East African countries are facing more pressure to pay their loans after the world’s richest nations executed a botched debt relief plan that has pushed over half of the world’s poorest countries to external debt distress.
The Debt Service Suspension Initiative (DSSI) by the world’s 20 wealthiest economies commonly referred to as the ‘G20’ has not helped poor countries ward off the devastating effects of the Covid-19 pandemic as foreign creditors, particularly banks and pension funds, demand to be paid their loans.
Research by UK-based Jubilee Debt Campaign, a coalition of national organisations and local groups calling for the cancellation of unjust and unpayable debts of the poorest countries, reveals that lower-income nations which applied for debt relief ended up spending a massive $36.4 billion on external debt payments compared to a paltry $10.9 billion, which was either suspended or cancelled.
Private creditors received the largest amount of debt payments of $14.9 billion and suspended just 0.2 percent of payments.
“Failure to make banks, hedge funds and oil traders take part in G20’s flagship debt suspension scheme has made a mockery of this initiative. Tens of billions of dollars have flooded out of lower income countries at a time they were desperately needed to protect lives and livelihoods,” Tim Jones, Head of Policy at Jubilee Debt Campaign said last week.
“Meanwhile, the scheme has effectively become a bailout programme for private lenders as debt suspension by public lenders has enabled financiers to continue being paid,” he added.
Figures released by Jubilee Debt Campaign show that EA countries are among the poor countries of the world that have been hit most with the G20’s failed debt relief plan.
Tanzania managed to suspend repayment of only three percent of its external debt burden, which stood at $301.4 million in June this year, followed by Kenya (10 percent), DR Congo (20 percent), Uganda (27 percent) and Burundi (42 percent).
Kenya’s Public Debt rose to Ksh7.7 trillion ($70 billion) in June from Ksh1.5 trillion ($13.63 billion) in June 2011 as the government borrows heavily to finance a fiscal deficit that has averaged 7.4 percent of gross domestic product (GDP) over the past 10 years (2011-2021).
As at June Kenya’s foreign debt stood at Ksh4 trillion ($36.36 billion), with domestic debt standing at Ksh3.7 trillion ($33.63 billion).
Analysts at Cytonn Investments said Kenya is sliding into debt distress with its debt-to-GDP ratio coming in at 67.5 percent in June 2021 compared to the IMF recommended threshold of 50 percent for developing countries.
Uganda provisional public debt stock was Ush70.38 trillion ($19.46 billion) in June while Tanzania’s stood at Tsh887 billion ($385.08 million) consisting of external and domestic debts of Tsh692.9 billion ($301.4 million) and Tsh194.1 billion ($84.26 million) respectively.
“A major risk of increased debt is the higher cost of financing. The debt service-to-domestic revenue ratio has been steadily rising to 24.6 percent in June 2021, up from 22.4 percent and 21.7 percent in June 2019 and June 2020, respectively,” according to the Bank of Uganda.
Kenya’s debt service-to-revenue ratio is currently estimated at 65.8 percent compared with the recommended threshold of 30 percent.
“With a projected public debt to GDP ratio of 76.6 percent in 2021 and rising debt service-to-revenue ratio of almost twice the IMF threshold, we are of the opinion that the country could attain debt distress levels, which increases her vulnerability to external shocks,” analysts at Pan-African Credit Rating Agency Agusto said.
In Rwanda, rating agency Fitch revised the outlook on the country’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to negative from stable and affirmed the IDR at 'B+' largely due to weakening public finances and increasing public sector debt, a trend exacerbated by the pandemic shock.
“High budget deficits associated with the pandemic have led to a sharp increase in public debt levels,” the rating agency said in July.
Last month, World Bank Group President David Malpass said that over half of the world’s poorest countries are debt distressed.
He noted that low income countries will be pushed further into financial stress when the debt relief scheme expires in December
“Governments have large fiscal deficits often pushing the public debt to dangerously high levels that require careful investment decisions by both the public and private sectors,” he said.
In April last year, the World Bank and the IMF urged G20 to establish the DSSI to help countries concentrate their resources on fighting the Covid-19 pandemic and safeguard the lives and livelihoods of millions of the most vulnerable people.
The G20 scheme, which took effect on May 1, 2020 offered to suspend external debt payments to other governments for 73 countries.
At the time of the announcement, the G20 said it would lead to more than $20 billion of debt payments being suspended to enable spending on health systems and fighting the pandemic.
However, 46 countries which applied for the relief had just 23 percent of their external debt payments suspended between May 2020 and June 2021, with 77 percent continuing to be paid.
The G20 is now replacing the suspension initiative with a Common Framework for Debt Treatments – a debt restructuring scheme by the end of this December.
Last week, the G20 urged all official bilateral creditors to implement the debt relief plan fully and in a transparent manner.