The European Union and Debt Relief for African Countries

18 July, 2020

During the Covid-19 pandemic, talks and discussions around African debt cancellation, or relief, became current and debated internationally. The crisis impact on African economies could lead to a slow down in growth of 1.8 percent in the best-case scenario, or a contraction of 2.6 percent in the worst case. This has the potential to push 27 million people into extreme poverty. Without a quick and effective response, governments bear the risk to lose control and face unrest. African ministers of finance conceived an economic emergency stimulus of 100$ billion to support public governments recovery plans. Among these measures, debt cancellation or standstill is critical to avoid the worst-case scenario. Among other actors affected by such continent-wide fiscal policy, the European Union is one of the most important to safeguard African lives and economies.

Current state of the African Economy

On March 31st, the United Nations Economic Commission for Africa (UNECA) released a statement including various economic measures, guidelines to counteract the rising cases and deaths of Coronavirus in Africa and the consequent economic crisis. One of their most important requests highlighted in their statement, has been a call for debt relief from “bilateral, multilateral and commercial partners with the support of the multilateral and bilateral financial institutions such as the IMF, the WBG, and EU, to ensure that African countries get the fiscal space required to deal with the COVID-19 crisis.”

The measure would have to affect all African countries in a coordinated and collaborative way. Debt relief has been conceived by African leaders to happen through a special purpose vehicle [SPV] to be created with the objective to manage all sovereign debt obligations. The relief would consist in a portion of their debt to be forgiven or converted into long term, low interest loans. The proposal became urgent due to both a substantial drop in revenue from a decrease in commodity prices and rise in the costs of imports. This put pressure on both currencies’ inflation and the exchange rates. As a consequence, to sustain anti-crisis economic measures, African countries would have indebted even more leading to unbearable national debt levels. Currently, the overall foreign African debt is estimated at $417 billion and in 2018, 36% of African government external debt was owed to multilateral organisations such as the World Bank and IMF, 32% to bilateral creditors, including 20% to China, and another 32% to private lenders.

Contrary to the plan, Ade Ayeyemi, Chief Executive Officer of the Pan African Banking Group, declared to Bloomberg that he was clearly against any form of debt cancellation for the continent. He conceived debt forgiveness as a form of default, which distorted markets with possible unintended consequences. In the interview, he stated that “forgiveness is not helpful because your debt is somebody else’s savings. When you go to the market to borrow money, the market is looking at your current and past behaviour”

International and European Debate

As seen, African fiscal policy centred around debt relief, is highly debated, and it involves a range on international actors and stakeholders. The World Bank and the IMF have already given their endorsement for debt relief. The IMF has announced a debt relief of six months for IMF debt obligations to 25 of the most vulnerable countries worldwide, 14 of which are in Africa. In mid-April the G20 announced a suspension of bilateral debt payments for 73 of the poorest countries, half of them in Africa. This means that bilateral government creditors will suspend debt repayments. But Africa wants both the G20 and IMF to go further. Given that global economic recovery is only expected to occur within two to three years, the African finance ministers urged development partners for stronger actions. Support from the EU is needed to achieve this.

In Europe, there are proponents for greater assistance to Africa: financing that extra spending and covering the costs of lost trade will require substantial assistance and new investment from the international community. The EU is the biggest African aid donor and trade partner. Moreover, as stated by the EU Commission president, Ursula von der Leyen, strengthening EU-Africa relations is at heart of the Commission’s agenda. Thus, a question concerning the role of the EU in these debates naturally emerges.

Officials in both France and Germany have said debt relief measures will likely need to be extended, while President Emmanuel Macron spoke in favor of “massively canceling” a portion of Africa’s debt load. Jutta Urpilainen, Commissioner for International Partnerships, declared that there is the need to go beyond G20 decision. The EU is taking actions to support debt relief efforts towards African countries, together with multilateral partners.

In a web conference with the Sahel G5 countries, Charles Michel, president of the EU Council, noted that debt relief for Africa was not a new debate, but said the potentially devastating economic impact of COVID-19 put it back on the agenda. Burkina Faso, Chad, Mali, Mauritania, and Niger expressed the request to cancel the foreign debt, in a bid to save the continent’s economy from the virus’ aftermath. While no details were provided on the size of the debt relief, the EU Council agreed to discuss this policy with EU Member States and to report back to the G5 in 3 months.

Looking Forward

African countries are fighting an exogenous and transitory economic shock, which needs to be tackled with substantial and unconditional financial assistance. There is the risk that Africa defaults on its foreign debts due to the corona crisis. The issue is highly debated and the policy outcome is difficult to foresee. Within Africa, there are also some contrary opinions on the issue. Some African leaders stated their concerns on the long-term outcome of such policy.

On the European Union side, the EU has geopolitical ambitions when it comes to EU-Africa relations. To support them in an ambitious and credible way, it should take the global lead and push for African debt cancellation or stronger relief. European countries, together with the US and Japan, dominate the governance and agenda-setting of the IMF and the World Bank. Hence, the EU and its Member States have a responsibility to lead this fiscal policy in cancelling Africa’s debt during the Covid-19 crisis. Two of the most important European institutions, the European Central Bank and the European Investment Bank might take the lead in this fiscal policy.

Share this: