Rising cost of debt requires all-hands-on-deck approach, says World Bank

The World Bank’s 2021 Africa Pulse report says in West Africa, debt vulnerabilities are high and rising in many countries in the region

Given the rising cost of debt on the continent, there is the need for governments to adopt an all hands-on-deck approach which will explore all options such as the debt suspension programmes and other initiatives to tackle the situation, the 2021 Africa’s Pulse report has said.

The World Bank report urges governments on the African continent to strengthen collaborations with the international community to address liquidity and sustainability issues especially as the COVID-19 pandemic has led to unsustainable debt in several Sub-Saharan African countries.

To bring about immediate relief, the World Bank says governments eligible for the Debt Service Sustainability Initiative (DSSI) and Common Framework for Treatments beyond the DSSI, should take advantage of them, as these two policies specifically address debt standstills and relief in response to the COVID-19 shock.

The DSSI framework suspends debt service payments to bilateral official creditors for eligible countries during a certain period.

According to the World Bank, the DSSI-eligible countries in Sub-Saharan Africa would save up to US$ 5.1 billion during the period of May-December 2020 and US$4 billion during the period of January-June 2021.

Then, the Common Framework for Debt Treatments beyond the DSSI is intended to help countries with either liquidity or solvency problems, including debt restructuring. Consequently, this framework helps enlarge the fiscal space.

International Development Association (IDA)-eligible countries public and publicly guaranteed debts with an original maturity of more than one year are eligible. This framework seeks comparable treatment from all official bilateral creditors (Paris Club and non-Paris Club) and private creditors.

Besides the two initiatives, the World Bank further urges governments to adopt the Sustainable Development Finance Policy (SDFP), and the issuance and use of Special Drawing Rights (SDRs) are designed to enhance debt sustainability and debt relief.

The Sustainable Development Finance Policy (SDFP) enhances fiscal space by strengthening debt sustainability, debt transparency and debt management. Increasing the issuance of SDRs will inject international liquidity through central banks and, hence, will boost countries’ fiscal space, the report states.

In West Africa for example, the report further states, debt vulnerabilities are high and rising in many countries in the region.

The median debt level is projected to peak in 2021, at 69% of GDP, up from an estimated 65% of GDP in 2020. Debt service relative to tax revenues is projected to exceed 20% in some countries, including Ghana.

Ghana’s debt stock has now risen to more than GHC291 billion, representing 76.1% of GDP as of December 2021. Besides this, government intends to borrow about GHC41.3 billion in 2021 to support the budget, a move which will further increase the debt level.

In its post 2021 budget analysis, auditing firm Deloitte Ghana, urged government to consider taking advantage of the DSSI in order to free up some funds in the short-term to take care of some necessary expenditure.

“Government should diversify sources of borrowing by seeking concessionary facilities from developing partners. In addition, government should take advantage of the recent Debt Service Suspension Initiative (DSSI) introduced by the G20 countries. The DSSI will help the government restructure existing debt and reduce the debt burden in the short to medium term,” the report said.

Commenting further on why it is necessary for government to consider the move even though it is of short term in nature, Yaw Appiah Lartey, financial advisory leader, Deloitte Ghana, said it would free up some revenue for government to undertake important projects and provide avenue for macroeconomic strictures to be improved.

“If Ghana fails to take advantage of the DSSI, the country could lose the opportunity to get some liquidity in the short term to support social, health and economic spending required to support the proposed economic recovery. This could potentially lengthen the expected recovery period post-COVID-19.”

Appiah Lartey added, “In addition, government will also lose the opportunity to manage and improve the macroeconomic environment in the short term. Government indicated in the 2021 Budget Statement and Economic Policy that Ghana will be going to the international market to borrow using the Eurobond.

“The cost of borrowing from the international market is relatively cheaper for countries with strong economic fundamentals. The DSSI is an opportunity for government to manage and improve the macroeconomic situation ahead proposed borrowing from the International Capital Market (ICM),” he said in an interview with the B&FT.

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