The G20 Debt Service Suspension Initiative (DSSI) aims to provide temporary debt service relief to low-income countries, of which many are in Sub-Saharan Africa (SSA). This will allow governments to increase necessary spending on health care and the economy during the COVID-19 pandemic. So far, only 22 of the 77 eligible countries have requested debt relief under the initiative. Kenya, for example, recently indicated it will not seek a suspension of debt payments through the DSSI in part because it could harm its credit ratings and damage access to international capital markets.
Notwithstanding debt relief in the past, SSA governments have continued to accumulate debt, and increasingly from commercial international lenders and investors. The IMF indicates 16 SSA countries[1] are either in debt distress or at high risk of debt distress. The need to safeguard debt sustainability could lead to long and drawn out deleveraging that inhibits growth prospects, particularly if the process is disorderly. In the past 10 years, more highly-indebted SSA countries tended to register lower growth rates than less-indebted countries (Chart).
Higher debt service payments will reduce room for public spending on physical and social infrastructure. Governments may need to raise taxes to consolidate public finances, making it less attractive for local and foreign companies to increase investment. Planned reforms to strengthen public finances, support economic competitiveness and increase foreign direct investment may be difficult to maintain, particularly if political and social unrest rises. Growth challenges in Africa could curb opportunities to expand Australian exports from their 2018-19 amount of $5.1 billion (1% of Australia’s total exports).
[1] Cameroon, Chad, Republic of Congo, South Sudan, Central African Republic, Ghana, Sierra Leone, Zambia, Zimbabwe, Burundi, Cabo Verde, Eritrea, Ethiopia, The Gambia, Mozambique and Sao Tome and Principe.
