Whose debt is it

In December 2023, Ethiopia became the third African country in as many years to default on its global debt payment. It was supposed to pay $33 million to holders of the country’s only international government bond on December 11 but failed to do so even after the 14-day grace period ended on December 25. Zambia and Ghana are the other two countries to have defaulted on their debt since 2020.

Several African nations are faced with a debt crisis. Many of them have faced downgrades from prominent credit rat-ing agencies in the past five years. These nations include Kenya, Morocco, Nigeria, Ghana and Egypt. Speaking at the World Economic Forum in Davos on January 17, Nonkululeko Nyembezi, chairperson of Standard Bank Group, the continent’s biggest bank by assets, said that sovereign-debt crisis is the biggest issue facing Africa. Sample these cases. Nigeria is in talks to secure as much as $1.5 billion in budget support from the World Bank. Zambia’s bilateral creditors have rejected a plan to restructure its $3 billion in Eurobonds—a debt instrument issued in a currency other than that of the home country or market.

Kenya has secured $685 million from the International Monetary Fund and raised a $210 million loan from the Trade and Development Bank before its $2 billion Eurobond repayment is due in five months. Ethiopia’s default is largely attributed to climate change, apart from the COVID-19 pandemic and the Tigray region civil war. East Africa’s worst drought in 40 years resulted in runaway inflation and rising food and fuel costs, exposing the country to multiple climate-linked crises. Experts are concerned that Ethiopia’s default will have an economic ripple effect on neighbouring coun-tries. Considering most countries in the region are in debt distress or on the verge of default, it is feared that the majority might have a difficult time accessing credit on international markets due to a loss of confidence in their capital markets.

Following the default, three globally-recognised credit rating agencies—Fitch Ratings, Moody’s, and Standard & Poor’s Global Ratings—have downgraded the country to a risky borrower that cannot meet debt obligations. Ethiopia’s sad state of affairs gives credence to assertions that besides factors like an increase in the annual adaptation financing gap (due to the failure of rich nations to fulfil their promises), the debt crisis across Africa is partly to blame for stalling climate action.

Loan-funded initiatives

Ethiopia’s default and subsequent downgrade will, among other crises, raise the cost of borrowing, says Kenyan economist David Ndii. Besides increasing the cost of debt—one of the key sources of climate action finance in Africa—the crisis will impact green investments and general climate action in the country, possibly the continent, Ndii says.

Ethiopia’s debt default is intricately linked to its efforts in building climate-resilient infrastructure and a host of other ambitious green initiatives, especially in the energy sector, under the country’s Climate Resilience Green Economy vision. “Ethiopia’s external imbalance and attendant foreign exchange crises emanate from over-investment in infrastructure. With some green power projects of close to 7,000 MW still under construction, it has since doubled electricity generation from 1,800 MW to 4,500 MW, against peak power requirement of 2,000 MW,” says Ndii. The Grand Ethiopian Renaissance dam alone has a capacity of 6,450 MW and when completed, together with the others under construction, Ethiopia’s generation capacity will be more than four times the domestic demand.

But despite the mega investments using debt, the projected returns have not been forthcoming. “Unfortunately, close to a decade on, the anticipated private investment that would enable Ethiopia to pay for it has not materialised. Ethiopia was banking on export processing zones investment and has built several industrial parks around the country,” Ndii says. Climate and economic experts also opine that defaulting countries can no longer access foreign debt markets to plug budget deficits as their economies become closed off to foreign lenders.

Global responsibility

As the debt crisis brews across Africa, some countries are seeking debt relief or loan restructuring. Others are considering swapping debt and climate finance or green investments. Cape Verde, for instance, has struck a debt-for-climate deal with Portugal last year, with the latter agreeing to write off an initial $13 million the African nation owed them. Ghana has also won a moratorium on debt payments with official creditors till May 2026, and wants to finalise a deal with Eurobond investors to revamp $13 billion debt by the end of March, say media reports. There have been other positive developments. Ivory Coast, one of Africa’s fastest-growing economies, has announced it will become the first country in sub-Saharan Africa to sell a foreign bond in almost two years. This signals a renewed market appetite for regional investment.

But overall, stakeholders continue to highlight the need to accelerate full operationalisation of climate-related initiatives to provide an umbrella for action on debt, especially when the climate crises are forcing developing countries to increase their borrowing. So far, very little progress has been made, with the majority of the stakeholders unable to strike a balance between economic recovery, debt relief or restructuring and advancing green initiatives that ensure sustainable development for these nations.

This was first published in the 16-29 February, 2024 print edition of Down To Earth

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