At the ongoing World Bank Group Spring Meetings, a blueprint for emerging-market debt restructurings has been launched as a lifeline for sovereign debt crises in an effort to streamline a process that has grown increasingly lengthy and complex for some of the world’s poorest countries.
The playbook draws on some of the best practices from recent sovereign debt reworks. The playbook’s core proposition is simple yet progressive: act early, act collectively, and act transparently.
Instead of waiting for defaults to trigger chaos, the framework encourages nations to seek restructuring before debt becomes unmanageable. This approach is underpinned by three pillars:
At our last publication (Part I), we spoke about the first two pillars. We continue with the third Pillar today and make our next step remarks for emerging markets, private sector participation and the role of debt distressed African economies in making this new playbook a true way out.
Step 3: Finalizing the debt restructuring
Things to do or to be aware of include:
- On the official bilateral creditors side: For CF cases, finalizing the restructuring would include moving from the AIP to the signature of a “Memorandum of Understanding” with OCC members, subsequently followed by bilateral agreements with each creditor. Non-CF cases would involve similar steps.
- On the private creditor side: for bondholders, steps would typically include first an agreement in principle with the bondholders committee, followed a few weeks later by a bond exchange. This step can happen in the abovementioned Step 2, or in Step 3. Negotiations with individual commercial banks could either proceed in parallel, or follow a more sequenced approach, typically starting with the creditors having the larger claims. Finalization of the agreements with private creditors should be mindful of CoT considerations (see above). Agreements with official bilateral creditors typically include an assessment of the treatment provided by private creditors, and claw-back clauses that would be activated if CoT is not met.
The Role of Public-Private Partnerships
One of the most promising avenues for bridging the anticipated financing gaps and debt issues across emerging economies is through Public-Private Partnerships (PPPs).
In Africa, where public funds are scarce and debt levels are high, strategically combining public and private capital can unlock financing for sustainable development projects. PPPs allow for the de-risking of projects, making them more attractive to private investors who are often hesitant to enter markets deemed too risky.
Multilateral Development Banks (MDBs) and Development Finance Institutions (DFIs) play a pivotal role in this process. By providing concessional financing, guarantees, and other risk mitigation instruments, these institutions can leverage private capital to finance large-scale infrastructure, energy, and technology projects.
The African Development Bank’s Desert to Power initiative is a case in point. The project, aimed at harnessing the solar energy potential of Africa’s Sahel region, leverages concessional financing from MDBs to attract private sector participation. The project is expected to provide electricity to 250 million people, creating opportunities for economic growth and poverty alleviation.
However, for PPPs to be effective, local governments must create enabling environments. This includes improving regulatory frameworks, enhancing transparency, and ensuring political stability. Countries like Kenya and Morocco have shown that, with the right policy reforms, PPPs can drive significant investment in renewable energy and infrastructure, paving the way for sustainable development.
Kenya’s robust renewable energy sector, supported by PPPs, has positioned the country as a leader in clean energy in Africa, with over 90% of its energy coming from renewable sources.
De-risking Investments through Strategic Reforms
Attracting private capital to Africa requires a recalibration of risk perception. Many investors shy away from emerging markets due to perceived high risks, which are often inflated by global rating agencies.
Reforms that lower investment risks can go a long way in closing the financing divide. Countries must focus on improving the ease of doing business, streamlining bureaucracy, and enhancing legal frameworks for investment protection.
One of the key areas for reform is in the creation of Special Economic Zones (SEZs). SEZs have been successful in attracting investment by offering favorable tax regimes, simplified customs procedures, and access to infrastructure.
In countries like Ethiopia and Rwanda, SEZs have become hubs of industrialization and innovation, driving exports and creating jobs. The development of SEZs across Africa, tailored to specific local needs and economic contexts, can significantly boost private sector engagement in sectors such as manufacturing, agriculture, and technology.
Similar to successful SEZs in Ethiopia and Rwanda, Meridian Industrial Park leverages its strategic location and favorable tax regimes to attract both local and international investors. By tailoring its offerings to the specific needs of industries in Ghana, the park supports the country’s broader economic goals and enhances its competitiveness on the global stage.
