Paris Based Think Tank Looks For $50 Billion Funding to Ease Africa’s Debt Woes

Paris based Finance for Development Lab, a Bill & Melinda Gates Foundation-backed think tank, is looking for funds of $50 billion to help African nations with debt distress to re-enter capital markets and to protect them against future defaults. The think-tank, which was launched last month, said the amount was the median estimate of what is needed. The funds would be used to increase the quality of debt by providing guarantees, as well as to help African commodity exporters and importers against price fluctuations.

Some African nations that jumped into capital markets as global interest rates were dropped to record lows, are now on the verge of default because of the economic impact of the pandemic and Russia’s invasion of Ukraine. Zambia has already reneged on its debt. Investors, anticipating a wave of restructurings, are demanding a high risk premium from the most vulnerable countries, pricing them out of the market.

The average sovereign dollar bonds of African nations trade at 1,007 basis points above US Treasury yields, fulfilling a widely accepted definition of debt distress. Zambia’s debt is at 3,699 basis points above, Ethiopia’s at 3,489 and Ghana’s at 1,989.

The lab, which develops proposals, has already started discussions with politicians, including those in France, about contributing to the fund. Contributions could come in the form of International Monetary Fund special drawing rights.

It proposes offering rolling interest-payment guarantees and a debt-restructuring and facilitation facility to provide cash “sweeteners” to creditors to cut the length and cost of restructuring negotiations. Such a mechanism is necessary to help countries re-enter the market, the think-tank said.

The lab is also proposing a protection against commodity fluctuations by guaranteeing margin call payments triggered by rising prices.

The think-tank aims to develop links with Chinese academics as well, since many African countries are indebted to China.

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