Debt Restructuring in Africa: Building Public Assets and Addressing Bottlenecks for Low-Carbon Economic Transformation

The current narrative on debt sustainability often ignores the issue of what a government owns (assets) versus what a government owes (liabilities). While conventional approaches largely focus on the liability side, the kinds of assets a country is trying to build are vital to development and debt sustainability.

A new working paper by Yan Wang and Yinyin Xu voices concerns from the Global South that the prevailing debt sustainability analysis (DSA) framework has ignored public assets. Following a descriptive review of debt issues in Africa, Wang and Xu point to the importance of the public sector balance sheet in understanding debt sustainability. Their analysis reviews the role of 3,126 completed infrastructure projects, co-financed and jointly built by China and host countries, focusing on whether and to what extent the projects addressed infrastructure bottlenecks. Wang and Xu argue these completed projects form part of a country’s public operational assets that generate essential social services, jobs, government revenues, exports and growth.

Main findings:

• In an environment characterized by low interest rates and high uncertainty, the best way to overcome a debt overhang is not to stop investment but to continue to invest in public assets. Public assets are able not only to generate a positive yield, but also to support a green transformation, generate jobs and build revenues as well as economic growth.
• The continued emergence of new COVID-19 variants, together with the travel restrictions and trade/supply chain disruptions, have highlighted the risks that lie in global interdependence and the critical importance of tackling infrastructure bottlenecks.
  • To Wang and Xu, “development starts at home.” Rather than depending on cross-border flows, countries must recognize and build on their own wealth — that is, the assets and endowments that lie within their borders.
• China has been the largest contributor to the Group of 20’s (G20) Debt Service Suspension Initiative (DSSI), postponing debt repayments totaling over $2.1 billion during the COVID-19 pandemic. China has also committed to lending $10 billion from its shares of Special Drawing rights at the International Monetary Fund to developing countries in debt distress. While these efforts are indeed laudable, Wang and Xu argue more needs to be done. They say Chinese lenders should pay more attention to the macroeconomic and debt sustainability risk of borrowing countries and that more knowledge and skills need to be acquired for handling debt restructuring.
• Chinese lenders should be fully aware of the need to have transparency in order to coordinate with all the other creditors in cases where there is a need for timely and orderly debt restructuring.
• Wang and Xu say China and other bilateral lenders need to work together to design tailored restructuring plans to help African countries ease their debt burdens and expand fiscal space for a sustainable economic recovery.
• While restructuring debt, host governments may wish to consider how they can lower their carbon emissions via financing “net-zero assets.”

In pursuit of achieving sustainable development goals in the post-pandemic era, African countries need to know what the government owns (assets) and owes (liabilities), to distinguish “patient capital” from “footloose” investors and to separate long term (structural) and short term (liquidity) issues. In order to address the long-term structural issues, African countries need to work with patient capital holders such as multilateral development banks and regional and national development banks by experimenting with innovative asset-based refinancing and other approaches.