Conjoncture

Dealing with Africa’s risk of debt distress

ECO CONJONCTURE  
N°2  
February 2021  
DEALING WITH AFRICA’S RISK OF DEBT DISTRESS  
François Faure & Perrine Guérin  
Zambia’s recent sovereign default has cast a shadow of a looming wave of debt restructuring in Sub-Saharan Africa. The Covid shock has  
brought a significant risk of debt distress in several African countries, by exacerbating vulnerabilities that have built up over the past  
decade. While liquidity facilities through the DSSI and emergency lines have provided temporary support to many countries in the region,  
solvency issues remain and the prospect of debt restructuring is gaining ground. In this context, the methodology of the IMF and the World  
Bank remains the most suitable tool for assessing debt sustainability for low-income countries. The framework for common treatment  
of restructuring has recently been extended to all creditors. Given the scale of its financial commitments to African countries, China’s  
participation is essential. So far, the country has demonstrated a lack of transparency and limited cooperation. Its commitment to the  
common framework for debt treatment thus remains to be confirmed.  
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7
DEBT SUSTAINABILITY  
INCREASINGLY AT RISK  
CALL FOR DEBT  
RESTRUCTURING  
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DEALING WITH AFRICA’S RISK OF DEBT DISTRESS  
Zambia’s recent sovereign default has cast a shadow of a looming wave of debt restructuring in Sub-Saharan  
Africa. The Covid shock has brought a significant risk of debt distress in several African countries, by exacerbating  
vulnerabilities that have built up over the past decade. While liquidity support through the DSSI and emergency  
lines have provided temporary support to many countries in the region, solvency issues remain and the prospect of  
debt restructuring is gaining ground. The previous debt treatment framework might however prove insufficient to  
resolve the crisis, given that regional debt composition has changed. Debt crisis resolution thus requires an adaptive  
approach, of debt sustainability analyses and an equal sharing of the burden between creditors, including China.  
Debt sustainability increasingly at risk  
INCREASING GENERAL GOVERNMENT DEBT RATIO  
Regional pre-Covid outlook and dynamics  
Increasing debt level  
Sub-Saharan Africa  
%
GDP  
Emerging market and developing economies  
Back in the late 1990s, the high level of emerging countries’ public debt  
raised concerns over the ability of governments to free up resources  
and pursue efforts toward sustainable and inclusive growth. Referring  
70  
60  
1
to the idea of debt overhang , developing countries could become stuck  
50  
40  
30  
in a vicious circle whereby debt burden prevented investment and  
consumption, acting as a drag on growth.  
In reaction to this, the Heavily Indebted Poor Countries Initiative (HIPC),  
initiated in late 1996 by the IMF and the World Bank, allowed for debt  
relief in 36 countries, including 30 countries in sub-Saharan Africa  
20  
2
(
SSA). Back then, eight countries in the region were in debt distress  
10  
3
while seven others were at high risk of becoming so . This initiative,  
supplemented in 2005 by the Multilateral Debt Relief Initiative (MDRI),  
entailed the participation of multilateral financial institutions, bilateral  
official creditors, and (to a much lesser extent) private creditors. The  
Paris Club, initially created to provide coordinated debt treatment and  
ensure predictable resolutions of debt crises, provided substantial  
efforts under the HIPC, sharing around 36% of the relief. Altogether, these  
lenders completed a significant debt haircut in the most vulnerable  
countries that resulted in more than USD 100 billion in debt relief in  
SSA. These initiatives slashed the SSA public debt ratio from an average  
0
2
000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020f 2022f 2024f  
CHART 1  
SOURCE: IMF WEO  
As a result debt ratios almost reached pre-HIPC period levels (average  
public debt stood at 60% of GDP in 2000).  
of 66% of GDP in 2000 to a low of 24% in 2008, allowing for debt service On the domestic side, output and development stimulus efforts have  
alleviation and increased investment. Regional average GDP growth boosted public expenditure. When the shock of the financial crisis  
gained momentum, with an average of 5.8% over 2000-2010 (against in 2008-2009 led to a decline in private spending, countercyclical  
2
.5% over the previous decade). Although the immediate benefits of policies were implemented to fill the gap between fiscal needs and  
the initiative were unequivocally positive, their permanence implied revenues. These aimed to pursue reforms, moving towards attaining  
a moderate re-accumulation of debt in order to prevent situations of development goals and realizing infrastructure projects, as illustrated  
over indebtedness similar to that observed prior to the debt relief. by the rising average contribution of public investment to GDP for the  
The absence of provisions to address this has come to represent a region (+3 pp between 2000 and 2015). Meanwhile, the fiscal deficit  
significant shortcoming.  
widened, requiring governments to finance projects by contracting new  
debt. Although debt can act as a catalyst on investment that unlocks  
long-term growth, favorable external factors are necessary to enable  
such a trend, especially for Low Income Countries (LICs).  
In the aftermath of the financial crisis of 2008-2011, the dynamic  
shifted toward a widespread resurgence in debt in SSA. Between 2008  
and 2019 the regional public debt ratio increased from 29% of GDP  
to nearly 40%, with the largest increases seen in Angola (+77 ppt), Rising debt burden and riskier debt profiles in SSA  
Zambia (+72 ppt) and Mozambique (+71 ppt). Within the region, two-  
Besides its rising level, the region’s debt underwent significant  
fifths of countries exceeded the IMF’s prudential debt benchmark ratio  
compositional changes. The largest component of public debt in SSA  
4
of 55% of GDP . Multiple factors added to weak revenue mobilization  
countries continues to be from external sources. The traditional official  
and paved the way for extensive public financing.  
lending sources from multilateral creditors have however given way to  
an increase in new bilateral creditors, along with new access to bond  
1
2
3
Krugman (1988)  
market issuance. The share of concessional debt has been declining in  
favor of private and non-Paris Club creditors.  
Inability to fulfil their financial obligations  
According to the LIC Debt Sustainability Framework (LIC-DSF) analysis by the IMF and  
the World Bank.  
When it comes to bond market access, the post-financial crisis outlook,  
characterized by high commodity prices and a context of enduring  
low interest rates, allowed emerging and SSA markets to thrive, with  
4
The 55% threshold refers to the benchmark for public debt (in NPV) used in the Debt  
Sustainability Framework (DSF) set out jointly with the WB. It corresponds to a medium  
debt carrying capacity.  
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Meanwhile, bilateral creditors’ share fell and their composition  
SSA EXTERNAL GENERAL GOVERNMENT DEBT CREDITORS SHARE (% TOTAL)  
changed. Paris-club external public debt share in SSA dropped by about  
6
5
0% between 2006 and 2018, to about 30% of the total . China became  
the biggest official creditor in the region. The countries with the highest  
public debt commitment to China are Angola (USD 20 billion, 45% of its  
total external public debt), Ethiopia (USD 11 billion, 32%) and Kenya  
Private creditors  
Bilateral  
Bonds  
Multilateral  
Commercial banks  
Other private  
(
USD 7 billion, 22%). In the region overall, 20% of total government  
2
1
4.9  
7.6  
25.4  
18.3  
24.1  
2
1
3.2  
7.8  
23.3  
23.1  
debt today is estimated to be owed to China . Of this, only 15% be-  
nefits from concessional terms and an estimated 60% takes the form  
of commercial loans. Most of China’s lending is denominated in USD  
and part of it is also collateralized, meaning that debt repayments are  
secured by commodity revenues. Nevertheless, the precise amount of  
China’s lending is unclear. About 50% of Beijing’s lending is not reported  
7
2
2
8.6  
25.4  
23.9  
17.4  
7.5  
1
2
6.0  
18.4  
7.3  
19.5  
7.7  
1
1
9.9  
1.2  
8
.0  
7
.5  
6
.9  
7
.7  
7
.9  
6
.6  
20.5  
1.1  
1
9.9  
18.6  
18.2  
20.2  
1
8.1  
6.7  
1
6.7  
8
officially and therefore does not appear in IMF and World Bank figures :  
this makes it hard to quantify bilateral financial transactions, making  
it challenging to monitor high-risk countries. China is not part of the  
OECD’s Creditor Reporting System, which shares data, and it operates  
outside the Paris Club framework. These practices thus significantly  
increase the probability of hidden debt surprises. The resulting reconfi-  
guration in public debt has fueled concerns over the sustainability of  
debt in sub-Saharan Africa, whose threshold has lowered.  
2
8.7  
28.1  
28.7  
27.3  
28.3  
29.5  
29.6  
30.5  
2
5.1  
2011  
2012  
2013  
2014  
2015  
2016  
2017  
2018  
2019  
CHART 2  
SOURCE: WORLD BANK, INTERNATIONAL DEBT DATABASE (IDS)  
Impact of borrowing conditions on debt dynamics and  
external refinancing requirements  
CHINESE LOANS TO AFRICA  
The virtuous circle by which expected investment-led growth should  
stabilize or even allow a decrease in the debt-to-GDP ratio (stock  
effect), and improve fiscal and external balances (flow effect), has  
not produced the intended effects. Persistently large non-interest  
fiscal deficits explained about 40% of the increase in LICs’ debt ratios  
between 2013 and 2019. Moreover, while fiscal and current account  
deficits have deteriorated, the new sources of financing have offered  
less favorable lending agreements than those of traditional official  
lenders, and have accordingly resulted in riskier forms of debt.  
USD Bn  
30000  
25000  
20000  
15000  
10000  
Sovereignloansandbondshaveincreasinglybeenagreedoncommercial  
terms, with foreign currency denomination, higher interest rates and  
shorter maturities than those of the traditional lenders. These features  
imply negative debt dynamics and entail higher refinancing risks. For  
SSA countries, we estimate public debt interest at 5.1% of GDP over  
2009-18 (against 3.2% in 2000-08).  
5000  
0
2
000 2002 2004 2006 2008 2010 2012 2014 2016 2018  
This existing debt structure has mechanically fostered a debt  
accumulation dynamic. The latter is a function of primary fiscal balance,  
real GDP growth but also of real interest rate and the exchange rate  
CHART 3  
SOURCE: CARI, JOHN HOPKINS UNIVERSITY  
(
see Box1). In the present case, all these variables have significantly  
investors searching for high-yield investment opportunities. This has acted as upward forces in the public debt law dynamic.  
represented a successful alternative to concessional loans, the latter  
The large share of foreign-denominated debt has also exposed SSA  
being often conditional on reforms and specific spending commitments.  
governments to currency risk. This weakness relates to the original  
While only South Africa had access to bond market issuance until  
006, 16 countries have issued sovereign bonds since then. The  
9
sin (foreign currency borrowing) due to the inability to borrow in  
2
domestic currency, mainly because shallow financial systems provide  
limited investment opportunities in local currencies). Although the  
share of public debt in domestic currency has increased somewhat  
over the past few years, on average the proportion that is foreign-  
5
market nevertheless remains very concentrated , exemplifying the  
heterogeneity and selectivity in market access. One interesting feature  
of bond issuance in the SSA region has been the relative indifference  
of investors relating to Debt Sustainability Analysis (DSA): despite  
unsustainable debt classifications, some countries (such as Cameroon  
in 2015 and Ghana in 2018) managed to tap into markets on quite  
favorable terms.  
6
7
World Bank Group, Africa’s Pulse, Volume 17 (April 2018)  
C.Calderón & A.G. Zeufack, Borrow with Sorrow? The Changing Risk Profile of Sub-Saha-  
ran Africa’s debt , Policy Research Working Paper 9137, World Bank Group, African Region  
(
January 2020)  
8
S. Horn, C.M. Reinhart & C. Trebesh, China’s Overseas Lending, Working Paper 26050,  
5
Angola, Côte d’Ivoire, Ghana, Kenya, Nigeria, and Senegal account for the majority of  
issuance.  
