Africa's Ukraine crisis wrecking ball

IFR IMF/World Bank Report 2022
18 min read
Jason Mitchell

Rising prices piling pressure on continent's economies

Many African countries are now at greater risk than ever of defaulting on their foreign debt and urgently require a restructuring as they face a perfect storm of high fossil fuel and grain prices and rising international interest rates.

The Ukraine invasion’s greatest impact has been the surge in the price for fuel, wheat, cereals and fertilisers this year, which have spurred inflation in sub-Saharan Africa to record highs, breaching central bank targets. Median inflation in the region increased to 10.9% in July from 6.5% in January, according to the World Bank. In Ghana and Nigeria, annual inflation rose to 31.7% and 19.6% in July from 13.9% and 15.6% in January, respectively. In May, the average per capita monthly price of a local food basket across all East African countries hit US$17, 53.6% higher than in May last year and 21.6% higher than in January this year, before the Ukraine war started.

Rising import bills are weighing on current account deficits throughout the region, triggering a massive depreciation of domestic currencies in many African countries and stoking up further inflationary pressures. A number of central banks have reacted swiftly with aggressive monetary policies by raising rates to levels not seen for a number of years (for example, in August, Ghana’s central bank raised interest rates by 300bp to 22%, its biggest hike since 2002).

High inflation is also having a big impact on household consumption in a region where people allocate more than 40% of their spending on food, says the World Bank. Some 30 million more Africans were pushed into extreme poverty and 282 million people are now experiencing hunger in Africa. High debt combined with the risk associated with monetary policy tightening in advanced economies has widened sovereign spreads, in particular in countries that are in or at risk of debt distress and economies with high exposure to exchange rate or interest rate risks.

In 2020, sub-Saharan Africa had a total external debt stock of US$702.4bn, compared to US$379.9bn in 2012, according to the World Bank. The amount owed to official creditors, including multilateral lenders, governments and government agencies, increased to US$258bn from US$119bn over the same period. In 2020, during the Covid-19 pandemic, 73 low-income countries globally were eligible for the G20’s Debt Service Suspension Initiative. It temporarily paused official debt payments for the poorest countries but it expired at the end of 2021.

In April, the IMF said that 41 of the countries that had been eligible for DSSI were at high risk of or in debt distress, including many African states. Of these 41 countries, only Chad, Ethiopia, Somalia and Zambia have requested a debt treatment. Furthermore, a further 20 countries have demonstrated important breaches of high-risk thresholds – half of which also had low reserves, rising gross financing needs or a combination of these two in 2022.

The share of countries in sub-Saharan Africa at high risk of debt distress grew to 60.5% in April from 52.6% in October last year, while the average external debt stock to exports increased to 203% in 2020 from 154% in 2019 and only 80% in 2012, according to the World Bank. The average external debt stock to gross national income stood at 43% in 2020 against 38% in 2019 and only 24% in 2012. The average debt service to exports amounted to 21% in 2020 compared with 16% in 2019 and only 6% in 2012.

Zambia first

At the start of September, Zambia – the first African nation to default on its external debt in the Covid-19 era – won IMF board approval for a 38-month extended credit facility amounting to US$1.3bn (100% of quota). It is an important step in the country’s restructuring of its debt, which grew to US$17.3bn at the end of last year (debt to China accounts for more than one-third of the total).

At the end of June, Zambia’s official creditors – led by China and France – agreed to provide financing assurances to secure the IMF board’s final approval. Its debt restructuring has been a slow-moving process that the government kicked off in November 2020 when the sovereign missed a US$42.5m Eurobond coupon payment.

“I think we should think of the current conjuncture as a series of cumulative economic shocks, which have impacted the world’s poorest, least resilient countries the most,” said Abebe Aemro Selassie, director of the IMF’s African Department.

“First, there was the Covid-19 pandemic, which many African countries have yet to recover from fully. In particular, there remains a significant legacy of adverse balance sheet effects and, more damaging in the long run, a deep hit to progress on educational attainment. And now, following Russia's invasion of Ukraine, we are seeing a significant impact on the region from the sharp increase in food and fuel prices. Of course, even before the Ukraine invasion, it was clear that inflation was going to be a problem, and the war has exacerbated this.

“By the end of 2021, the external financing conditions facing many African countries had become difficult, with borrowing costs rising significantly. With some 60% of low-income countries in sub-Saharan Africa already at high risk of debt distress or in debt distress, tighter global financing conditions make things more difficult still. The outlook for debt difficulties will depend much on what happens to growth, and the extent of policy reforms will vary from country to country.”

