How Can China And Others Make DSSI Work For Africa’s Post-Pandemic Economy

By Amodani Gariba

The coronavirus pandemic has not only been a public health crisis. The pandemic came with major political and economic repercussions we are yet to defeat. As people got infected and countries put under lockdowns, global supply chains got broken and economic activities took a major hit. Despite the easing of restrictions, many economies have yet to fully recover. 

In a push to jumpstart their economies, many developed nations have injected loads of cash into their system. The US for instance injected $3 trillion – the biggest the world has ever seen. The big losers from the pandemic seem to be African countries, which have piles of foreign debts to pay, despite the slump in economic activities. Until recently, Africa’s calls for debt relief fell onto deaf ears. The G20 responded to these calls by spearheading the Debt Service Suspension Initiative (DSSI) for vulnerable countries. Many African countries fall under this category. In this article, we will examine the role of China in the initiative and show how much depends on it. 

Breakdown of Africa’s debt stock

In recent years, Africa’s quest for development has caused an appetite for foreign loans on the continent. Perhaps, what motivated this appetite is the economic theory that says economic growth is stimulated with infrastructure. There has been a tremendous development of infrastructure across Africa, most funded by loans. Where do these loans come from? Let us have a general break down.  

There are three categories of debt in Africa: Private, multilateral, and bilateral debts. African governments hold private debts when they issue foreign bonds. The most prominent of this type is the Eurobond. Individuals and private companies in Europe hold these debts. Multilateral debts are those given by multilateral financial institutions like IMF and World Bank. These debts are quite unpalatable because they come with a lot of conditionality. African countries normally do not take these loans, unless there are no options. Bilateral loans are those Africa gets from other countries. In this category, China stands tall among Africa’s bilateral lenders. Of Africa’s total debt, China alone commands an impressive 20 percent, making China, one of Africa’s most important lenders.

Realities with Africa’s pandemic economy

At 8.8 percent, Ghana, a year before the pandemic, was the fastest growing economy in the world. Today, the country is growing at 0.8 percent. According to African Development bank’s 2020 West African Economic Outlook, the West Africa sub-region was projected to grow at 4 percent in 2020, but because of the pandemic, the economy ended up contracting by 2 percent.  There has been a severe fall in revenues in Africa. Although the price of oil has risen, it is yet to get to pre-pandemic levels.  The markets for mineral commodities are still closed. Revenues from tourism, which contributes tremendously to foreign revenues, have taken a slump. Proceeds from these commodities are what African governments use to service their outstanding debts. Given no debt relief, African governments are likely to default. Millions of Africans lifted from poverty could fall back, if their governments disregard domestic needs to service foreign debts. Left alone, the situation is a disaster in the making. 

Is G20’s DSSI going to rescue Africa?

Pressured by both African governments and the IMF and World Bank, Africa’s lenders have responded to calls for debt relief. The G20 announced a debt relief service called the Debt Service Suspension Initiative (DSSI). The purpose of the initiative is to provide liquidity support to developing countries. The UN estimates that developing nations need $2.5 trillion to combat the impact of COVID-19.  Seventy-three developing countries are eligible out of which thirty-seven are African. These African countries collectively have a $5.75 dollars in debt service due from May to December 2020.

The DSSI is a platform through which private and bilateral lenders could use to help vulnerable debtors. However, problems have started to develop. Some borrowers and lenders alike have started developing cold feet for the program. The World Bank (WB), which holds about 21% of all debts of DSSI-eligible African countries is yet to join. Yet, David Malpass, President of WB is calling out China Development Bank (CDB) for not participating. However, one of the two leading Chinese lending institutions – China EXIM bank, has joined the initiative. Save Angola, CDB’s inclusion in the initiative would not have any significant impact on Africa’s DSSI participants. 

Some African countries including Ghana, Rwanda, Kenya, and Nigeria, which are eligible for DSSI, have chosen not to join the initiative to access debt reliefs. These countries fear their participation could trigger a downgrade in their credit ratings, which will impede their ability to secure loans on the financial market in the future. The fact the DSSI forbid beneficiaries from non-concessional borrowing during the period of moratorium makes the initiative kind of a bitter pill for these African countries. Some private lenders are also back scaling. They fear African governments could use their debt reliefs to service Chinese debts.

G20’s DSSI is a good initiative, but until surrounding issues are resolved, Africa’s debt situation will not transform for the better.

What is needed

Professor Paul Collier’s book, The Bottom Billion, written 13 years before the pandemic, talks of the plight of less developed countries of the world. He dived deeper into how the rich countries could share a world with about a billion people, for which Africa alone, constitute 70 percent, trapped into permanent poverty. Having a billion people in poverty is not only a problem for poor countries. When these poor countries become exporters of terrorism, immigrants, etc. it becomes a problem for the rich countries too. He argues that it is imperative that rich countries commit to solving the problems of their poor neighbors before they get out of hand. 

The pandemic has made Colliers prediction more likely. The world is at a crossroads. It is the collective responsibility of all to make sure Africa comes out of this storm strong. For this reason, debt relief is imperative and the DSSI must work.  These are some recommendations to consider. 

1. CDB must join the DSSI for the sake of Angola, which has most of its debts owed to the bank. 
2. China must be transparent with its case-by-case debt relief program. This is because debt relief that private creditors may grant African countries may depend on the terms of Chinese debt relief. More favorable Chinese debt relief terms may lead to terms that are more favorable from private lenders.
3. Credit rating agencies must seize ratings for countries under the DSSI until the moratorium is over. Given this, eligible African countries will be open to taking advantage of DSSI. 
4. The conditions that prevent DSSI beneficiaries from accessing non-concessional lending should not apply as a blanket for all. It should be varied depending on the financial position of each country. Hard hit African countries should be able to access more long-term financing to jumpstart their economies.  Debt service alone will not do the magic for African countries hit hard by the pandemic.
5. Given its share of total African debt, World Bank should join the DSSI. WB could do this in a manner that will not jeopardize its position as a lender of last resort. This will end the unnecessary political bickering, which is threatening the success of DSSI. WB’s inclusion will give China more confidence to come in stronger.