NBER (July 2019)  
9 B.Eichengreen, R. Hausmann & U.Panizza, The Pain of Original Sin (2003)  
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1
0
denominated remains predominant . The dynamic shows that while  
domestic currency debt issuance has somewhat improved, domestic  
markets remain modest in size, since they offer less favorable issuance  
conditions than international markets. Real exchange rate depreciation  
LAW OF MOTION FOR PUBLIC DEBT  
d=d ×(i/(1+g )) - d × (gr/(1+g )) - d ×(π (1+gr )/(1+g ))+ α ×d  
t-  
f
t
t-1  
t
t
t-1  
t
t
t-1  
t
t
t
(
measured as the exchange rate effect minus the inflation effect, see  
11  
×ε×(1+i )/(1+g)-pb+f  
1 t t t t t  
Box1) accounted for about 20% of the increase in the debt ratio of LICs  
between 2013 and 2019.  
The interest rate effect:  
The real GDP growth effect:  
The inflation effect:  
d ×(i/(1+g ))  
t-1 t t  
The proportion of complex and/or collateralized debt structures also  
makes risk monitoring and prevention complicated. In the case of  
collateralized debt, creditors (especially China, where the practice is  
common) acquire ownership of infrastructure or natural resources in  
the event of default. China often resorts to these type of guarantees.  
These insurance terms have far-reaching consequences in the event  
of a crisis, as this would further weaken the affected government’s  
revenues. This also goes against the equal burden sharing principle  
which is at the core of the G20 guidelines.  
-d ×(gr/(1+g))  
t-1 t t  
-d ×(π (1+gr )/(1+g))  
t-1  
t
t
t
f
α×d ×ε×((1+i )/(1+g))  
t-1 t t t  
The exchange rate effect:  
With:  
d
i
g
r
Stock of public debt  
Average nominal debt interest rate  
Nominal GDP growth rate  
Real interest rate  
1
2
Under these conditions, liquidity and solvency (see box 1 ) have come  
increasingly under threat. The oil shock in 2015 made the issue more  
acute, with weakening exports, ballooning fiscal and current account  
deficits and depreciating currencies. Debt dynamics eroded further in  
π
α
ε
pb  
f
Inflation  
Share of foreign currency denominated public debt  
Change in the exchange rate (local currency per USD)  
Primary budget balance  
1
3
the region, particularly in oil-intensive economies . In 2015, two coun-  
tries were in debt distress and six others faced a high risk of debt  
distress.  
Other debt creating flows and residual  
The effect of the pandemic crisis  
The current crisis further highlights the pitfalls of debt in Sub-Saharan  
Africa. Although the coronavirus has spared the region in relative terms  
so far, its economic effects are highly detrimental.  
BOX1  
SOURCE: BNP PARIBAS  
The outlook in SSA outlook has worsened as a result of sharp fiscal  
and external financing pressures. Given the already limited room for  
manoeuvre, debt sustainability has deteriorated significantly further.  
the virus, tourism inflows will remain very scarce as global mobility  
stays far below its usual level. This has deprived tourism-dependent  
economies of an importance source of fiscal revenue and foreign  
exchange reserves, as well as a significant share of employment.  
Slowdown in growth and erosion of fiscal outlook  
The SSA region suffers from the shock, as shown by the steep GDP Security issues and political instability may also hinder tourism in  
contraction observed in almost every country. The continent is set to the short term, affecting economic activity. Meanwhile, the slump in  
suffer its first recession in 25 years, with regional economic activity commodity prices has hit the most dependent economies hard. With  
anticipated to drop on average by -3% in 2020 according to the IMF the oil price estimated at USD 43 per barrel this year (more than 30%  
(
from +3.2% in 2019). This shock is unprecedented, with substantially down on 2019), oil-intensive SSA economies have been particularly  
more detrimental impact than those of 2009 and 2015. Estimates for affected by the dynamic: GDP is likely to contract by 4% in these  
recovery also illustrate the severity of the shock: GDP levels are not countries.  
predicted to reach their pre-pandemic levels before 2022, and recovery  
in the largest economies is expected to take even longer (2024/25).  
The growth shock has created a storm for public financing through  
its effects on revenues. Overall, SSA government revenue in 2020 is  
The channels of transmission of the crisis to the SSA economies are estimated to have fallen by 17.5% in nominal value terms compared to  
many-fold. On the domestic side, the countries’ activity has been 2019. Meanwhile, exceptional spending plans for health and welfare  
hindered by the negative effect of lockdowns and social distancing measures have been implemented to mitigate the crisis. The impact on  
measures. Although most containment measures have been lifted, the public finances has therefore been substantial and fiscal vulnerabili-  
external environment has remained a drag on economic activity. The ties, already stacking up since 2008, have been exacerbated.  
collapse of global demand and disruption of supply chains in developed  
countries has hindered domestic production. But in LICs, the services  
sector – with tourism and hospitality at the forefront – has been  
particularly affected. With developing countries seeing resurgence of  
The most indebted countries are Cape Verde, Mozambique, Angola and  
Zambia. Overall, debt ratios are projected to increase by about 14 ppt  
compared to 2019. Mozambique, Togo and Burundi are the countries  
with the sharpest predicted increase in public debt as compared to last  
year. Accordingly, the situation is likely to become unsustainable and  
debt metrics point both to liquidity and solvency issues.  
1
0 C. Calderón & A.G. Zeufack, Borrow with Sorrow? The Changing Risk Profile of Sub-Saha-  
ran Africa’s debt, Policy Research Working Paper 9137, World Bank Group, African Region  
(
January 2020)  
The interest burden should average 32.2% of revenue in 2020, and  
could reach more than 76% of revenue for SSA oil-exporting countries.  
1
1 This figure includes non-SSA countries.  
12 A large part of this overview retains some definitions and developments of an article by  
Charles Wyplosz on debt sustainability (“Debt sustainability assessment: Mission impossi-  
ble,” Review of Economic Institutions (2011).  
13 Angola, Nigeria, Cameroon, Congo, Equatorial Guinea, Chad, Gabon, South Sudan  
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Rising external financing requirements  
While their current account balances will not return to pre-oil shock  
levels, SSA countries have faced a substantial increase in external  
financing requirements. Moreover, the pandemic has also put new  
Foreign direct investment (FDI) flows, already on a downward trend  
before the crisis, also came to a sudden stop. Although this drying-up  
could prove temporary, net FDI in SSA is likely to decrease by around  
-
20% this year.  
external financing into disarray, as SSA countries are overall quite The outlook for basic balances (current account balances + FDI) has  
heavily dependent on financial flows from countries that have thus considerably weakened, such that the regional external financing  
themselves been hit hard by the virus.  
gap will remain significant, estimated at USD 290 billion over the pe-  
riod 2020-23. Given the already high level of external debt, and limited  
FX reserves (4.1 months of imports on average), the ability to cushion  
and adjust to the shock is extremely narrow.  
