Abuja, March 16, 2021 The African Development Bank (AfDB) has urged African governments to establish a financial stabilisation mechanism for a comprehensive plan for debt restructuring.
President of the AfDB, Dr Akinwumi Adesina, said this at the launch of the bank’s 2021 edition of its annual African Economic Outlook, according to a statement from its office on Tuesday.
Debt restructuring is a process that allows a private, public or a sovereign entity facing cash flow problems and financial distress to reduce and renegotiate its delinquent debts to improve or restore liquidity so that it can continue its operations.
Also, a debt becomes delinquent when payment is not made by the due date or the end of the “grace period” as established in a loan or repayment agreement, in the case of a debt being paid in installments.
This is according to Chapter 6 on Delinquent Debt Collection of a Revised March 2015 document retrieved from the website of the U.S. Bureau of Fiscal Service-Treasury, Debts Management Services.
Adesina, however, urged African governments to consider collectively establishing the mechanism which would give Africa the fiscal space it needed to deal with debts.
“It is high time that we set up a homegrown financial stability mechanism where we work together to mutualize our funds and ensure we avoid the spillover effects that come from global pandemics or any external shocks.
“We must start by making sure that we carry out the macroeconomic policy reforms and the fiscal policy reforms that we need to get done.
“Africa is not looking for a free pass. We are just looking for an equitable way in which Africa’s fiscal space gets dealt with,” he said.
He presented a proposed African Financial Stabilisation Mechanism as a critically needed solution that would allow African countries to agree on a set of convergent macroeconomic policies and principles and pool funds.
He said this would allow Africa “deal with the cause of the illness and not always the symptoms”.
Adesina said that the funds issued by the International Monetary Fund (IMF) from the special drawing rights would “go a long way” to stabilising foreign reserves and the exchange rate.
The AfDB president noted that this would allow countries to handle debt and re-engage in massive pro-growth investments that would help them to quickly recover from the COVID-19 pandemic.
Prof. Joseph Stiglitz, an American Economist and Professor at Columbia University, New York, backed Adesina’s call and proposed an international debt framework.
“That’s a question I’ve been very concerned with for a long time. You need debt restructuring and that needs to be really high on the international agenda.
“Every country has bankruptcy laws but there’s no bankruptcy law for international debt.
When there’s too much debt, it’s as much the creditor’s problem as the debtor’s problem,’ Stieglitz said.
Stiglitz added that what needed to be done with debt was comprehensive and quick restructuring.
“We don’t want to fall into the trap of doing too little, too late,” he said.
The professor’s proposal called for an international debt framework that included the private sector, given its growing role as a source of government debt.
The 2021 edition of the African Economic Outlook estimated that Africa’s GDP contracted 2.1 per cent in 2020, the continent’s first recession in half a century.
GDP is projected to grow by 3.4 per cent in 2021.
The report further estimated that African governments would require additional gross financing of about 154 billion dollars in 2020/21 to respond to the COVID-19 crisis.