The issue for many African nations is the high level of public debt built up again since they enjoyed US$100bn of debt relief under the Heavily Indebted Poor Countries Initiative and the related Multilateral Debt Relief Initiative during the past 25 years.

In the past, official creditors of African countries were primarily the rich Western states and multilateral institutions like the World Bank and the IMF. This group has now expanded to include China, India and Turkey, and multilateral institutions such as the African Export-Import Bank and the New Development Bank, a multilateral development bank established by the BRICS countries (Brazil, Russia, India, China and South Africa).

In addition, the amount of bonds issued by African sovereigns on international markets has tripled in the last 10 years. They are held by a broad range of investors such as insurance companies, pension funds, hedge funds, investment banks and individuals.

“Debt dynamics in the region are somewhat tied to commodity price fluctuations and various debt relief initiatives,” said Andrew Dabalen, chief economist for Africa at the World Bank. “The upward trend in debt resumed after bottoming in 2011 and was exacerbated by the fall in commodity prices in 2014, due to revenue shortfalls and income losses. Public debt surged substantially in the wake of the Covid-19 pandemic as governments ran up primary deficits to provide support to the most affected people.

“Debt dynamics worsened with the uncertainty arising from the speed as well as the size of monetary policy tightening in advanced economies, which widened sovereign spreads and increased debt service costs. With the war in Ukraine, many countries have delayed the fiscal consolidation process they embarked on after the Covid-19 pandemic to reduce public debt and avoid vulnerability associated with debt sustainability concerns.”

Two camps

Broadly speaking, African countries can be divided into two categories: those that are net commodity importers and those that are net commodity exporters.

This year, many of the commodity-importing countries have implemented containment measures, such as regulating fuel price movements, waiving import duties on cereals (especially wheat) and subsidising fertilisers and cooking gas. Furthermore, cash transfers and other social safety nets have been provided to the most vulnerable people. This has exhausted fiscal space and pushed up public debt to unsustainable levels in many countries.

By contrast, oil-rich countries have benefited from windfall gains from elevated oil prices. Countries such as Angola and Nigeria are well positioned to do this; however, the gains to Nigeria have been muted owing to difficulties in increasing production targets.

Among mineral and metal exporters, inflation was 4% in June, compared to 8% in January, thanks to external revenues from high metal prices. In Zambia, inflation dropped from 15% at the beginning of the year to 9.9% in July, closer to the central bank ceiling of 8%, reflecting favourable terms of trade associated with copper prices along with the appreciation of the currency, the kwacha.

However, inflation surged in Botswana and South Africa to 14.3% and 7.6% in July, respectively, far above the central bank target range of 3%–6%. In addition to the effects of the Ukraine war, South African economic growth has been held back by the damage caused by floods in the Kwazulu-Natal province early this year and electricity outages.

Unfavourable terms of trade on the back of rising commodity prices have pushed up the import bills for net commodity-importing countries. This in turn has weighed on current account balances and caused domestic currencies to depreciate. Sovereign default risks increased sharply in Ghana, Kenya and Ethiopia, breaching the Emerging Market Bond Index spread threshold of 1,000bp. EMBI is a benchmark index that measures the bond performance of emerging countries and their corporations. Specifically, public debt remains elevated in Cabo Verde (159% of GDP), Eritrea (152%), Mozambique (99%), Ghana (85%) and the Gambia (80%).

By contrast, in Angola, the gain from elevated oil prices – coupled with rising oil production – led to rising fiscal and external revenues. The current account registered a surplus of 15% of GDP in the first quarter of 2022 and the fiscal surplus is set to keep public debt on a downward trajectory. A similar pattern is observed in Zambia, where the currency has appreciated thanks to high copper prices and the progress made towards a debt restructuring. Across sub-regions, debt edged up in East and Southern Africa, while it contracted in West and Central Africa, according to the World Bank. Excluding Nigeria, oil-exporting countries are expected to reduce government debt significantly.

“The difference between this year and other years is that some long-running structural problems have come to the fore this year: one is the politics and the other one is climatic,” said Gregory Smith, an emerging markets fund manager at M&G Investments and author of 'Where Credit Is Due', a book about African debt.

“When you look at emerging markets there is always geopolitical risk but it is difficult to predict how it will manifest itself. Of course, this year, the dominant theme has been Russia’s invasion of Ukraine and its consequences. Both the structural problems have had an impact across the African continent but have really been concentrated in a few countries.

