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Why African Countries Default on External Debt Payments


FILE - A currency trader displays banknotes in his booth at a market in Kinshasa, Democratic Republic of Congo on August 11, 2021.

As debts pile on some African economies due to increased borrowing amid unforeseen domestic expenditures, states have resorted to defaulting on external debts or have threatened to default in a desperate move to restore macroeconomic and debt sustainability.

Earlier this month, international credit rating company Fitch Ratings said there will be a continuous uptick in external debt service burden for its rated sovereigns in sub-Saharan Africa, excluding South Africa, from 2023–2025.

"Debt service payments falling due will remain significantly higher than the average level seen in 2019-2021," it said.

On Monday, Ghana suspended payments on most of its external debt, calling it an "interim emergency measure." The West African oil and gold producing nation is facing its worst economic crisis in a generation.

Ghana's finance ministry said it will not service debts including its Eurobonds, commercial and most bilateral loans even as bondholders chastised the decision as lacking clarity.

The country's total public debt stands at 467.4 billion Ghanaian cedis or $55 billion dollars.

Ghana is the third African state to default on external debts since the start of the pandemic. Zambia and Mali defaulted in late 2020 and early 2022 respectively.

Mali, which stopped external debts servicing due to regional sanctions over a coup, has honored all missed payments following the lifting of economic sanctions in July, its finance ministry said.

Zambia on the other hand is yet to finalize discussions with bilateral creditors to restructure its debts. With China as its largest creditor, the southern African nation has struggled to conclude a delayed restructuring of debts that reached 133% of GDP, according to the International Monetary Fund (IMF).

Accra reached a $3 billion staff-level agreement with the IMF mid-December, while Chad and Kenya also got the green light for a program by the Bretton Woods Institution.

Edwin Truman, senior fellow at Harvard Kennedy School’s Mossavar-Rahmani Center for Business and Government, told VOA that although debt defaults increase borrowing costs in the future, "it’s not always for an extended period of time."

"As a tactic, rather than going on and paying its interest or suspended its interest payments, Ghana said we're not going to pay and right now we're going to wait until we get a more comprehensive settlement in support of a program with the IMF," he said.

"It’s obviously not the wrong thing to do because it essentially shifts the initiative to the country and puts it to the creditors to come to the negotiating table sooner rather than later."

Truman cited the pandemic, global recession, Russia’s invasion of Ukraine as well as droughts experienced in some African countries as breaking points.

In 2021, six countries — Chad, Eritrea, Mozambique, Republic of the Congo, South Sudan and Zimbabwe — were seen as debt distressed as African governments issued a record $7.5 billion in sovereign bond, 10 times more than in 2016. The IMF changed the ratings for Zambia and Ethiopia from moderate to high risk.

Peter Quartey, a professor of economics at the University of Ghana’s Institute of Statistical, Social and Economic Research (ISSER), told VOA from Accra that he's not entirely "surprised" to see countries defaulting on external debt payments.

"Most of these African countries have high debt GDP ratios. They also spend a greater proportion of their revenue in financing debts service, and that’s not sustainable and so, it is expected that they would get to a point that they would default," Quartey said.

"Some have lost as much as 60% on the value of their bonds, and that is very significant. A lot of these people rely on their returns. Some are pensioners and they rely on their returns to buy medication, finance their day-to-day expenditures."

At the U.S.-Africa Leaders Summit in Washington last week, U.S. president Joe Biden announced plans by his administration to led $21 billion to the IMF for low-and middle-income countries.

Biden said the support would help African economies " build resilience against future crises" and "prioritize their people, and not backbreaking debt payments."

Truman said the proposal "is not completely dead-on arrival."

"Africa has in recent... decades even, had more support in Congress from both parties than a lot of other regions of the world. So the extent that the $21 billion is principally devoted to programs in Africa.....it has some reasonable chance," he said.

Some information in this report came from Reuters.

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