Webinar Summary – COVID-19 and Sovereign Debt: The Case of the Southern African Development Community

By Christina Duran

Closing out the Fall 2022 Global China Research Colloquium, the Boston University Global Development Policy (GDP) Center hosted a webinar discussion on the COVID-19 pandemic, sovereign debt and the case of the Southern Africa Development Community (SADC) region on Tuesday, December 13, 2022. Daniel Bradlow, SARCHI Professor of International Development Law and African Economic Relations at the University of Pretoria, and Magalie Masamba, Post-doctoral Research Fellow at the University of Pretoria, presented the findings from their 2021 multi-disciplinary book, “COVID-19 and Sovereign Debt: The Case of SADC”. Cecilia Springer, Assistant Director of the Global China Initiative (GCI), moderated the discussion. 

Before starting the discussion, Springer noted the incredible timeliness and salience of the discussion In the midst of the US-Africa Leaders Summit and the release of both the International Monetary Fund’s (IMF) 2022 update of their Global Debt Database and the World Bank’s new International Debt Report (IDR).

Masamba began the discussion by introducing the book project. At the height of the pandemic in 2021, the project began with a call for papers in a series of online workshops which culminated in a 15-chapter book bringing together 17 authors from around the world. For Masamba, the book provided a platform for African voices on issues on sovereign debt management and debt restructuring. The project also acted as a capacity development initiative, where authors from the African continent partnered with international authors, including Kevin P. Gallagher, Director of the GDP Center, and Senior Academic Researcher.

The book covered four themes: the global economic structure and debt landscape, debt management and restructuring, a holistic approach to sovereign debt and case studies from different southern African countries. This includes a case study on Mozambique surrounding the litigation against government officials in connection with the $2 billion loan scheme in 2016, a case on Namibia and the role of central banks, as well as a study on Zambia, as the country currently undergoes debt restructuring under the Group of 20’s (G20) Common Framework.

To inform how the current debt landscape impacts the lessons learned in the book, Masamba drew on the IMF’s recent Global Debt Database update. According to the update, the total global debt fell by 10 percentage points from gross domestic product (GDP), the largest fall in the past seven decades, following 2020 which had the highest increase of global debt in one year. While this is welcome news for advanced and some emerging economies, Masamba argues the situation is very different for low-income, developing  countries who saw an increase in their global debt. “Different countries are experiencing a debt rollercoaster in different ways,” said Masamba.

Based on the World Bank’s new debt report, the total debt stock for sub-Saharan Africa is $790 billion, of which the official creditors amount to $254 billion and private creditors $216 billion. Masamba concludes African countries will have to borrow externally to meet their needs. The need to borrow has been made more urgent by the COVID-19 pandemic, along with other crises like Russia’s war in Ukraine and concerns over financing development, achieving the UN 2030 Sustainable Development Goals (SDGs) and combatting climate change.

Official sources of loans have been insufficient, so the private sector has increasingly played a role in closing financing gaps, but this advent also raises questions on how to deal with the complexity of restructuring privately held debt. Even in a scenario where official creditors decide to write off Africa’s current debt stock, Masamba argued this would not be sufficient for African countries to achieve a sustainable debt level, as official creditors account for $254 billion in total debt stock, leaving $216 billion from private creditors. The World Bank reports private creditors account for a greater share of external debt for low- and middle-income countries, complicating the approach to debt management.

Next, Masamba presented the five lessons learned from their research. First, they highlight the importance of revisiting responsible borrowing processes. For the researchers, the problem of debt not only requires consideration when there’s a problem, but from the onset, stakeholders must also examine how countries procure debt. Thus, there is a need for clear public disclosure, the role of public participation especially in parliamentary processes and greater accountability for a government’s borrowing.

Second, they point to the importance of debt transparency, asking what should be disclosed when and to whom. Not only should state borrowing procedures be disclosed, but also debt data disclosure requirements of both the public and creditors. This would allow both the public and creditors to have a picture of the debt landscape and have the information necessary to renegotiate their debt. Also, Masamba and Bradlow consider the transparency of contractual terms, a complex issue when deciding what should be disclosed and what should be kept confidential.

During the pandemic, contractual clauses became very important. Thus, the third lesson emphasizes the importance of legal predictability. Regarding debt as an inherently contractual agreement, debt contracts (using the term broadly) need to be more comprehensive. The agreements must also have fair risk allocation, clearly defining who is responsible for what and the consequences of risk occurring. More attention should also be paid to contracts by having model agreements, as well as capacity development on drafting and negotiating agreements.

When considering the question of how to bring everyone to the table, including private creditors, the researchers developed the fourth lesson, on ensuring comparability of treatment in restructuring. This also means tackling issues of transparency.

Finally, the researchers concluded that issues of debt affect all facets of life, including economic, social, political, cultural and environmental concerns. Thus, solutions that result in a resilient future require the development of a comprehensive approach that accounts for all aspects of a borrower’s situation, including climate change, human rights issues, financial sustainability and fair burden sharing.

Masamba presented one additional lesson: the current approach to Africa’s debt distress is insufficient and Africa needs a new approach to restructuring, beyond the Debt Service Suspension Initiative (DSSI), which has provided debt deferrals to 48 out of 73 eligible countries, and the G20’s Common Framework.

While she notes the importance of debt relief and debt forgiveness, Masamba emphasized the need for a more comprehensive approach to deal with debt issues that accounts for environmental, social and human rights considerations.

Then, Daniel Bradlow expanded on the need for a new approach that incorporates those lessons and provides a creative way to dealing with Africa’s current debt problems.

