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The Prospect of Debt Crisis looms over Sub-Saharan Africa

As global financial leaders arrive in Washington for the International Monetary Fund and World Bank Group’s Spring Meetings, Abebe Selassie, head of the IMF’S Africa department, has been quick to call out the need for debt relief, and reform, amongst developing nations in the continent’s sub-Saharan region. Talking to the Financial Times, Selassie argues, “We need a much more efficient sovereign debt framework,” and that “we need to be sure that resources are going to support countries rather than being used to service unsustainable debts.” Both Ghana and Zambia have defaulted on their debts since the start of the pandemic, with both sub-Saharan countries struggling to restructure agreements with foreign creditors. In addition to rising global interest rates, rising global food prices and extreme weather in the region have served as supply shocks to sub-Saharan economies’ abilities to finance government budgets.

Global Food Price Index

Source: United Nations Food and Agriculture Organization

On the one hand, although global food prices have fallen to levels seen before the Russian invasion of Ukraine, the IMF’s Global “price of food index” still shows a 45 percent increase in food prices since the start of pandemic lockdowns in March 2020, forcing food-importing countries including those of sub-Saharan Africa with an obviously inelastic demand to stomach rapidly increasing costs. Meanwhile, Comoros Finance Minister Mze Abdou contends, “African countries really are victims. They really aren’t responsible for these devastating effects” of extreme weather events, including drought, famine, and cyclones. Rising prices and lowering productive capacities have acted alongside a rising cost of borrowing for African governments, as global monetary tightening to offset inflation (which would be beneficial to a country’s ability to pay off its debts) has resulted in higher interest rates that African countries must pay back. If anything, it may be close to miraculous that Ghana and Zambia have remained the only two African countries to have defaulted since the start of the pandemic.

As the confluence of several devastating factors leaves its toll on sub-Saharan finance, leaders have backed up the IMF’s Selassie’s calls for reform in government debt in the region. Sierra Leone Finance Minister Sheku A.F. Bangura predicts, “The crisis we have is a permanent one… We need a much stronger and consolidated approach” debt financing, especially in light of government bond yields in sub-Saharan Africa soaring over 10 percent higher than that of US Treasury securities. In other words, unprecedented interest rates mean that simply providing debt relief to African countries may not be enough; to repeat Selassie, “we need to be sure that resources are going to support countries rather than being used to service unsustainable debts,” especially in light of other shocks to sub-Saharan economies. Such calls for debt reform also comes only a few months after the IMF’s unveiling of the “Resilience and Sustainability Trust,” or RST, designed to help “low-income and vulnerable middle-income countries build resilience to external shocks and ensure sustainable growth.” The design of the RST allows the IMF to channel excess reserves with IMF Special Drawing Rights from richer countries to more developing countries, with $40 billion already being pledged for the trust according to IMF Managing Director Kristalina Georgiva.

Nonetheless, rising interest rates may be quickly negating lump-sum payments to sub-Saharan governments. Ghana Finance Minister Ken Ofori-Atta, in talking to the Financial Times, argues that IMF and World Bank efforts in providing debt relief to the region must be escalated, calling for an increase in the latter’s lending capacity to Africa from $70 billion to over $200 billion. As pleas for increased support further emanate from the sub-Saharan region, there’s no denying that many breaths will be held over the outcome of key policymakers’ meetings over the next week in Washington.


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