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


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

In 2021, the sustainability of sovereign debt and financing for development will be the top priorities and challenges for policymakers. Before the COVID-19 epidemic, sub-Saharan Africa’s sovereign debt increased because of growing financing requirements and insufficient domestic resource mobilization. Many countries took advantage of investors’ yield and used it to issue sovereign debt on the international capital market. The 2008-2009 global financial crisis resulted in very low global interest rates. The severe oil shock of 2014 caused debt accumulation to accelerate. It is estimated that one-third of sub-Saharan African countries were in or at risk from financial distress before the COVID pandemic.

The COVID-19 pandemic was the worst and most widespread shock African countries have suffered in over 30 years. The drop in economic activity has led to a reduction in government spending revenues. This is precisely when more spending is required to combat the pandemic and support countries. The result is that debt levels have increased significantly, and more countries will soon be in financial distress or at risk. The International Monetary Fund today estimates that the region will require an additional $ 345 billion by 2023. Create a financial portfolio to pay off your debt.

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

Multilateral and regional financial institutions have provided financial support to African countries to combat the pandemic. The G-20 announced in early 2020 a Debt Service Suspension Initiative to suspend sovereign debt repayments for countries that are least developed, including many African countries. Although the DSSI was well-intentioned, it was necessary because debt service payments for African countries had increased significantly due to rising debt levels and higher debt share. Private sector. Its implementation was not successful. In summer 2020, the DSSI raised only $ 4 billion. This is well below its target of $ 12 million. Participating countries. Concerns over sovereign credit downgrades and loss of capital market access are critical reasons for the DSSI’s failure to be adopted. Due to the absence of creditors, including the private sector, the DSSI initiative Debt freezing had a limited impact.

Effective sovereign debt management is essential in the current rush to finance development programs within a challenging post-COVID environment. This includes efficient domestic resource mobilization, public spending, and effective sovereign debt management. As debt restructuring will become a common occurrence in many countries’ future years, the international community must support these efforts and work to create a comprehensive framework to orderly restructure sovereign debt.

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