Apr 13, 2022
African Debt Risks Heightened by War in Ukraine, World Bank Says
(Bloomberg) -- Russia’s war with Ukraine has escalated sovereign-debt risks in sub-Saharan Africa, increasing the need for better relief measures to avert a “large wave” of crises among the region’s developing countries, the World Bank said.
The share of countries in the region at high risk of debt distress has grown to 60.5% from 52.6% in October, the Washington-based lender said Wednesday in the April edition of its Africa’s Pulse report. Fears about debt sustainability are reflected in the widening of sovereign spreads for several sub-Saharan African nations, driven by rising interest rates in developed economies and the war in Ukraine, it said.
While being at a high risk of debt distress is “not a death sentence,” the global community must continue working to come up with clear solutions for countries in need, Albert Zeufack, the World Bank’s chief economist for Africa, said in an interview.
“We need to ensure that concessional financing is available to African countries,” he said. “Ultimately, the issue is not whether or not countries contract debt -- all countries do. The question is how do African countries raise affordable finance in a sustainable way for infrastructure development and to finance their economic recovery.”
Even before the war, debt levels on the continent were rising. That’s as self-imposed austerity programs and Covid-19 relief measures that sought to provide some of the world’s poorest nations with the fiscal space to address health needs, stimulate their economies and help reduce debt or vulnerabilities have been insufficient, the lender said.
The Group of 20 nation’s Debt Service Suspension Initiative ended in December and attempts to reorganize borrowings under its new Common Framework for Debt Treatments, a set of guidelines that the most powerful countries drafted to mitigate debt crises in poorer states, have made little progress.
Given the slow process, African countries ought to think twice about taking on new loans, Zeufack said.
“It’s important for African countries to really refrain from contracting non-concessional debt unless there is a clear prospect for that debt to have a return rate that is higher than the interest rate,” he said. “The issue again isn’t debt or no debt, it’s what do you use the debt for.”
To date, only three African countries -- Chad, Ethiopia and Zambia -- have applied to re-organize their debt under the common framework. That’s as others fear participating in the program could be seen as a sign of default and trigger negative credit-ratings actions.
High and increasingly vulnerable debt levels are among the factors that’ll lead to sub-Saharan Africa’s regional economic growth decelerating to 3.6% this year, down from an estimated expansion of 4% in 2021, the World Bank said.
High debt burdens and monetary policy normalization, in line with developed economies, mean there’s limited firepower to support households facing cost-of-living crises. The region’s inflation rate is projected to average 6.2% in 2022, up from 4.5% a year earlier, and higher fuel and food costs stemming from war-induced price pressures will increase the likelihood of civil strife, the lender said.
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