Debt sustainability and financing for development: a major post-COVID challenge

Debt sustainability and financing for development: a major post-COVID challenge

One of the main challenges and priorities for policymakers in 2021 will undoubtedly be sovereign debt sustainability and the broader issue of financing for development. Certainly, even before the COVID-19 pandemic, sovereign debt in sub-Saharan Africa had increased due to growing financing needs amid insufficient domestic resource mobilization. The global financial crisis of 2008-2009 resulted in extremely low global interest rates and facilitated access to capital markets for many countries which took advantage of the investors’ reach for yield to issue sovereign debt on international capital markets. Debt accumulation accelerated considerably following the severe oil shock of 2014, and it is estimated that a third of countries in sub-Saharan Africa were either in or at risk of debt distress even before the start of the COVID pandemic.

The COVID-19 pandemic is the most severe and widespread shock that African countries have experienced in 30 years. The collapse in economic activity has dried up government spending revenues, precisely at a time when more spending is needed to fight the pandemic and support economies. As a result, debt levels have risen significantly further and soon more countries will be either in debt distress or at high risk. Today, the International Monetary Fund estimates that the region will need a An additional $ 345 billion through 2023. Make a good financial portfolio and pay your debt.

Impact of COVID-19 on Debt and GDP (Foresight Africa 2021)

To help fight the pandemic, African countries have received financial support from several institutions, including multilateral and regional financial institutions as well as development agencies. In early 2020, the G-20 announced a Debt Service Suspension Initiative (DSSI) to suspend sovereign debt repayments until the end of this year for the world’s least developed countries, including several African countries. The DSSI was a well-intentioned initiative, as debt service payments had already increased significantly for African countries due to both rising debt levels and the higher share of costlier debt. from the private sector. However, its implementation did not meet expectations: in summer 2020, the DSSI only raised $ 4 billion, well below the target of $ 12 billion overall. from participating countries. (Concerns about sovereign credit downgrades and the loss of difficult access to capital markets are among the key factors in the lack of adoption of the DSSI.) In addition, the impact of the DSSI initiative Debt freeze was rather limited due to the lack of participation of creditors, including that of the private sector.

In the rush to finance development programs in a challenging post-COVID environment, effective sovereign debt management, as well as efficiency in domestic resource mobilization and public spending, have become imperative. The international community must continue to support these efforts and work on a comprehensive framework for an orderly restructuring of sovereign debt, which is a major loophole in the global financial system, as debt restructuring is likely to be inevitable for many countries in the years to come.

Participation in the Debt Service Suspension Initiative and potential savings (Foresight Africa 2021)