Some African nations, which rushed into capital markets as global interest rates fell to record lows, are on the verge of default because of the economic impact of the Covid-19 pandemic and Russia’s invasion of Ukraine. Zambia has already reneged on its debt. Investors, anticipating a wave of restructurings, are demanding a high risk premium from the most vulnerable countries, pricing them out of the market.
The sovereign dollar bonds of African nations, on average, trade at 1,007 basis points above US Treasury yields, fulfilling a widely accepted definition of debt distress. Zambia’s debt hovers at 3,699 basis points, Ethiopia’s at 3,489 points and Ghana’s at 1,989 basis points.
“Is this a failed experiment, something that lasted as long as cheap money was the name of the game post sub-prime?” Cohen said. “Is the game over and we never see, and I don’t want to name a country, but we never see them back in the market?”
The lab, which develops proposals and would want an established institution to house the facility, includes representatives on its steering committee from the United Nations Economic Committee for Africa and think tanks from Santiago and Accra to New Delhi. World Trade Organization Director-General Ngozi Okonjo-Iweala attended its launch.
The Gates Foundation provided $2.6 million in September 2021 to kick-start the project.
“Last year, we had conversations with passionate thinkers affiliated with the Paris School of Economics, who brought new ideas and energy to the financing debate –- from francophone Africa to the Paris Club to the private sector,” the foundation said in a response to questions. “We jointly thought about a new organisation with a vision to create an engaged community of think tanks and research centers that could help provide new, yet practical and evidence-based proposals. Ideas to meet the financing challenges of today.”
Cohen said he’s begun talking to politicians, including those in France, about contributing to the fund. Contributions could come in the form of International Monetary Fund special drawing rights, he said.
The lab is proposing offering rolling interest-payment guarantees and a debt-restructuring and facilitation facility to provide cash “sweeteners” to creditors to cut the length and cost of restructuring negotiations, it said in a document.
Such a mechanism is necessary to help countries re-enter the market, Cohen said.
Protective umbrella
“Either they are locked out of the market or they can re-enter, provided they are enhanced by some form of guarantee,” he said. “This kind of mechanism would be needed to restore access to the market. There will be a lot of restructuring in the years to come. Some cash could have a big leverage.”
The alternative is that countries locked out of capital markets will need to depend on grants and multilateral development banks for their financing needs, he said.
The labs is also proposing a protection against commodity fluctuations by guaranteeing margin call payments triggered by rising prices.
“Tell us how much money is on the table and we will tell you how many people we can get under the protection of this umbrella,” Cohen said.
The labs also plans develop links with Chinese academics as many African countries are indebted to China, he said.
“We are thinking of a parallel group of Chinese scholars thinking of the role of China, the main creditor to Africa,” he said.