Current account receipts have dropped on the back of the sharp global  
contraction and declining trade volumes. In the first half of 2020, global  
demand has stalled, and value chains have been disrupted significantly.  
Global trade would have contracted by 9.5% this year overall. The Debt issuance and refinancing  
decline in commodity prices has allowed importing economies to  
Given the already concerning debt outlook and the necessity to fill fiscal  
and external financing gaps, countries are bound to rely on further debt  
issuance. Yet, before the pandemic, SSA’s debt load projection stood at  
counterbalance falling exports. However, in oil-dependent economies,  
current account deficits have widened; for these countries as a whole,  
this figure is expected to have reached -3.8% on average in 2020 and to  
remain negative in 2021. Moreover, remittances from migrant workers  
have also dropped (-20% estimated in 2020), on the back of weak  
economic growth and lower employment levels in host countries.  
5
6.4% of GDP in 2020; the current projection is now 65.6%. In the region  
as a whole, over 50% of gross external financing needs (estimated at  
USD 900 bn in 2020-23) will relate to external amortization.  
SSA AVERAGE EXTERNAL DEBT SERVICE  
SSA INCREASING EXTERNAL VULNERABILITIES  
Amortization  
Interest  
Outstanding external debt (RHS)  
% GDP  
100  
USD Bn  
Total external debt (r.h.s)  
Financial account  
Current account  
Change in reserves  
% GDP  
%
GDP  
8
100  
80  
60  
40  
20  
0
50  
40  
30  
20  
10  
0
90  
80  
70  
60  
7
6
5
4
3
2
1
0
50  
-
-
20  
40  
-10  
40  
30  
20  
10  
0
-20  
-30  
-40  
-50  
-60  
80  
100  
-
-
08  
09 10 11 12 13 14 15 15 17 18 19e 20f 21f  
2
010 2011 2012 2013 2014 2015 2016 2017 2018 2019e 2020f 2021f  
CHART 4  
SOURCE: IMF WEO  
CHART 5  
SOURCE: IMF WEO, BNP PARIBAS  
STEEP GDP CONTRACTION  
Sub-Saharan Africa  
MOST INDEBTED SSA COUNTRIES  
%
GDP  
General Government Ratio  
019/20 change (RHS)  
% point  
Growth, Y/Y, %  
4
4
3
3
25  
20  
5
0
5
0
1
1
1
40  
20  
00  
Emerging market and developing economies  
World  
2
8
7
6
5
4
3
2
1
0
8
0
0
6
1
1
5
0
5
0
40  
20  
-
-
-
-
-
1
2
3
4
5
2015/18  
Oil price shock  
0
2
008/09  
The Great Financial  
Crisis  
2019/20  
Covid19  
07  
08 09 10 11 12 14 14 15 16 17 18 19e 20f 21f 22f 23f 24f  
CHART 6  
CHART 7  
SOURCE: IMF WEO, BNP PARIBAS  
SOURCE: IMF, BNP PARIBAS  
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The unprecedented shock thus ramps up external debt servicing  
costs, exposing countries to a significant risk of external debt distress.  
External debt service accounted for about 37% of exports in 2020  
LIQUIDITY, SOLVENCY AND SUSTAINABILITY  
(
compared with the IMF’s 23% maximum threshold).  
The most basic definition of solvency is the capacity of an economic  
agent (a state, a company, a household) to generate resources to repay  
its debt over the entire lifetime of a loan (one refers also to capacity/  
ability to repay its debt). Liquidity is defined by the capacity of economic  
agents, at a point in time, to have or to gather the necessary resources  
to service the debt. One usually makes this distinction to discriminate  
between insolvent economic agents and agents that may face short-  
term liquidity constraints for specific reasons (temporary lack of cash,  
and/or refinancing difficulties) but retains a good capacity to pay. This  
classical distinction was first introduced by Bagehot (in “Lombard  
Street, a description of the money market”).  
In several countries, the exceptionally degraded outlook may be  
temporary. For others, return to a sustainable trajectory increasingly  
looks a long way off. The impossibility of meeting debt repayments and/  
or refinancing their debt could leave default as the only option. The  
IMF’s DSA analysis currently identifies six countries in debt distress  
(
Republic of Congo, Mozambique, Somalia, Sudan, Zimbabwe, and  
Zambia).  
In another eleven countries, pressures have raised debt distress to high  
levels (Angola, Ethiopia, Kenya, Sierra Leone, Cameroon, South Sudan,  
Burundi, Gambia, Cape Verde, Ghana and Chad).  
Debt solvency is also commonly defined more formally as a situation  
when the expected present value of primary surpluses is large enough  
to pay back the debt, principal and interest (or, more technically, when  
the current debt plus the present discounted value of all expenditures  
does not exceed the present discounted value of all revenues). Thus sol-  
vency is accurately defined, though it raises implementation difficulties  
as it is forward-looking.  
Countries in debt distress  
A deeper analysis allows the introduction of some granularity, to better  
understand the issues at stake in the above-mentioned countries. Using  
liquidity and solvency indicators enables us to draw a more accurate  
outlook for those countries facing a high risk of debt distress. While  
the two issues can be interrelated, there are situations where they are  
distinct from each other.  
By contrast, debt sustainability is not as clearly defined. According to  
Charles Wyplosz, debt sustainability aims at answering a deceptively  
simple question: when does a country’s debt become so big that it will  
not be fully repaid? Actually, it is virtually impossible to answer the  
question due to methodological and measurement issues according to  
Wyplosz (the “impossibility principle”).  
HIGH RISK OF DEBT DISTRESS SSA COUNTRIES (2020)  
Like solvency, sustainability is entirely forward-looking. Secondly, and  
more importantly, there is the idea that there is a threshold to the debt.  
