Kemi Adeosun, the former Finance Minister, pinpointed that African countries’ failure to reduce social spending is a major factor in their recurrent struggles with debt distress.
Adeosun, who was in office from November 2015 to September 2018 during the tenure of former President Muhammadu Buhari, was participating in a panel discussion with Nobel laureate Economist Joseph Stiglitz on Africa’s sovereign debt crisis at the Columbia Global Centers in Paris, France, on Monday.
According to Adeosun, ‘The long periods needed to carry out debt restructuring, such as that in Zambia, have their roots in lack of action before a default takes place.’
She pointed to a ‘failure to manage the pre-period,’ further noting that countries in debt distress are often reluctant to admit it due to the need to cut social spending, especially the democratic one’
‘The lack of international mechanisms for sovereign debt restructuring hampers the prospects for Africa achieving sustainable public finances or being able to contribute to the clean energy transition.’
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‘That means there is a tendency to ‘kick the can down the road’. Eurobond holders need to initiate conversations with sovereigns ahead of a potential default,’ Adeosun told The Africa Report.
Expanding on her viewpoint, she emphasized that when a sovereign country can continue servicing its debt, it might lead to a time loss, but initiating conversations about restructuring would offer a head start to the process.
Also contributing his insights to the discussion, Stiglitz stressed the challenge posed by the lack of coordination among diverse creditors, such as China and Western hedge funds, who shows a general distrust of other parties, thereby making the process of debt restructuring more complex.
‘We have no framework for debt restructuring across sovereigns, and the result is too little debt restructuring, too late.’
‘Private sector lenders have shown they are not good at assessing risk, as evidenced by the Great Financial Crisis starting in 2008. Nothing, in his eyes, has been learned by the West since.’
‘There are incentives not to learn and not to respond to what is predictable. The build-up of African debt was caused by the sudden withdrawal of financial inflows from the West and China triggered by COVID-19, creating a “potentially massive problem,” the award-winning Economist added.’
It is worth recalling that Zambia’s debt restructuring has been extended since the country defaulted on its debt in November 2020. Despite reaching an initial agreement in June with creditors, including China, on $6.3 billion of its debt, the finalization of this agreement is still pending.