Abebe Selassie, the Director of the African Department at the International Monetary Fund. PHOTO | COURTESY
Abebe Selassie, the Director of the African Department at the International Monetary Fund, spoke with Berna Namata on low-income countries and the financing challenges brought by Covid-19.
Most countries in the region have borrowed heavily to contain the pandemic. To what extent is the IMF concerned about the debt situation in the region worsening?
While debt was expected to gradually decline prior to the pandemic, the Covid-19 crisis is leading to a large upward shift of the debt path. In that context, the IMF has already been able to provide some debt relief under our Catastrophe Containment and Relief Trust (CCRT) to SSA countries.
Some—many—countries in the region will need additional official sector financing beyond existing initiatives. We stand ready to support SSA members that request Fund programmes. Strong reform efforts under IMF programmes can help countries with high debt loads reduce vulnerabilities and help preserve hard-won access to market financing for SSA countries. Fund programmes catalyse more official financing to support recovery.
The IMF can only lend when debt is sustainable. Debt sustainability analysis should be undertaken on a country-by-country basis. We will continue to use the time-tested tools to evaluate countries’ debt sustainability (LIC DSF [Debt sustainability framework for low-income countries] and MAC DSA [Market-access country debt sustainability analysis).
Unfortunately, this may not be enough for some countries. Where debt is unsustainable, restructuring will be needed by all major creditors, including private sector claims. While the Fund has the tools and experience to navigate this, the international debt “architecture” should be strengthened. For example, greater debt transparency and better tools for managing non-bonded or collateralised debt would be beneficial. Official creditors will also need to find better ways to work together to resolve these difficult cases.
Under the G-20 initiative, some countries have been granted an extended period for loan repayments. But it is clear Africa needs more than debt restructuring, it needs debt relief. What is the IMF’s position on this issue?
The shock of the pandemic hit at a time when debt vulnerabilities in the region were already rising and Covid is further straining the capacity of some countries to deal with debt.
In sub Saharan Africa, 27 countries (out of 37 eligible) have requested relief under the Debt Service Suspension Initiative (DSSI). While this has provided some breathing space, it provides only temporary liquidity support. Moreover, some SSA countries have received less DSSI relief than expected given the time required to reach rescheduling agreements, and for others debt service on the rescheduled obligations could add to challenges in future years.
While many countries will need additional support, it is important not to view the region through a single “debt prism” that suggests all countries require debt restructuring. There is significant variation among countries’ circumstances, and it will be important that we take a country by country approach.
Given that only a fraction is owed to commercial lenders, governments are increasingly calling for debt relief, specifically from multilateral lenders including the IMF. Has the IMF considered a debt relief package for low-income countries?
The IMF under its charter is not permitted to simply cancel claims or write off debt. Instead, the IMF’s ability to provide debt service relief on its loans to members is based on the availability of grants for the repayment of those loans. The IMF can mobilise these grants from donors, and the IMF does this through trust funds such as the Catastrophe Containment and Relief Trust (CCRT).
The CCRT allows the IMF to provide debt relief for the poorest and most vulnerable countries hit by catastrophic natural or public health disasters. In April 2020, the IMF expanded its provision of debt service relief under the CCRT to cover exceptional balance of payments needs arising from the Covid-19 pandemic, by freeing up financial resources of the low income countries (LICs) to respond to the pandemic.
The CCRT is providing grant-based debt service relief to the 29 poorest LICs with outstanding credit to the IMF, until April 2021. The total debt relief for these first two tranches amounts to almost $500 million. Efforts are under way, through a fundraising campaign, to request grants from a broad range of donors and to extend the duration of grant-based debt relief to these members for another year until April 2022.
The IMF has also temporarily increased access limits under its concessional emergency lending facility, the Rapid Credit Facility (RCF) under the Poverty Reduction Growth Trust (PRGT), to respond more effectively to LICs’ urgent needs. The IMF is currently seeking additional donor support to expand its PRGT concessional lending for low-income countries.
In your view, given the huge financing needs some countries have yet they have limited fiscal space, how best can these countries raise the resources they need to fund economic growth?
Indeed, policymakers in countries with limited fiscal space and less access to financing face formidable challenges. Spending on health care as well as lifelines for people and firms is needed to address the Covid-19 crisis. Meanwhile, there are massive longstanding needs for investment in people and infrastructure to foster economic growth and attain the sustainable development goals.
In these countries, policymakers will need to safeguard public investment, to the extent compatible with saving lives and livelihoods, and enhance its efficiency. To the extent possible, policymakers should protect transfers to lower-income households while increasing progressive taxation and ensuring highly profitable firms are appropriately taxed, aiming at a growth-friendly and equitable adjustment.
Tax policy options include increasing tax rates on higher bracket incomes, capital income, higher end property, or wealth. In addition, the lower oil price level facilitates increases in taxes (or reductions in subsidies) on fuel, which in emerging markets and developing economies will impact mostly the well-off. It is crucial to ensure full transparency, good governance, and costing of all fiscal measures, especially given their size, exceptional nature, and speed of deployment. Spending should be reallocated from less productive expenditures such as untargeted subsidies toward investment in education, health, and infrastructure. Measures to improve expenditure efficiency, by strengthening public investment management institutions, are likewise important.
Moreover, the crisis makes a global response even more necessary to avoid slipping further behind on the sustainable development goals. Global efforts to ensure universal access to affordable and effective vaccination or treatment are the highest priority to contain the human, economic, and fiscal costs of the pandemic. In low-income countries, higher deficits should, to the extent possible, be financed from concessional sources. For some of these economies to recover from the pandemic and to achieve the SDGs, the international community must act with debt relief, and access grants particularly for the poorest countries.
What are the prospects of the region in 2021? What are the risks?
Faced with an unprecedented health and economic crisis, countries have acted swiftly to protect their people from the worst of the crisis. But amid high economic and social costs, many have been reopening their economies.
The current outlook for 2020–21 is broadly unchanged from the June update, with activity in 2020 projected to contract by 3.0 percent, still the worst outcome on record. This represents a drop in real per capita income of 5.3 percent, bringing per capita incomes back to 2013 levels. For 2021, regional growth should recover modestly to 3.1 percent.
This outlook is subject to some key downside risks, particularly regarding the path of the Covid-19 pandemic, the resilience of the region’s health systems, and the availability of external financing.
Policymakers aiming to rekindle their economies now have fewer resources at their disposal and will likely face some difficult choices. On current trends, significant financing gaps are likely to prevail, and without significant additional financial assistance, many countries will struggle to simply maintain macroeconomic stability while also meeting the basic needs of their populations.
The need for transformative domestic reforms to promote resilience (including revenue mobilization, digitalization, and fostering better transparency and governance) is more urgent than ever.
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BIO
Current position: Director of the African Department at the IMF, a position he has held since 2016.
Previous positions: Deputy director, African department; Mission chief for Portugal and South Africa; Division chief, African department’s Regional studies division; the IMF’s senior resident representative in Uganda. Earlier in his career, he worked on the Fund’s lending programmes with Turkey, Thailand, Romania and Estonia. Before joining the IMF in 1994, he worked for the government of Ethiopia and the Economist Intelligence Unit in London.
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