Lastly, sustainability also means that the government can service its  
debt without requiring an unrealistic correction (from a social and poli-  
tical point of view). This refers to the IMF definition, according to which  
“a debt is sustainable if it satisfies the solvency condition without a  
major correction” and also “given the cost of financing”.  
2
2
2
1
1
1
1
50  
25  
00  
75  
50  
25  
00  
Zambia*  
Ethiopia  
Solvency issues  
Burundi  
Gambia  
Sierra Leone  
Ghana  
In practice, as a first approach, it is widely acknowledged that debt is  
sustainable if ratios are bounded and stable or declining.  
Cameroon  
7
5
2
5
0
5
0
Given the forward nature of this definition, Debt Sustainability Analy-  
sis (DSA) has emerged as the most complete tool for assessing Lower  
Income Countries’ debt-carrying capacity and thus solvency (although  
the IMF has only partially addressed Wyplosz’s impossibility principle).  
Based on each country’s current macroeconomic framework, the DSF  
compares debt burden indicators (in baseline and alternative scenarios)  
to determine the risk of debt distress (see box 3).  
Angola  
Kenya  
South Sudan  
Cabo Verde  
Chad  
0
3
6
9
12 15 18 21 24 27 30 33 36 39  
External debt service (% exports)  
*
In debt distress  
CHART 8  
SOURCE: IMF WEO, BNP PARIBAS  
BOX2  
SOURCE: BNP PARIBAS  
Zambia is a a case in point: it combines both high external debt service  
ratio (in percentage of exports) and external financing needs (in  
percentage of FX reserves). The country has both liquidity and solvency  
issues. The high external financing need translates into high liquidity  
pressures, because reserves are not sufficient to fill the gap between  
this year’s financing requirements and resources. The level of external  
debt service, as a percentage of export, illustrates the structural  
increase of external debt. Zambia’s liquidity issue recently crystalized  
into a default, with the missed payment of Eurobond coupons in  
November 2020 and January 2021. The country’s insolvency highlights  
the necessity for debt restructuring to reduce debt service and restore  
debt sustainability.  
In some countries, the debt burden is below the IMF threshold  
external debt service to export ratio of 23%). However, their limited  
(
liquidity means that, although they would have the financial ability  
to pay, they do not have sufficient reserves to adjust with a shock.  
As detailed earlier, the fall in foreign exchange inflows (through  
tourism, commodity exports, etc.), along with inflationary pressures,  
have significantly eroded FX reserves. In these cases (upper part  
of the chart 8), the urgent financing lines provided by IFIs and the  
rescheduling of debt repayment within the DSSI framework allows  
such countries to make ends meet.  
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By contrast, high external debt service in some countries translates  
into a deeper issue of insolvency (right part of the chart), as for Zambia;  
it applies also to Cameroon, Ethiopia and Kenya (in the bottom right of The need for urgent action requires identifying the challenges relating  
the chart). For these countries, temporary relief might be insufficient to to the current debt-restructuring framework, and those regarding the  
overcome the crisis. Indeed, financing sources and lending conditions involvement of China.  
offer limited options for countries willing to refinance their debt in a  
sustainable manner.  
As average debt burden grows and the exchange rate depreciates, re-  
financing risk can materialize even though financing conditions were The debt-restructuring framework  
Call for debt restructuring  
The debt-restructuring framework: the importance of  
Debt Sustainability Analysis  
to normalize. Even if issuance has been on favorable terms, conditions  
may change to prevent a government from debt rollover. Large coupon  
payments on governments’ bonds are due between 2021 and 2025,  
with a yearly average payment estimated at USD 4 bn.  
In November, the G20 and Paris Club creditors agreed on a framework to  
address unsustainable sovereign debt (“Common Framework for Debt  
Treatments beyond the DSSI”). The rationale behind this framework is  
that “prevention is better than cure”. There is indeed a large consensus  
In addition, further bond issuance could now prove difficult as the fron- about the cost of sovereign defaults in terms of output losses directly  
tier market enthusiasm has faded away. Although SSA sovereign yields or indirectly through various channels (trade, investment, credit, bor-  
1
6
have recently decreased, after peaking in May, they remain on average rowing costs, exclusion from capital markets) . Given the severity of  
14  
7% higher than their 2019 level . Cote d’Ivoire recently succeeded the economic impact of the pandemic, prominent economists have not  
1
in issuing a 12-year USD 1.2 billion bond with historically favorable only called for a necessary suspension of debt service, at least during  
conditions. However, its economy has fairly solid fundamentals by re- the pandemic (that is the purpose of the DSSI), but also recognized that  
gional standards; large divergences remain between countries.  
“many countries’ debts will need to be restructured; there will be no  
17  
alternative to a negotiated partial default” . In October the IMF gene-  
ral manager, Ms. Kristalina Georgieva, urged creditors and debtors to  
start restructuring processes sooner rather than later, quoting a recent  
academic study showing that post-default restructuring is associated  
with larger declines in GDP (together with other macroeconomic va-  
The market move therefore might not apply to the weakest countries,  
whose market access will likely take longer to recover. Unable to re-  
finance their debt, they could find debt restructuring the only option.  
In this regard, the nature of creditors is crucial, given that their profile  
influences the length and conditions of any possible restructuring.  
1
8
riables) than preemptive restructuring .  
The Paris Club and its guidelines allow for a coordinated, fair, trans-  
parent and effective approach to debt treatment between defined bi-  
lateral creditors. Within its framework, restructuring operations are  
conducted in close cooperation with the IMF and accompanied by re-  
form programs. Given the existence and relatively successful history  
of debt treatment frameworks (such as HIPC), it is reasonable to ex-  
pect this could apply in the current context - particularly for countries  
whose debt is mostly owed to multilateral and bilateral creditors: Bu-  
rundi, Chad, CAR, Cape Verde, Gambia and Sierra Leone.  