Echoing Masamba’s comments, Bradlow called the current approach to debt restructuring problematic, as there is no formal mechanism that compels anyone to participate in the process. For private creditors, it’s a voluntary process. The process tilts in favor of creditors even further because the process relies on debt contracts between the private creditors and the debtor, meaning they focus on the rights of the creditors in those agreements. Collective action clauses can under-emphasize the debtor’s many commitments from its constitutional obligations and treaties it has signed, all of which are viewed as lesser obligations than the loan contracts.

Bradlow explained that creditors do not necessarily lack kindness, but rather are influenced by financial incentives and sometimes legal requirements to maximize their returns, as well as fiduciary or regulatory requirements that might limit their ability to deal with the debt.

Bradlow then presented the Debts of Vulnerable Economies (DOVE) Fund, which seeks to change this approach through four innovations. First, the fund proposes principles to guide the discussions on restructuring and reinvestments, creating a conceptual framework that both the debtor and the creditor accept as the basic principles and framework of their negotiation. Second, the DOVE Fund seeks to change the intra-creditor dynamics, so the creditors become more open to being creative and innovative in their approaches to imagining a new approach to sustainable debt restructuring.

Third, it seeks to reach an optimal outcome, rather than a profit maximizing outcome. Bradlow defines an optimal outcome as being sensitive to the financing needs of both the creditors and the debtors, but also looking for the best possible mix of financial issues, social-environmental, human rights and governance considerations, and reaching an agreement optimal for everyone.

Finally, the approach should bring all stakeholders to the table so that all stakeholders can participate in a fund that would buy the debt of the sovereign debtor and agree to restructuring consistent with the DOVE Fund principles.

Bradlow explained that the DOVE Fund principles are based on 20 different international norms and standards, ranging from the Institute of International Finance (IIF) to the UN Conference on Trade and Development’s (UNCTAD) Principles on Promoting Responsible Sovereign Lending and Borrowing. However, Bradlow argued that while all the international standards are relevant, none completely address a comprehensive approach for debt restructuring, focusing on the negotiating process and the substantive outcomes. Bradlow summarized the DOVE Funds eight principles: guiding norms, transparency, due diligence, optimized outcome assessment, monitoring, inter-creditor comparability, fair burden sharing and maintaining market access. Over the last year, in addition to working on the book, they have been working on a project to develop the DOVE Fund.

They tested the concept and the principles with a range of interested groups at the World Bank, the IMF, with investors, civil society groups, as well as legal and sovereign debt experts. Currently, they are searching for a particular country to test the applicability and success of the principles. However, recognizing the difficulty of finding an interested party to give a small group of people hundreds of millions of dollars to be a powerful voice in a particular debt negotiation, Bradlow and co-authors are seeking a way to have a token investment in a country’s bonds to advocate actively for the DOVE Fund principles to become the conceptual framework for that country’s debt negotiations. Bradlow hopes to take the work from the book and the DOVE Fund project and convert it into policy in a particular area over the next year.

Moving into the Q&A section, Springer fielded questions for the panelists on renewable energy investments, the role of China and asked about the prospect of debt restructuring in the SADC region in 2023. Citing a recent report tackling the challenges with financing renewable energy projects in the SADC region, Masamba explained that multilateral development banks (MDBs) can play a greater role in helping to mobilize resources to de-risk projects, making renewable energy projects more bankable. If countries like Zambia can provide government guarantees to finance projects, maybe MDBs that care about renewable energy and climate change can play a larger role in financing for development in Zambia.

With the end of the year and the emergence of ‘polycrisis’ around the world, Masamba does not want to be the bearer of bad news, but predicts the debt landscape in 2023 will likely be worse . In 2023 and 2024, many countries will face challenging debt repayment schedules, due to higher interest rates, maturing debt and compounding interest from the DSSI deferrals. Masamba argues many African countries will ask for more debt relief and debt forgiveness than restructuring. However, she also considers the role of not only private sector creditors, but also China, the continent’s main bilateral creditor. Masamba finds China’s participation in the creditor committee on the Common Framework restructuring of Zambia, as a co-chair with France, extremely encouraging, but without private sector participation, China will be discouraged from participating.

Considering a question on the most important institutional change that would make the process more democratic, Masamba said this question speaks to the issue of accountability. The case of Mozambique is evidence of what happens when you do not have enough checks and balances. She suggests additional checks and balances, like approval from the office of the attorney general, would provide some legal scrutiny on the contractual agreement itself. Answering a question from Rebecca Ray, Senior Researcher at the GDP Center, about the prospects of governments adopting greater transparency practices, Masamba notes the issue of transparency has gained more global attention, but warns if transparency is not taken seriously,  every decade countries will find themselves in the same position as they did during the Heavily Indebted Poor Countries (HIPC) Initiative.

Concluding the Q&A section, Bradlow considers a debt jubilee at a global scale and the prospects of finding an institutional sponsor for the DOVE Fund. Bradlow insists a debt jubilee has some short-term benefits, but ultimately would be insufficient and unsustainable. As Africa faces climate crises and problems of poverty, inequality, unemployment and a rising youth bulge, Bradlow argues Africa needs far more money than it can expect through grants from traditional or non-traditional donors and will have to raise that money elsewhere.

For Bradlow, the answer is to use the DOVE Fund to create a formal sovereign debt-fighting mechanism. Bradlow imagines a situation in which a country in a debt crisis can go to the international equivalent of a corporate bankruptcy procedure, where all the stakeholders come together in a process overseen by a judge or some independent decision maker to reach a solution based on law and experience. Bradlow remains optimistic as the response from various people in financial institutions, international organizations and civil society experts has been uniformly favorable. Bradlow said the conceptual framework has been accepted by all of these stakeholders, but transferring that into something more practical continues to be explored.

*

Never miss an update: Subscribe to the Global China Initiative Newsletter.