Rethinking the Common Framework Ali Zafar

One of the major challenges in today’s global economy is a growing crisis of debt in low-income African countries. In a context of growing geopolitical competition, many sub-Saharan countries are struggling to pay their debts, especially in the aftermath of the COVID pandemic, and food and fuel price increases resulting from the crisis in Ukraine. The total external debt of sub-Saharan Africa has more than doubled in the last decade, reaching more than USD 700 billion in 2023, and debt servicing surpasses expenditures in social sectors in many countries. Relatedly, there has been a growing number of countries facing significant debt challenges, including Kenya, Ethiopia, Malawi, and Nigeria.

For many countries in the Global South, debts incurred during a more optimistic era in the 2000s and 2010s are now becoming increasingly difficult to service and restructure. A G-20 Common Framework for Debt Treatment (CF) was set up in 2020 to address insolvency and protracted liquidity problems of developing economies but has been largely unsuccessful in delivering the necessary relief. Four African nations —Chad, Ethiopia, Ghana, and Zambia—have made requests for debt relief under the Common Framework, and each case has been characterized by significant delays and complexities.

There are multiple reasons for this. Firstly, there is growing heterogeneity among creditors, which include countries such as China, multilateral and bilateral institutions, and Eurobond issuers. Eurobond issuance has expanded tremendously, reaching a total of more than USD 150 billion in 2022. More than 40 percent of African debt is now owed to commercial creditors. This increasing diversity has made finding orderly solutions to debt restructuring more elusive. Secondly, the international system has not successfully defined a way to achieve common treatment among creditors. Thirdly, there is little creditor appetite for haircuts based on the current global situation. Finally, the cost of borrowing has surged in an era of tight money and higher interest rates set by central banks in USA and Western Europe.

The numbers are alarming. According to a recent International Monetary Fund (IMF) assessment, the average debt ratio in sub-Saharan Africa has almost doubled in just under a decade—from 30 percent of GDP at the end of 2013 to almost 60 percent of GDP by end-2022.  Ethiopia, for example, is experiencing significant growth in its debt burden, with a total debt/GDP ratio of close to 40 percent in 2023. An applicant for debt relief under the G20 Common Framework, Ethiopia faces debt service payments of more than USD 7 billion between 2023 and 2025, including a 1 billion Eurobond due to mature in December 2024.

The existing debt architecture that currently exists under the CF should be reformed. There are five specific aspects of the existing framework that can be redesigned. First, the Debt Sustainability Analysis (DSA) currently undertaken by the IMF suffers from lack of realism. Growth and export projections are often too optimistic, and climate shocks are not considered. As a result, existing analytics minimize the principal haircut required to restore many low-income African countries to solvency. DSA projections should incorporate a greater degree of realism and analytical precision in diagnosing differences between liquidity and solvency. In cases where there are longer-term solvency issues, creditors should work together on providing debt relief.

Another important area for reform is the lack of uniformity among loans emerging from China. A more consolidated approach and uniform treatment is required in the case of Chinese loans, as many are negotiated under varying terms and conditions, presenting a challenge to African governments. Relatedly, it is also critical to define a framework for comparability of treatment among creditors, including the appropriate discount rate. Currently, Paris Club creditors and China favor maturity extensions without principal haircuts, while Eurobond issuers favor upfront cash payment in return for debt write-downs and a shorter-term payment horizon. A simple formula that divides the necessary debt relief payments by the share of total debt held by each creditor may be a better solution than relying on a discount rate formula and NPV (Net Present Value) calculations, an area where there is no clear agreement between official and private creditors.

Fourth, it is key for sub-Saharan African governments to cap their debt service outflows by ringfencing social and human development expenditures and ensuring that these sectors are protected from cuts during any debt restructuring process.  This would serve to protect vulnerable groups from bearing the brunt of drastic budget cuts. Finally, under an IMF program, it will be key to have a smoother and more gradual fiscal adjustment path for countries rather than an abrupt short-term adjustment. Fiscal austerity and consolidation will not lead to growth. A less austere fiscal program makes better economic and political sense if coupled with clear programs of targeted social expenditure. With the reforms presented here, and the support of the international community, African countries can find better and more lasting solutions to an orderly resolution of the current debt difficulties.

** This article builds on the analysis and research produced for the IDEAs Conference on the African Debt Crisis and the International Financial Architecture