Reducing Low-Income African Country Debt Risks in a Post-Covid-19 Era

This document is based on a webinar organized by the MFW4A Secretariat and TCX fund. The session entitled " Reducing Low-Income African Country Debt Risks in a Post-Covid-19 Era" allowed panelists to discuss the already fragile debt situation in low-income African countries facing Covid-19 economic fallout. Higher healthcare cost, lower tax revenues, and a fall in commodity prices created by the ongoing health crisis increase the likelihood of capital outflows and subsequently, currency depreciations. A drop in foreign exchange (FX) rates is especially detrimental for countries with a high proportion of debt denominated in external currency, notably the USD. In 2017, an average of 74% of low-income country debt was denominated in a foreign currency and a recent study found that debt-to-GDP tend to grow at a faster rate when countries with a high share of foreign currency debt face a currency depreciation (Griffiths, Panizza and Taddei, 2020). Unfortunately, many low-income countries face enormous difficulties when trying to borrow long-term in their own currency, and therefore require assistance from Development Finance Institutions (DFIs). However, DFIs themselves cannot usually accept the currency risk and policy makers have an incentive to prefer hard currency financing due to lower ex-ante cost and the neglecting of implied cost. If mismanaged, the current situation could deteriorate further given the uncertainties surrounding any global economic recovery and have catastrophic impact on the African financial sector.