns was about $290 billion. The IMF and World Bank said that Sub-Saharan Africa will need significant additional funding to counter damage wrought by the pandemic, to bolster its economic recovery prospects, and mitigate threats posed by climate change.
The IMF’s Global Economic Growth Forecast projects that Sub-Saharan Africa will achieve 3.7% gross domestic product growth in 2021 and 3.8% growth next year, which is up from a 1.7% economic contraction in 2020. But this projection for Sub-Saharan Africa is well below the IMF’s global economic forecast of 5.9% growth and a reversal of the trend of the past few years where African economies outpaced the rest of the world. That’s likely due to the large gaps in vaccination: the IMF said that while almost 60% of the population in advanced economies are fully vaccinated and some are now receiving booster shots, about 96% of the population in low-income countries remain unvaccinated.
Beyond the lack of vaccination, commodity prices and the mismatch in supply and demand stemming from global bottlenecks have set off inflationary alarm bells. The IMF sees interest rates rising faster than previously expected, which will have imported consequences for Africa’s economies. These factors have created a three-speed economic trajectory for Africa.
Different Recoveries Throughout Africa
This three-speed economic track is categorized by economies boosted by higher commodity prices, such as Burkina Faso, South Sudan, and Guinea. These three countries have GDPs that will all grow faster than 5% or more this year. The fast track also includes countries that led the pre-pandemic economic growth rate charts thanks to these countries’ relatively superior fiscal and monetary governance, such as Côte d’Ivoire or Ivory Coast, Kenya, Benin, Niger, and Rwanda. In addition, the fast track includes countries whose economies dipped the most in 2020, including Botswana, Seychelles, and South Africa. The South African economy is the only one among the G20 group of countries that will not achieve pre-pandemic levels of growth before 2022.
Most countries in Africa are on the medium-speed track, indicating that most of the continent will not reach pre-pandemic economic output levels for several more years. This trend will be a major setback for Africa’s growth narrative, and it puts the continent behind other emerging market regions.
The slowest-speed track includes countries with structural economic weaknesses, such as Angola and the Republic of Congo, as well as war zones and failing states, such as the Central African Republic. Angola, in fact, will suffer from a sixth consecutive year of economic contraction, and the Republic of Congo, or Congo Brazzaville, will mark a seventh year of negative GDP growth.
Ethiopia, one of the largest population centers in Africa, used to be the continent’s fastest-growing economy. But due to the ongoing civil war in Ethiopia’s northern regions, it’s now categorized with other war zones such as Afghanistan, Libya, and Syria. This is a drastic reversal from Ethiopia’s previous success story. As a former champion of foreign investment, Ethiopia faces Western sanctions, a threatened suspension of U.S. preferential trade terms, and a potential debt default scenario.
The IMF and World Bank will not extend the pandemic-era Debt Service Suspension Initiatives (DSSI), which since May 2020 have delivered more than $5 billion in relief to more than 40 eligible countries around the world. This means that countries offered a suspension of their bilateral and concessional debt interest payments will have to resume interest payments on January 1, 2022, while also settling the arrears on two years of suspended interest payments.
Beyond offering temporary debt interest relief, the DSSI has also committed participating countries to disclose all their public sector financial commitments and to limit nonconcessional borrowing. This has enhanced transparency in many low-income countries. The initiative has had a major impact in some African countries; in Angola, total DSSI savings have accounted for 4.7% of GDP, in Mozambique 5%, and in tiny Djibouti 5.7%. Even initially reluctant markets such as Kenya eventually joined the DSSI initiative.
Although the G20 has called on private creditors to participate in the initiative, little has been taken up by commercial lenders. The initiative has also failed to achieve its goal of reducing debt service costs thus far, with potential savings estimated at only 1% of the GDP from January. For many African countries, the end of the DSSI will renew debt servicing risks, especially for countries suffering from low or slow economic growth and low revenues — the majority of African countries. In many instances, external debt has outpaced GNI, as well as export growth.
To offer continued relief to such countries, the G20 and the Paris Club late last year launched the so-called common framework for debt treatments to restructure unsustainable debt situations and protracted financing gaps in DSSI-eligible countries. Ethiopia, Chad, and Zambia have already applied to the common framework. The World Bank has urged low- and middle-income countries to consider restructuring their debts when this DSSI expires. African countries that are not DSSI eligible, such as Sudan, have also begun debt restructuring talks.
The average debt-to-export ratio increased three times over a decade to 205% last year. Such data is being hampered by a lack of transparency of debt in some countries, such as Zambia, Republic of Congo, and Angola, particularly in relation to loans issued by Chinese state banks and related companies. World Bank President Malpass has often been critical of these opaque lending terms in Africa and other emerging markets.
That points to the current reality of debt and geopolitics becoming completely intertwined. The common framework will replace the DSSI for the most distressed countries in the world and is likely to become a theater of geopolitical rivalry between the U.S. and China, as heavily indebted African countries, such as Ethiopia, Zambia, Chad, and potentially others, apply for debt relief.
Western bilateral concessional and commercial creditors will seek greater transparency into these countries’ borrowing terms with China. These creditors will also seek to avoid a scenario where any debt relief offered under the common framework does not facilitate continued debt servicing and repayment to Chinese creditors. That has been a major stumbling block for the DSSI and other pandemic-era debt restructuring processes.
An Uneven Recovery
The majority of African countries’ economies will not reach pre-pandemic levels in 2022. Some of them may take at least three to five years to reach pre-pandemic levels, even those that are seeing benefits from commodity booms.
It’s a disparate economic story throughout Africa. For investors, it’s important to realize that each African country differs in terms of how its economy will recover, how its debt remains sustainable or needs to be restructured, and how this will pertain to geopolitical rivalries, particularly China and the U.S.
Robert Besseling founded specialist intelligence company EXX Africa in 2015, after pursuing a decadelong career in political risk forecasting at industry-leading firms in the UK and U.S. In late 2020, in the midst of the coronavirus pandemic, EXX Africa was rebranded as Pangea-Risk to cover 68 African and Middle East countries. At Pangea-Risk, Robert leads a team of partners, researchers, and contributing analysts to produce commercially relevant and actionable analysis on political, security, and economic risk in Africa and the Middle East.