“In terms of global economics, there has also been the problem of inflation and the risk of recession in large developed markets, such as the US and the EU, and slower growth in China. That backdrop has not been very good for African debt. The global economic outlook has been the biggest channel impacting African debt this year.

"Firstly, the strong US dollar has made it more expensive to service external debt. Secondly, there is a higher cost of borrowing (for example, the US 10-year has increased to around 3%). Thirdly, there has been large-scale risk aversion, which has meant that investors have feared riskier assets. This has had an impact on the cost of African borrowing and many African countries have been shut out of the market.”

Isaac Matshego, an economist at Nedbank, says there are definitely African countries where a debt restructuring is necessary. Zambia must continue negotiations with its private creditors and, under the G20’s Common Framework, any restructuring with these creditors must be concluded under similar terms to the agreement with official creditors.

“Ghana is another country which definitely looks like it requires a restructuring. It is sitting on around US$13bn of Eurobond debt. Overall, its government debt is quite high and foreign debt makes up around 40% of its total debt. Kenya is another one that looks like it must restructure its debt. Its debt servicing costs are now very high and take up a huge chunk of fiscal income,” said Matshego.

External public debt is not always the main debt pressure. For some countries, there are bigger near-term struggles with domestic public debt burdens – for example, in Ghana.

Ulrich Volz, a professor of economics and director of the Centre for Sustainable Finance at SOAS, the University of London, agrees that many African economies will require a debt restructuring.

“A thorough debt sustainability assessment is needed to determine who needs debt relief – and how big the haircut is that creditors need to accept,” he said. “Importantly, the debt sustainability analysis conducted by the IMF needs to account for critical investment needs in areas such as health, education and climate resilience.

“Without creating the right incentive mechanism to get debtor government, bilateral creditors and private creditors to the negotiation table, not much will happen. There is a large risk that much-needed debt restructurings will be delayed, with adverse impacts for development.”

He said that in many African countries high public debt service has been crowding out critical investment that is needed for climate-proofing economies and enabling a green, resilient and equitable recovery.

“There won’t be any growth if governments are struggling to stay afloat,” he said. “Private investment will not flow if the government is teetering on the verge of bankruptcy.”

Relief repeat

During the pandemic, the G20 put the DSSI in place to temporarily pause official debt payments for the world’s poorest countries, but it expired at the end of 2021, forcing participating countries to resume debt service payments. At the start of 2021, Zambia applied for debt relief under a scheme known as the Common Framework, which was coordinated by the G20 and aims to help countries restructure their debt and deal with insolvency and protracted liquidity problems. It has been a protracted process.

Since March 2020, the IMF has provided exceptional levels of emergency financing, facilitated by a series of temporary increases in the annual limits on overall access to the fund’s resources. In 2020, IMF financial assistance to low-income countries surged to US$13bn, compared to an average of US$2bn a year before the pandemic. In all, 53 out of 69 eligible countries received financial support, with more than half in sub-Saharan Africa.

In July 2021, the fund approved a further 45% increase in normal concessional financing access limits under the Poverty Reduction and Growth Trust, alongside the elimination of hard limits for the poorest countries if their programmes meet requirements for above-normal access and stronger safeguards to ensure debt sustainability. Since March 2020, the IMF says it has provided sub-Saharan Africa with around US$50bn of financing.

In October 2021, the G20 pledged to channel an additional US$100bn Special Drawing Rights to vulnerable countries and, if this commitment materialises, it will help many of Africa’s lowest income nations navigate this difficult period. Furthermore, in April this year, the IMF’s board approved a Resilience and Sustainability Trust to help ensure that resources are used to provide critically needed policy support and longer-term funding.

However, Abebe Aemro Selassie says the international community should go further, for example, by removing obstacles to the implementation of the Common Framework and allowing for swift and efficient debt restructurings where needed.

The impacts of the Ukraine crisis combined with the Covid-19 pandemic and climate-related shocks continue to hold back the region’s economic recovery: sub-Saharan Africa’s growth is projected by the World Bank to decelerate from 4% in 2021 to 3.6% in 2022.

Africa was battered during the Covid-19 pandemic and many countries became a lot more indebted. This year, many economies were looking forward to stronger growth to repair their damaged balance sheets. However, the Ukraine crisis has been a wrecking ball, which has left a number of African sovereigns on the verge of debt default.

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