Why African countries are in debt distress — Adeosun

Former Minister of Finance, Kemi Adeosun has said that African countries are often in debt distress because they failed to cut social spending.

Adeosun, who was a minister from November 2015 to September 2018 during the administration of former President, Muhammadu Buhari, said this in a panel discussion with Nobel prize-winning Economist Joseph Stiglitz on Africa’s sovereign debt crisis, which was held 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,” adding that countries in debt distress are often reluctant to admit it due to the need to cut social spending, especially the democratic one.

Advertisement

“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.

“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.

She further maintained that if the affected sovereign country can keep servicing its debt, then there would be a loss of time, but when a restructuring is needed, such conversations will ensure the process ‘has a head start’.

Also speaking at the event, Stiglitz said the difficulty of coordination between diverse creditors, including China and Western hedge funds who ‘don’t trust anyone else’ makes debt restructuring more difficult.

“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.

Recall that the debt restructuring for Zambia has been protracted since the country defaulted on its debt in November 2020, and an agreement in principle with creditors, including China, was reached on $6.3bn of its debt in June, but this has yet to be finalised.