The Common Framework on Debt Treatment (CFDT) was adopted by  
the G20. It is expected to ensure 1/ broad participation, involving offi-  
cial creditors not previously part of the established Paris Club process,  
and also private creditors; and 2/ fair burden sharing between credi-  
tors (i.e. participating debtor countries may seek treatment on terms  
that are comparable to or better than those of other creditors, inclu-  
ding those in the private sector). The recent request for debt relief from  
Chad and Ethiopia will come under this Common Framework, and will  
test the effectiveness of such a debt reduction process.  
Restructuring negotiations might however prove more difficult for  
countries where the bulk of debt service in 2021 is mostly owed to  
China, non-officials or bondholders. Regarding bondholders, most of  
SSA bonds will come to maturity as of 2024. Payments due to China, by  
The framework will be based on Debt Sustainability Analysis (DSA),  
carried out jointly by the IMF and the World Bank, which will help  
to inform the treatment needed to restore debt sustainability, as it is  
already the case. The IMF takes a case-by-case approach on whether  
a country requires debt restructuring, taking into account debt sustai-  
nability analysis and the continued availability of the financing that  
countries need for their longterm growth and development.  
1
5
contrast, represent significant amounts in 2020 and 2021 .  
Given the lack of transparency in China’s practices, debt treatment  
agreements could face some hurdles. The case of Zambia again provi-  
des a concrete example: in the absence of a coordinated and transpa-  
rent approach, private bondholders refused to provide debt relief (i.e.  
From debt overhang to comprehensive Debt Sustainability  
payment deferral). Lacking information, investors could not price the Analysis  
risk involved in the operation and therefore turned down Zambia’s re-  
profiling request in order not to unilaterally bear the risk. The country’s  
situation is therefore subject to high uncertainty, all the more so given  
that no IMF program will be granted as long as the public debt is  
deemed unsustainable. Accordingly, the debt-restructuring framework  
calls for an adaptive approach.  
The rationale behind debt restructuring/cancellation is not new; it has  
been developed in the seminal theoretical framework called the debt  
19  
overhang approach . According to this approach, under a bargaining  
process between debtor and creditor, there is a level of debt beyond  
which the debtor has no interest in repaying their debt despite finan-  
cial sanctions (i.e. there exists a “laffer curve” for debt). If so, it would  
be beneficial for creditors to propose a debt reduction in order to maxi-  
mize repayments.  
1
6 Das, Papaioannou, Trebesh (2012) for a survey  
1
4 S&P Africa Hard Currency Sovereign Bond Index  
17 Carmen Reinhart and Kenneth Rogoff (Project Syndicate, April 2020)  
18 Aonuma, Chamon, Erce, Sasahar (2020)  
1
5 Loan commitments, which peaked in 2013, generally have a grace period of 5-10  
years, suggesting African countries now face significant repayment (CARI, Johns Hopkins  
estimates).  
19 Eaton and Gersovitz (1981), Eaton & al (1986), Cohen & Sachs (1986) quoted in Raffinot  
(2008)  
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The impossibility criticism is partly addressed in the enhanced version  
of the DSA with the inclusion of stochastic tools (fan charts) that give  
DEBT BURDEN THRESHOLDS AND BENCHMARKS UNDER HIPC INITIATIVE  
a spectrum of possible outcomes based on the stochastic properties  
22  
of country-specific data . Moreover, “fan charts incorporate feedback  
between macroeconomic variables that drive the debt dynamics”, al-  
lowing for the persistence of shocks.  
PV of external public debt  
in % of:  
External debt service in % of  
exports (indicative targets):  
So far, fan charts have been developed for Market Access Countries DSA  
Exports  
200-250  
150  
Revenue  
280  
Exports  
20-25  
15-20  
(
i.e. advanced and emerging countries). More recently, a complemen-  
23  
Initial HIPC  
tary methodology to the fan chart approach has been proposed . Like  
fan charts, it is based on a stochastic approach to debt dynamics but  
unlike fan charts it helps to rule out, via stress tests, unusual predic-  
tions regarding variables over which uncertainty is high. The purpose  
of this methodology is not to determine the spectrum of debt trajectory  
Enhanced HIPC  
250  
DEBT BURDEN THRESHOLDS AND BENCHMARKS UNDER THE DEBT  
SUSTAINABILITY FRAMEWORK  
(
as fan charts do) but to determine the distribution of the default pro-  
bability for 1/ a spectrum of socially and politically feasible macroeco-  
nomic scenarios and 2/ a given level of indebtedness.  
External debt service  
in % of exports (indi-  
cative targets):  
PV of external public  
debt in % of:  
PV of total public  
debt in % of:  
Then, for a given level of indebtedness, the methodology assesses the  
appropriate size of debt relief consistent with a maximum probability  
of default. Debt sustainability is defined by the level of debt relief re-  
quired, or the equivalent maximum probability of default.  
Sustainatiliby1 GDP  
Exports  
Exports  
Revenue  
GDP  
In our view, these criticisms/alternative methodologies do not put into  
question the DSA exercise, especially for LICs. Indeed, for LICs, the  
interest of stochastic methods is questionable; taking into account a  
country’s specificities is more valuable than simulating debt dynamics  
using a spectrum of the states of the economy.  
Weak  
30  
40  
50  
140  
180  
240  
1
10  
15  
21  
14  
18  
23  
35  
55  
70  
Medium  
Strong  
The DSF analysis goes beyond the “mechanical use” of thresholds. True,  
the DSF framework analysis provides a final rating of debt distress  
risk (low, moderate, high risk and debt distress) which relies on the  
comparison of solvency indicators with indicative benchmarks. But the  
framework includes stress tests, the use of judgment at different levels  
of the decision process, and, to some extent, countries’ specificities (see  
box 2). Moreover, the rating process thus allows for some flexibility,  
and it has been improved over time to refine analysis.  
TABLE 1  
depends on the debt carrying capacity of the country  
The difficulty here is to set thresholds beyond which it would be opti-  
mal to restructure or to cancel debt and which will be usable as bench-  
marks for all countries or limited clusters of countries, and whatever  
the economic and social context. Despite this, debt sustainability me-  
thodologies rely basically on the use of thresholds.  
