“There is a very interesting story of women as entrepreneurs outperforming men, yet they have six times less access to financing. So, open up space for women and they would carry you forward, great for them, great for Africa,” said Kristalina Georgieva, Managing Director of the IMF. In this context, “open up space” means increasing access to financing, credit, and opportunities. The Covid-19 crisis has hit women especially hard as they are more likely to work in jobs that require in-person contact, work in the informal economy, spend more hours of the day managing households, and now must also see to their children’s education. At the macro level, could the same be said about countries, especially those in sub-Saharan Africa?
Africa, the world’s second largest continent and with historically low population density, has for decades experienced a dearth of space, of the fiscal kind. Though they have continued to grow, the economies of the world’s fastest growing region by population have not keptpace. Before the public health and economic crisis wrought by Covid-19, many countries in sub-Saharan Africa – and 40% of low-income countries – were already experiencing debt distress and lacked sufficient mechanisms for generating fiscal revenues (job creation and tax collection). According to the IMF, the region’s economy contracted 2.6 percent in 2020, its first recession in 25 years. Now, the region is projected to grow just 3.3 percent, far less than the estimated global 5.5 percent in 2021.
Although responding quickly to support businesses and people as economies ground to a halt, low-income countries in general, including those in sub-Saharan Africa, lacked the fiscal firepower of their wealthier peers. Advanced economies unleashed fiscal support totaling 24 percent of GDP, emerging economies 6 percent of GDP, and low-income countries just 2 percent of GDP, which was already at a lower level to start.
Aware of low-income country’s lack of fiscal space to respond to immediate “challenges posed by the coronavirus outbreak” and seeking to give them time to assess “financing needs” going forward, the IMF and World Bank had in March 2020 lobbied the G20 to suspend bilateral debt payments from countries who requested assistance. In April, the G20 initially agreed to suspend debt payments from 73 of “the poorest countries” until the end of the year; this was later extended to June 2021 and could be extended further when the IMF and World Bank meet in April.
As Dr. Georgieva referenced in an interview, the creditor (lender) to debtor (recipient) landscape has changed markedly. Gone are the days when a handful of public institutions would lend to a select number of debtor nations; both the number and kinds of creditors and debtors have proliferated. According to a World Bank analysis, “80% of the debt stock” of IDA-eligible (poorest, developing) countries “is owed to multilateral and bilateral official creditors”.
What has changed is the number of middle- and low-income countries that are now lending to other low-income countries in part to advance their own development goals. What may have been a boon for both countries in the pre-crisis period – as this gave emerging economy lenders access to markets and debtors to financing – may now be a source of economic vulnerability. Likewise, the growth of “private sourcing of financing,” which now accounts for about a quarter of total “debt services obligations”, had previously given countries more choice, but has now made blanket calls for debt reduction nearly obsolete.
For Africa especially, there is also the issue of China’s commitments to debt reduction and relief. As Africa’s “largest single-state” creditor, China holds a lot of sway over how African economies recover post-Covid-19. As of June 2020, Yun Sun’s, of the Brookings Institution, thinking was that the $2 billion debt suspension over two years – out of a total of $60 billion committed to Africa in 2015 – could be the “maximum amount China will contribute” globally, while it prioritizes bilateral restructuring agreements.
Debt suspension, when possible, provided welcome relief, but it may not be sufficient for countries that were already in weak economic situations pre-crisis. South Africa, for example, already had a high debt to GDP ratio and was experiencing an economic slowdown. After a severe contraction in 2020, it is expected to recover modestly before plateauing. And South Africa, like many other countries, is seeking to strengthen fiscal resources and has introduced plans for economic reforms meant to incentivize private investment. In order for countries to recover and “take advantage of [technological] transformations” post-pandemic, some have called for debt cancellation. The reality, as Dr. Georgieva pointed out, is that countries working to reform and diversify economically fear being blocked from future financing if debt is canceled instead of restructured.
Although the IMF, under its charter, is not permitted to cancel debt, it can service debt relief from donor grants through its Catastrophic Containment and Relief Trust (CCRT) for which 25 countries received relief in April 2020. The IMF has also provided unprecedented emergency financing to member states throughout the pandemic period. In Africa, it has dispersed over $17 billion – more than thirteen times the amount in a normal year – through various emergency-financing tools.
A portion of the disbursements has come in the form of Special Drawing Rights (SDRs), a “reserve asset” created to bolster “member countries’ official reserves”. Adequate reserves are important as they increase the resilience of economies to any disruptions or shocks such as a pandemic or a lack of external financing flows. The IMF is currently discussing whether a second round of SDRs should be made available for this “second recovery stage of the crisis”.
International finance and multilateral institutions have realized that fast and bespoke assistance is most effective for managing crises and subsequent recoveries. The differences within countries as well as between countries necessitate tailored solutions to current and future problems. That is why the G20’s so-called “Common framework for dealing with debt issues,” which the IMF supports through its analyses, is focused on working with countries “on a case-by-case basis”. So far, three African countries – Chad, Zambia, and Ethiopia – have requested treatment under this framework. The IMF, for its part, is also working to support countries with more financing as each enters a different stage in its recovery. As countries around the world have recognized existing vulnerabilities and seek to ‘build back better,’ there has been a shift to focusing on the wellbeing of economies to people. In that sense, the same could be said for countries, too.