Deterring debt vultures in AfricaFinancial institutions need to play their part in helping the continent to recover.
Covid-19 is creating Sub-Saharan Africa’s worst social and economic crisis since World War II. The region’s economy is set to contract by 1.6 percent in 2020, its worst performance on record. Global merchandise trade could shrink by 13-32 percent this year, which will hit Africa hard. And the World Health Organisation warns that the number of coronavirus cases in Africa could increase to 29-44 million in the first year of the pandemic, with up to 190,000 deaths.
If these predictions turn out to be accurate, the pandemic would overwhelm African countries’ health systems, devastate their economies, and threaten millions of people with unemployment, hunger, and homelessness.
Mindful of these potentially horrific consequences, 18 African and European leaders recently warned that, ‘only a global victory that fully includes Africa can bring this pandemic to an end’. Among other measures, they called for ‘an immediate moratorium on all bilateral and multilateral debt payments, both public and private’ until the pandemic has passed.
The international community is beginning to respond. At their recent virtual meeting, G20 finance ministers and central bank governors agreed to suspend debt-service payments by the world’s poorest countries on all official bilateral credits from May 1 until the end of 2020, and left open the possibility of extending the repayment freeze. Some G20 governments are also contributing to efforts to help the poorest countries meet their obligations to the International Monetary Fund.
The Institute of International Finance, which represents over 450 of the world’s largest financial institutions, has expressed support for a temporary debt-service moratorium for poor countries. But neither the IIF nor its members have specified the terms on which they would implement such a suspension. Moreover, they have given no indication of whether they would commit to suspend trading in poor countries’ debt instruments during the crisis.
This is a problem, because some $117 billion of Sub-Saharan African countries’ roughly $150 billion in long-term debt to private creditors is in the form of bonds. Debtor countries owe the bondholders about $8 billion per year. And markets are clearly not confident that these countries will meet their obligations: Angolan and Zambian sovereign bonds were recently trading at around 35 cents on the dollar, for example.
This situation is ripe for so-called vulture funds to exploit. These speculators have previously made enormous profits by buying deeply discounted debt in the expectation that they will be able to demand full repayment from debtor governments—and to sue any that demur. Vulture funds have used this strategy against about a dozen African countries and a number of other sovereign debtors, most notably Argentina.
Some countries have passed laws to discourage such activity. But these funds are adept at using their bond holdings to intimidate sovereign borrowers into prioritising the debt owed to them over other obligations, including to their own citizens.
To mitigate the risk of such speculation, the international community should establish a Debts of Vulnerable Economies (‘DOVE’) fund. The fund could be based at an African institution such as the African Development Bank, but should be managed by an independent board representing all stakeholders, thereby demonstrating its independence from both debtor countries and creditors.
Governments, international organisations, foundations, financial institutions, private firms, and individuals could all contribute to financing the fund. For example, rich countries could donate a portion of their unused Special Drawing Rights to the IMF, which would convert them into foreign exchange that it then contributed to the DOVE fund. The IMF membership could also agree to sell part of the IMF’s gold reserves, currently valued at $138 billion, to finance the fund.
The DOVE fund would have two main roles. First, it would buy African sovereign bonds at market prices (that is, with the current steep discounts) and promise to implement a repayment standstill on this debt until the global health crisis abates.
The DOVE fund would also pledge to work with African governments to ensure that their debt does not unduly burden their economic rebuilding efforts when the global economy starts to grow again. It would stipulate that any future debt renegotiations be consistent with all applicable international standards, such as the United Nations’ Guiding Principles on Business and Human Rights, Principles for Responsible Investment, and Principles on Promoting Responsible Sovereign Lending and Borrowing. These measures, and their possible positive impact on African sovereign-debt prices, should help to deter speculators.
Second, the DOVE fund would urge all other private-sector creditors to commit to a standstill on African debt payments and trading for as long as the crisis lasts, and, on a case-by-case basis, to consider renegotiating this debt thereafter.
After all, leading financial institutions such as BlackRock, and influential groups including the US Business Roundtable, have recently argued that firms (including financial institutions) should serve the interests of all their stakeholders, instead of putting shareholders’ interests first. Financial institutions’ stakeholders include their borrowers and innocent third parties—such as citizens—who are affected by their actions and decisions. Moreover, many of the institutions that hold African country debt have environmental, social, and human-rights policies requiring them to comply with all relevant international standards.
The Covid-19 pandemic threatens to make African countries even more vulnerable to aggressive sovereign-debt speculators. But the crisis also presents financial institutions with an opportunity to change the way they do business and play their part in helping the continent to recover.
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Frequently asked questions about the coronavirus outbreak
UPDATED as of September 22, 2020
What is Covid-19?
Covid-19, short for coronavirus disease, is an illness caused by the coronavirus SARS-CoV-2, short for severe acute respiratory syndrome coronavirus 2. Common symptoms of the disease include fever, dry cough, fatigue, shortness of breath and breathing difficulties. In severe cases, the infection can cause pneumonia, severe acute respiratory syndrome, kidney failure and even death.
How contagious is Covid-19?
Covid-19 can spread easily from person to person, especially in enclosed spaces. The virus can travel through the air in respiratory droplets produced when a sick person breathes, talks, coughs or sneezes. As the virus can also survive on plastic and steel surfaces for up to 72 hours and on cardboard for up to 24 hours, any contact with such surfaces can also spread the virus. Symptoms take between two to 14 days to appear, during which time the carrier is believed to be contagious.
Where did the virus come from?
The virus was first identified in Wuhan, China in late December. The coronavirus is a large family of viruses that is responsible for everything from the common cold to Middle East Respiratory Syndrome (MERS) and Severe Acute Respiratory Syndrome (SARS). After an initial outbreak in Wuhan that spread across Hubei province, eventually infecting over 80,000 and killing more than 3,000, new infection rates in mainland China have dropped. However, the disease has since spread across the world at an alarming rate.
What is the current status of Covid-19?
The World Health Organisation has called the ongoing outbreak a “pandemic” and urged countries across the world to take precautionary measures. Covid-19 has spread to 213 countries and territories around the world and infected more than 31,405,983 people with 967,505 deaths and 22,990,260 recoveries. In South Asia, India has reported the highest number of infections at 5,557,573 with 88,943 deaths. While Pakistan has reported 306,304 confirmed cases with 6,420 deaths. Nepal has so far reported 65,276 cases with 427 deaths.
How dangerous is the disease?
The mortality rate for Covid-19 is estimated to be 3.6 percent, but new studies have put the rate slightly higher at 5.7 percent. Although Covid-19 is not too dangerous to young healthy people, older individuals and those with immune-compromised systems are at greater risk of death. People with chronic medical conditions like heart disease, diabetes and lung disease, or those who’ve recently undergone serious medical procedures, are also at risk.
How do I keep myself safe?
The WHO advises that the most important thing you can do is wash your hands frequently with soap and water for at least 20 seconds or use hand sanitizers with at least 60 percent alcohol content. Avoid touching your eyes, nose and mouth with unclean hands. Clean and disinfect frequently used surfaces like your computers and phones. Avoid large crowds of people. Seek medical attention if symptoms persist for longer than a few days.
Is it time to panic?
No. The government has imposed a lockdown to limit the spread of the virus. There is no need to begin stockpiling food, cooking gas or hand sanitizers. However, it is always prudent to take sensible precautions like the ones identified above.