There is little doubt that for a growing number of SSA countries, debt  
sustainability is at stake, as shown in chart 9 (countries at high risk  
and in debt distress). DSSI will provide a temporary relief, but the need  
for restructuring will eventually become urgent. In this regard, some  
questions remain about the concrete involvement of China in any debt-  
restructuring framework.  
There have been a very large number of applied studies with various  
methodologies (macroeconomic indicator-based decision trees, early  
warning signals, econometric estimates) aiming at selecting risk indi-  
cators of default and their associated thresholds. Unsurprisingly, stu-  
dies have highlighted numerous different risk indicators and, in some  
2
0
cases, different threshold values for the same indicator.  
China’s involvement: progress and shortfalls  
In practice, debt thresholds were first introduced under the HIPC  
initiative framework (see table 1). The actual official thresholds are  
those used for DSF analysis by the IMF/WB. The DSF analysis is more  
flexible since it allows for a granularity of thresholds depending on the  
debt-carrying capacity of the country. But, for the weakest countries,  
the threshold for external-debt-to-GDP ratio has remained broadly  
the same (150% for HIPC, 140% for the DSF). The range for debt-ser-  
vice-to-exports has not changed.  
The key role of China in the present situation makes its involvement  
a necessary part of SSA debt restructuring. Past experience, however,  
shows that China has opted for various methods of debt relief that  
differ from those used by the IMF or the Paris Club. The latter is typi-  
fied by the principles of creditor solidarity, conditionality, information  
sharing and comparability of treatment.  
In contrast, the lack of transparency from China considerably  
complicates the ambition to provide solvency relief to SSA countries.  
The difficulty in appreciating the very scale and scope of Chinese loans  
make it more difficult to develop the trust needed for collective action.  
The DSA approach has been criticized. On top of the difficulty of setting  
appropriate debt ceilings, the DSA method can suffer from the impos-  
sibility principle . DSA is indeed a forward-looking methodology, with  
a very long horizon; thus, not only are macroeconomic assumptions  
2
1
Creditor solidarity and comparability of treatment also seem not to  
feature in China’s practices. The country’s treatment of debt has often  
taken place under non-disclosure requirements, with bilateral negotia-  
tions mostly behind closed doors.  
(
growth, inflation, primary fiscal balance, interest rates) by definition  
uncertain, but also public debt projections are very sensitive to those  
assumptions.  
2
0 Das, Papaioannou, Trebesh (2012) for a survey  
1 Wyplosz (2011)  
22 IMF guidance note for public debt sustainability analysis in LICs  
23 Guzman & Lombardi (2017)  
2
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9
EVOLUTION OF RISK OF DEBT DISTRESS IN SSA DSA COUTRIES  
DSSI ELIGIBLE COUNTRY’S DEBT SERVICE: CREDITOR’S SHARE, 2021 (% TOTAL)  
Bonholders  
Total Official bilateral*  
Total Official multilateral  
Total Non-official*  
China  
Low  
Moderate  
High  
Debt Distress  
3
2
6
2
4
100  
90  
80  
70  
60  
50  
40  
2
6
2
5
6
6
7
7
9
5
6
6
4
7
7
7
9
9
11  
7
1
7
1
4
1
3
1
1
4
6
10  
2
1
1
9
3
0
1
0
1
5
14  
5
20  
1
5
1
6
1
0
0
1
2
12  
12  
12  
1
1
9
9
6
6
5
4
2
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020  
CHART 9  
SOURCE: IMF, DSA LIC DATABASE  
CHART 10  
SOURCE: WORLD BANK INTERNATIONAL DEBT STATISTICS (IDS), BNP PARIBAS  
SSA BONDS MATURITY SCHEDULE  
CHINESE LENDERS SHARE (% TOTAL AFRICA LENDING)  
USD Bn  
Angola  
Zambia  
Seychelles  
Ethiopia  
Namibia  
Kenya  
Rwanda  
Mozambique  
Cameroon  
Other  
13.4  
140000  
120000  
100000  
Supplier's  
Credits  
6
.4  
80000  
60000  
40000  
20000  
0
Eximbank  
5.3  
5
CDB  
24.8  
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029  
CHART 11  
SOURCE: BLOOMBERG, BNP PARIBAS  
CHART 12  
SOURCE: CARI JOHN HOPKINS UNIVERSITY, BNP PARIBAS  
Collateral clauses furthermore imply that Chinese creditors might be- China’s exposure makes it crucial for it to share comparable treatment  
nefit from preferential treatment, distorting payment seniority rules. with other creditors. With the crisis, the country has shown itself to  
China’s restructuring programs are often agreed in parallel with IMF be moving slowly toward increased multilateralism by committing to  
assistance programs. Yet studies show that restructuring requirements the G20 DSSI in April 2020. This unprecedented move notwithstanding,  
are often tighter than those provided by the G20, and appear unrelated China remains cautious in its commitment. The country does not  
to the IMF assessment.  
classify its state-owned banks – specifically, EximBank and CDB (which  
hold 80% of total loans in Africa) – as official lenders, thus exempting  
their loans from the moratorium. Accordingly, it has so far pursued  
loan reprofiling on a bilateral basis: recent official statements have  
mentioned bilateral agreements with 11 African countries, and the  
waiving of interest-free loans with maturity due in 2020 for 15 African  
countries. In particular, the country has granted Angola a 3-year  
debt repayment moratorium, allowing for significant relief. That was  
however NPV (Net Present Value) neutral: this means that the relief is  
bound to be temporary, and financial pressures are likely to reappear  
when the moratorium ends.  
While extension of debt repayment periods is widely used, other res-  
tructuring methods like haircuts, reduced interest rates or refinancing  
have been less common in China’s practices. These features have thus  
fueled doubt over Chinese lenders’ motives and alleged lack of sus-  
tained support. The concept has emerged of China’s debt trap diplo-  
2
4
macy , with the idea that the country was using its financial power  
to saddle African countries with debt in order to increase its leverage.  
24 B.Chellaney (2017)  
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Thus, there are questions around the effectiveness of the current  
initiative and its adequacy with respect to current SSA debt-related  
challenges. Although the Common Framework for Debt Treatment could  
be extended, it remains to be proved that it can ensure an effectuve  
management of the crisis.  
