African countries in 'deep debt distress'

Debt overhang is a situation where a country’s debt is high and exceeds its expected ability to repay and debt servicing is expected to increase.

07 January 2021 | Economics

We need to find ways to adjust the debt burden, so that the burden of debt on people in poorer countries can be reduced dramatically. David Malpass, Group President: World bank

Chad and several other countries are already in deep debt distress and more will join their ranks this year, given the severity of the global recession triggered by the Covid-19 pandemic.

The African oil producer Chad may need a deep reduction in the net present value of its debt, and creditors would need to work with the country to find a viable solution to its debt overhang, World Bank Group President David Malpass said.

"For some countries, it's a red alert," he said during a teleconference. "We need to find ways to adjust the debt burden, so that the burden of debt on people in poorer countries can be reduced dramatically."

He said Zambia had already defaulted on some of its debts and restructurings were under way in Angola and Ecuador but declined to name other countries facing acute problems. He said the Bank and the International Monetary Fund were currently assessing the debt sustainability of countries facing problems.

The novel coronavirus, which has killed more than 1.85 million worldwide, has hit emerging market and developing countries particularly hard, exacerbating heavy debt burdens already faced by many countries before the crisis.

"Unsustainable debt levels are a major obstacle," Malpass said. "It was made worse by the pandemic - substantially worse, both in terms of domestic and external debt burdens."

Recovery plan

He said it was critical to reduce the debt burden on poorer countries to foster investment and support the global recovery.

China, the biggest creditor by far with 65% of official bilateral debts, had to focus on its response, given sharp declines in countries' ability to service those debts, he said.

Adjustments were clearly needed to ensure debt sustainability assessments reflected lower short-term and long-term interest rates, Malpass said, noting that debt reductions could occur through cuts in debt stocks, but also by lowering interest rates on existing debts.

In addition, Malpass underscored the need for legislative changes in major financial centres to expedite the restructuring of private sector debt. The current system favoured creditors and made it very difficult for debtor countries to "achieve the reduction in debt that's needed in this new environment."

Malpass said a common framework for debt treatments adopted by China and other Group of 20 major economies in November, and extension of a freeze in official bilateral debt payments through June were good steps, but more work would be needed.

He said he had already spoken with Italian officials and they were committed to continuing efforts to help heavily indebted countries during Italy's year at the helm of the G20. – Nampa/Reuters

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