Debt relief frameworks should be African Union’s critical focus at G20

The African Union (AU) became a full member of the G20 in September 2023, a significant milestone representing 1.5 billion Africans. To make the most of this membership and align with the continent’s Agenda 2063 development programme, the AU should use its influence to enhance Africa’s debt sustainability.

Debt is a massive challenge for Africa. Currently, 23 African countries are in financial distress, and three have defaulted on their debts. When a country defaults, the consequences are severe and far-reaching. Like an individual missing loan payments, sovereign default triggers a cascade of detrimental effects, impacting economic stability, the populace’s well-being, political stability, and the nation’s global financial standing.

Since the Covid-19 economic fallout, various meetings have tried to address debt relief for low- and middle-income countries, particularly in Africa: the June 2023 Paris financing pact summit; December 2023 United Nations Climate Change Conference (COP28); and April 2024 International Monetary Fund and World Bank Spring meeting.

Common Framework

The G20’s Common Framework for Debt Treatment (‘Common Framework’) has been at the heart of these efforts. Established in 2020, it was modelled on the Paris Club, an informal group of creditor nations founded in 1956. The Paris Club aims to find sustainable solutions to debtor countries’ payment difficulties. It has restructured debt for many nations over the years.

The Common Framework initially sought to facilitate structured debt relief, ensuring that countries eligible for the Debt Service Suspension Initiative (DSSI) could manage and repay their debts. The DSSI, launched in 2020, temporarily suspended debt service payments for poor countries to help them manage the economic impact of the pandemic. When the DSSI expired in 2021, countries became dependent on the Common Framework for support.

Ethiopia, Chad and Zambia requested relief under the Common Framework in early 2021. Ethiopia reached an interim debt payment suspension agreement with bilateral creditors such as China, but its negotiations are still ongoing. Chad concluded a tentative arrangement at the end of 2022. In March 2024, Zambia became the first country to complete a restructuring under the G20’s debt-rework architecture.

In January 2023, Ghana became the fourth country to seek treatment under the Common Framework. In January this year, it made significant progress by reaching a draft agreement with its official creditors to restructure $5.4-billion of debt.

However, the Common Framework has several shortcomings. Bureaucratic hurdles and delays worsen economic challenges for countries in need. Zambia’s process took over three years, causing unnecessary harm to its economy. African governments currently face a significant burden, paying 500% more in interest on capital market debt than they would if G20 leaders promptly implemented financial reforms.

A crucial consideration is the impact of a diversified creditor landscape on debt restructuring under the Common Framework. In 1996, Paris Club members held 39% of low-income countries’ debts, but now have only 11%. The current landscape includes diverse actors like China and Saudi Arabia who are not part of the Paris Club and may prefer bilateral negotiations, which contrast with the Paris Club’s collective approach. This divergence can delay resolutions further.

Enforcement

The Common Framework also lacks strong enforcement mechanisms or incentives for creditors to participate, since it’s voluntary and non-binding. This results in inconsistent implementation and limited impact. The problem is worsened by insufficient comprehensive measures to address issues in borrowing countries. These include poor fiscal transparency and weak governance, which undermine the effectiveness of debt relief efforts.

The Common Framework focuses mainly on official bilateral creditors and doesn’t require private creditors to participate. Although it encourages similar treatment from private creditors, their involvement is voluntary and not enforceable. This makes comprehensive debt restructuring difficult, especially in Africa, where 43% of external debt is owed to private creditors.

Africa’s creditors, 2023. (Source: One Campaign)

The AU’s ascension to the G20 has created a pivotal moment for change. All six AU priorities for the coming three years depend on improving African states’ fiscal health. These include: fast-tracking Agenda 2063; advocating for international financial institutions’ reform; enhancing agricultural output; achieving a just energy transition; more trade and investment for rolling out the African Continental Free Trade Area; and improving Africa’s credit rating to boost investment in vaccine manufacturing and pandemic response.

In its first year at the influential platform, the AU has a chance to prioritise debt relief. This aligns with its G20 priorities and addresses the urgent need to improve the Common Framework. While the framework has significant shortcomings, it does offer a platform to advance solutions.

Read more in Daily Maverick: AU must use G20 membership to boost Africa’s role in shaping global financial systems

Fast-tracking Agenda 2063 and international financial institution reform are crucial for Africa, but tackling the economic distress caused by debt burdens is paramount. The AU should prioritise specific reforms, such as enhancing transparency and consistency, streamlining negotiations, and introducing incentive mechanisms for creditor participation. This will lay the foundation for a better debt resolution framework and support sustainable development and economic growth. Improving Africa’s credit rating will also attract investment in vaccine manufacturing and pandemic response.

While there are clear shortcomings in the Common Framework, the AU should focus on improving and optimising it rather than overhauling it entirely. By targeting immediate problems, the AU can build a strong foundation for substantial future advancements, ensuring that debt relief efforts truly benefit African nations and support their long-term economic health and stability.

Leveraging its new G20 membership, the AU can champion reforms that align with its broader goals and drive Africa towards its Agenda 2063 aspirations. DM

Jana de Kluiver, Research Officer, Africa in the World, Institute for Security Studies (ISS) Pretoria.

First published by ISS Today.