*
**  
The crisis surely highlights the risk of debt sustainability in a number  
of SSA countries. In cases where liquidity pressures are the most  
salient, debt service suspension and emergency disbursement facilities  
could prevent the risk of distress materializing. However, for countries  
exposed to solvency issues, debt restructuring may prove unavoidable.  
Indeed, debt must be brought back to sustainable levels in order not to  
jeopardize long-term growth. Pre-emptive debt restructuring might be  
preferable to a curative action.  
The restructuring decision relies on a debt sustainability analysis  
(
DSA) runs jointly by the IMF and the World Bank. This methodology  
poses some theoretical and practical issues. It is fundamentally  
based on thresholds alerts according to different scenarios and the  
method entails the risk that some countries would not qualify for debt  
restructuring based on these thresholds.  
In addition, given its forward-looking nature, the analysis of debt sus-  
tainability is complicated by the current unprecedented uncertainty.  
Nevertheless, the DSA remains the most sophisticated tool for asses-  
sing debt sustainability as it takes into account each country’s charac-  
teristics  
Beyond DSA, the debt-restructuring framework may be hindered by  
practical shortcomings. Debt restructuring history has shown that a  
successful coordinated creditors’ mobilization is possible. In the present  
context, it is worth noting that China’s involvement is unprecedented  
and will be crucial for a few sub-Saharan African countries to avoid  
default.  
So far, China has shown little transparency regarding loans and the  
restructuring agreements it granted did not meet the principles of  
solidarity between creditors and comparability of treatment. With  
the crisis, the country has however showed a greater willingness  
for cooperation. The first debt restructuring requests from Chad and  
Ethiopia under the G20 Common Framework for Debt Treatment (CFDT)  
will act as a test regarding China’s changing stance.  
Completed on 11 February 2021  
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1
THE DEBT SUSTAINABILITY ANALYSIS FOR LOW INCOME COUNTRIES  
The DSF (Debt Sustainability Framework) from the IMF and the WB for LICs aims to support countries in their development goals while minimizing the risk of debt distress.  
DSA (Debt Sustainability Analysis) is the support tool for DSF and assesses the risk of debt distress, drawing on a country’s capacity to carry debt and its projected debt burden  
under both baseline projections and alternative scenarios. It focuses on external public and public guaranteed (PPG) gross debt. The DSA produces a final debt distress rating  
based on a very in-depth methodology that can be adapted and calibrated to each country’s experience.  
Components: Macroeconomic scenarios, debt and debt service indicators and thresholds  
DSA methodology is based on a prospective macroeconomic baseline scenario controlled by realistic tools. The baseline scenario is supplemented by numerous stress tests:  
these alternative scenarios are standardized, tailored or even fully customized for countries with no data or with very specific risks such as war or health crises. Countries’  
classifications are first established from the baseline scenario to assess their debt-carrying capacity with regard to public debt level and servicing. More specifically, histori-  
cal data (over 5 years) and forecasts (over 5 years) of certain variables of the macroeconomic framework make it possible to assign a country score that in turn defines the  
thresholds for the debt and debt service indicators.  
Tools: The construction of intermediate debt distress signals  
In the baseline and the alternative scenarios, the comparison between the projected external debt burden indicators (over a 10 to 20-year projection) and the thresholds  
provide a core risk signal of debt distress. For the alternative scenarios, the methodology favors the most pessimistic forecast scenario.  
A first core risk signal of external debt distress is determined according to the following decision rules:  
-
-
-
Low when no debt burden indicator breaches the determined threshold under the baseline and alternative (even most extreme) scenarios  
Moderate when no indicator breaches thresholds in the baseline scenario but at least one indicator exceeds its threshold under the stress tests  
High as soon as an indicator exceeds its threshold under the baseline scenario  
A second core risk signal of overall debt distress is defined by combining the first signal derived from external debt indicators and a decision rule (based on an estimated  
indicative benchmark) for the total PPG. For countries with access to market financing, the core risk signal is supplemented by a signal of market financial pressures, measured  
via projected public gross financing needs (as a percentage of GDP) and the sovereign risk premium. These two indicators are measured as a deviation from reference values.  
Fine-tuning: The use of expert judgment  
Expert adjustments are made to complete the signal-based analysis and develop the assessment with factors that are not necessarily accounted for in the model. This enables:  
-
Discounting of the effect of temporary and marginal threshold breaches  
-
Additional assessment of the ability to repay in foreign currency in the event of a high risk of debt distress; to identify a potential conflict between fiscal austerity, imposed  
by the control of total indebtedness, and the external debt repayment, or if the debt share of non-residents might represent a potential source of decline in FX reserves  
-
-
Additional assessment of the potential risk arising from pressures on market financing and exposure to contingent liabilities and asset liquidity  
Taking into account the potential cost of specific factors not included in the methodology (endemic violence, war, pooling of FX reserves, etc) and long-term constraints  
that could justify a persistent exceeding of the threshold (e.g. depletion of natural resources or population ageing)  
Completion: The final rating  
The final debt distress risk assessment is given by a final classification: low, moderate, high, or materialized debt distress (e.g. debt restructuring, arrears). A final stress test  
is also carried out, to characterize the space available to the country to absorb a shock without breaching thresholds.  
Verdict: Debt Sustainability Assessment  
Debt unsustainability implies that, in the baseline scenario, one or more indicators exceed their threshold from the start of the forecast period and are likely to deteriorate  
continuously. In situations where indicators would improve, expert judgment allows the timing, the severity and the duration and nature (liquidity vs insolvency) of the breach  
to be assessed, along with confidence in the macroeconomic scenario.  
In general, the assessment of debt unsustainability must be broader than the technical analysis of sustainability; sustainability implies that the economic policy measures  
aimed at stabilizing the debt in a baseline scenario are politically feasible and socially acceptable, while maintaining growth at a satisfactory level, and consistent with moving  
towards SDGs. Conversely, when the country is in a situation of materialized debt distress and the authorities have drawn up an adjustment plan and/or decided to restructure  
their debt, the DSA criteria must be consistent with the framework.  
BOX3  
SOURCE: BNP PARIBAS  
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