The SADC region – like the rest of the African continent – was already facing heightened debt challenges prior to the outbreak of the COVID-19 pandemic.
The COVID-19 economic impacts have worsened the debt sustainability situations of most SADC countries.
The pandemic has affected key macroeconomic variables and global value chains which have significant implications for the debt sustainability outlook. Fiscal pressures like COVID-19 health expenditures and economic stimulus packages have put countries at great risk of debt vulnerability.
The average public debt for SADC increased from 39.2 percent in 2011 to 55 percent in 2019 (IMF, 2020).
The pace of public debt accumulation has been higher for Angola, Mozambique, Zambia, Swaziland, Namibia and South Africa, where it has exceeded the regional average of 30 percent of GDP.
In 2020, three countries were at high risk of debt distress, namely Zambia, Angola and Malawi; and two countries were in debt distress – Zimbabwe and Mozambique. For SADC market access countries (South Africa, Botswana, Namibia, Mauritius, Eswatini, and Seychelles), debt levels were considered sustainable.
The main drivers of debt accumulation have been new borrowing, budget deficits, exchange rates depreciations, the rise in interest rates, debt-creating inflows, commodity price fluctuations and low foreign direct investments.
COVID-19 has drastically reduced government revenues while expenditures have increased due to sharp rises in health expenditures, social programmes and business recovery bailouts.
In response to COVID-19, SADC countries put in place stimulus packages to promote economic recovery.
Among monetary policy measures, central banks responded by cutting interest rates and providing more liquidity.
On a global scale, the scope of fiscal support has been low and varies considerably across countries, ranging from as high as five percent of GDP in Seychelles and 4.2 percent of GDP in Namibia, down to 0.14 percent in Eswatini. This is compared to as high as 10 percent of GDP in advanced economies.
While these funds are small compared to the COVID-19 needs, given the limited fiscal space in SADC, the stimulus packages are likely to result in increased debt with little impact on growth.
All these issues have brought the matter of debt relief and restructuring firmly onto the global agenda as a measure to resuscitate economies and save domestic resources for use in the fight against the pandemic as well as for social assistance programmes.
The G20 countries, through co-ordination from the IMF and World Bank, have put in place several initiatives aimed at offering debt relief to low income economies.
The Debt Service Suspension Initiative aims to suspend debt repayments for 73 low income countries until June 2021. The DSSI was endorsed by the IMF, AfDB, Paris Club, China and the G20 to help poor countries manage the severe impact of the COVID-19 pandemic.
The main goal of the DSSI is to allow poor countries to concentrate their resources on fighting the pandemic and safeguarding the lives and livelihoods of millions of the most vulnerable people.
The majority of SADC countries are beneficiaries and countries will save millions of dollars from the initiative
The DSSI came with conditionalities: countries have to commit to use freed-up resources to increase social, health, or economic spending in response to the crisis; commit to disclose all public sector financial commitments (involving debt and debt-like instruments); and commit to limit their non-concessional borrowing as supported by ceilings under IMF programmes and the World Bank’s non-concessional borrowing policies.
However, the DSSI lacks the participation of private creditors and money freed up by this initiative could end up being used to repay private debts rather than to fund COVID-19 responses.
Further, the DSSI only covers a small percentage of debt payments due in 2021 by all developing countries. Middle-income countries are left out.
There are calls for the extension of the DSSI to 24 months (through to June 2022) instead of the current six months ending June 2021.
In essence, debt service suspension does not address the debt crisis – it just postpones the problem.
Africa needs a debt resolution mechanism that addresses the legality, legitimacy, and sustainability of debts.
In November 2020, G20 leaders approved a Common Framework for Restructuring of Debts for 73 of the World’s low income countries. To date, only three African countries (Zambia, Chad and Ethiopia) have sought relief under the initiative
The mechanism is short-term and does not address the core faults in the global financial architecture, nor the flawed debt financed mega-infrastructure approach to development.
Because the loan contraction and debt management and social protection frameworks in SADC fall short of fostering transparency, accountability and inclusiveness, external and domestic public debt are likely to remain at unsustainable levels.
It is important to address the above problem to avoid countries sliding into a debt crisis.
The increased and rapid borrowing during the COVID-19 resulted in suspension of good debt governance standard practices. SADC governments should ensure that proper good debt governance practices; eg getting parliamentary approvals.
In addition, parliamentarians at the SADC Parliamentary Forum and national parliaments need to urge governments to put pressure on the IMF to issue out SDRs. Particularly, African parliamentarians need to call on the IMF to issue Special Drawing Rights.
The African Union, finance ministers and the UN Economic Commission for Africa have all added their voices on the need for the SDR issuance.
In the likely event of SDR issuance, parliaments will have to play an important role in the usage, transparency and accountability of the funds.
SDRs comes with no IMF conditionalities attached. It is money that goes directly to country treasuries and national budgets.
Tirivangani Mutazu is Senior Policy Analyst (Debt Management) at the African Forum and Network on Debt and Development. This article has been extracted from Mutazu’s presentation at the March 15, 2021 AFRODAD & SADC PF webinar on Special Drawing Rights