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As African countries borrow billions to fight COVID-19, IMF warns insolvencies loom

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As dozens of African countries continue to borrow billions of dollars from international financial institutions, including the African Development Bank, the World Bank and the International Monetary Fund, there are risks that some countries may be unable to pay back, the IMF warned in its latest global financial stability report update released on Thursday.

The IMF has already disbursed over US$10 billion in loans to close to 30 countries in Sub-Saharan Africa to respond to the COVID-19 pandemic. That unprecedented amount is 10 times more than what the IMF has been disbursing to the Sub-Saharan African region annually, or an average of US$1 billion each year.

These loans are also being given easily to countries without the stringent conditions that have accompanied previous borrowings in pre-COVID-19 era. The interest rate is also lower and that fuels the appetite for more financial assistance.

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And while the money is needed to fight the deadly virus and reposition economies devastated by COVID-19 for growth, the IMF advised countries recently to spend COVID-19 money but keep the receipts.

“You might have heard the Managing Director, Kristalina Georgieva, and others at the IMF say we are urging countries to “keep the receipts”. Spend the money, but keep the receipts, and that means, you know, ensuring that the resources are properly used,” Mr. Gerry Rice of the Communication Department at the IMF said on May 22, 2020.

In its stability report released on Thursday, the IMF noted that debt levels were rising and potential credit losses resulting from insolvencies could test bank resilience in some countries amid the COVID-19 pandemic.

Some emerging market and frontier economies are facing refinancing risks, and lower-rated countries have started to regain access to markets only slowly, wrote Tobias Adrian and Fabio M. Natalucci, the authors of the report.

The report noted that pre-existing financial vulnerabilities were being laid bare by the pandemic.

“First, in advanced and emerging market economies alike, corporate and household debt burdens could become unmanageable in a severe economic contraction.

“Aggregate corporate debt has been rising over several years, and it now stands at historically high levels relative to GDP. Household debt has also increased in many economies, some of which now face an extremely sharp economic slowdown. The deterioration in economic fundamentals has already led to a corporate ratings downgrade, and there is a risk of a broader impact on the solvency of companies and households.

“Second, the realization of credit events will test the resilience of the banking sector as they assess how governments’ support for households and companies translates into borrowers repaying their loans. Some banks have started to prepare for this process, and expectation of further pressure on their profitability is reflected in the declining prices of their stocks.

“Third, nonbank financial companies could also be affected. These entities now play a greater role in the financial system than before. But since their appetite for continuing to provide credit during a deep downturn is untested, they could end up being an amplifier of stress.

“For example, a sharp correction in asset prices could lead to large outflows in investment funds (as seen early in the year), possibly triggering fire sales of assets.

“Fourth, while conditions have eased in general, risks remain for some emerging and frontier markets that face more urgent refinancing needs. Their debts’ rollover will be more costly should financial conditions suddenly tighten. Some of these countries also have low levels of reserves, making it harder to manage portfolio outflows”.

The economists advised countries “to strike the right balance between competing priorities in their response to the pandemic, being mindful of the trade-offs and implications of continuing to support the economy while preserving financial stability.”

“The unprecedented use of unconventional tools has undoubtedly cushioned the pandemic’s blow to the global economy and lessened the immediate danger to the global financial system—the intended objective of policy actions.

“However, policymakers need to be attentive to possible unintended consequences, such as a continued buildup of financial vulnerabilities in an environment of easy financial conditions.

“The expectation of continued support from central banks could turn already stretched asset valuations into vulnerabilities—particularly in a context of financial systems and corporate sectors that are depleting their buffers during the pandemic. Once the recovery is underway, policymakers should urgently address vulnerabilities that could sow the seeds of future problems and put growth at risk down the road,” they wrote.

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Simon Ateba
Simon Ateba
Based in Washington, District of Columbia, United States of America, Simon leads a brilliant team of reporters, freelance journalists, analysts, researchers and contributors from around the world to run TODAY NEWS AFRICA as editor-in-chief. Simon Ateba's journalistic experience spans over 10 years and covers many beats, including business and investment, information technology, politics, diplomacy, human rights, science reporting and much more. Write him: simonateba@todaynewsafrica.com

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