Moreover, improving local capital markets is crucial for de-risking investments. Strengthening domestic financial institutions and deepening local capital markets can reduce reliance on foreign debt, provide greater liquidity, and make it easier for local businesses to access financing. Countries like South Africa and Nigeria have made strides in developing their capital markets, but there is still much work to be done across the continent.
Mobilizing Capital for a Sustainable Future
Climate finance presents both a challenge and an opportunity for Africa. While the continent is disproportionately affected by climate change, it receives only a fraction of global climate finance. According to the Organization for Economic Co-operation and Development (OECD), climate finance provided and mobilized for developing countries reached $83.3 billion in 2020, still far short of the $100 billion annual target set by the Paris Agreement.
For Africa to benefit from climate finance, it must align its development strategies with global climate goals. This means investing in adaptation, resilience, and renewable energy projects that not only mitigate the effects of climate change but also provide sustainable economic opportunities.
Countries like Egypt, through its Nexus of Water, Food, and Energy (NWFE) programme, have demonstrated how strategic reforms can attract green investment. The NWFE programme, with a project pipeline worth $14.7 billion, has become a model for other developing economies in attracting climate finance for sustainable development.
However, it is important to note that much of the climate finance that flows to Africa comes in the form of loans rather than grants. This exacerbates the debt burden of already struggling economies. To truly align global financial architecture with local needs, there must be a shift towards providing more concessional finance and grants for climate projects in developing countries.
A New Era of International Financial Cooperation
Aligning global financial architecture with local needs requires more than just incremental reforms; it calls for a paradigm shift in how we think about development finance.
The international community must embrace a more inclusive approach, where developing countries have a stronger voice in the decision-making processes of global financial institutions. This is particularly important for Africa, which remains underrepresented in institutions like the IMF and World Bank.
Furthermore, there needs to be a greater focus on South-South cooperation. African countries have much to learn from each other’s experiences, and by collaborating more closely, they can share best practices and develop homegrown solutions to their unique challenges.
The African Continental Free Trade Area (AfCFTA) is a promising example of how regional integration can drive economic growth and create new investment opportunities. By fostering regional cooperation and building stronger trade ties, African nations can reduce their dependence on external markets and create a more resilient economic system.
Reforming Global Trade Policies to Support Local Development
Trade policies also play a crucial role in aligning global financial architecture with local needs. Currently, many developing countries face significant barriers to accessing global markets due to protectionist policies in developed countries.
These barriers hinder the ability of emerging economies to generate the foreign exchange needed to finance development projects. Furthermore, the current global trading system is heavily skewed in favor of developed nations, making it difficult for developing countries to compete.
Reforming global trade policies to ensure fair access to markets for developing countries is essential for sustainable development. The World Trade Organization (WTO) must prioritize reforms that reduce tariffs, eliminate non-tariff barriers, and provide preferential trade access to developing economies.
Additionally, regional trade agreements such as the African Continental Free Trade Area (AfCFTA) can help unlock new markets for African countries, boosting intra-African trade and generating much-needed revenue for development. AfCFTA has the potential to increase Africa’s GDP by $450 billion by 2035, according to the World Bank, creating new opportunities for local industries and businesses to thrive.
Conclusion
The new Playbook for Global Sovereign Debt Restructuring is a good immediate step for debt distressed emerging economies, but it is insufficient in addressing the unique challenges faced by these nations, resulting in a widening gap between global capital flows and local financing requirements.
To bridge this divide, a multifaceted approach is essential, including reforming international financial institutions, enhancing public-private partnerships, and developing supportive trade policies that prioritize the interests of developing countries.
By recalibrating risk perceptions, investing in local capital markets, and promoting regional cooperation, we can create a more inclusive financial framework that empowers African nations to leverage their potential for growth, address critical development challenges, and ultimately achieve their Sustainable Development Goals.
This shift demands concerted action from the global community, a commitment to equitable financial practices, and a willingness to reimagine our collective approach to development finance.
The writer is an award-winning “growth and turnaround” business leader with nearly two decades of multi-industry expertise across Europe, the Middle East and Africa. Specialized in Upstream financial Advisory, International Trade & Development, Economic Integration & Digitalization, Industrial Ecosystems & Special Economic Zones.
