Finance ministers in Africa will be closely following what is happening in Zambia. At the end of September, the south African country said it wanted to talk to its creditors about a temporary delay in servicing its debts. Holders of euro-denominated bonds were asked to let it know by October 20 what they thought of the idea.

Just three days after the announcement, S&P Global Ratings, the largest of the international rating agencies, downgraded the country's credit rating.

"In our view, the request indicates that Zambia currently faces significant difficulties in meeting its commercial obligations and is a likely precursor to a default on commercial obligations," the agency said, adding that it was downgrading the country's long-term ratings to CCC- from CCC and was maintaining a negative outlook.

Zambia's attempt to win a debt moratorium to create some breathing space amid the pandemic thus led to the exact opposite: a further shrinking of the financial headroom. For the lower the rating, the more expensive it gets to borrow.

Debt, recession, lack of stimulus packages

Although there is no blanket downgrade when a postponement is discussed, says Roberto Sifon-Arevalo, director of Government Bonds and Public Finance at S&P in New York. The analysts examine each individual case closely. But the key question is always: What about a country's ability to repay its debts to private creditors?

Zambia's credit rating was already low before the downgrade, with high interest payments to service its debt, hurting the country's ability to repay. "Of every dollar the country earns, it has to spend 46 cents just on interest payments," Sifon-Arevalo told DW. "So, you can imagine how difficult that is for a nation at any moment, let alone in the current situation."

The recession caused by the COVID-19 pandemic is hitting African countries harder than others. They lack the means to cushion the shock with aid packages worth billions. At the same time, global demand for their raw materials is collapsing. And remittances — the money Africans living abroad send home — are also decreasing.

G20 countries have offered some debt relief to sub-Saharan Africa. But Kenya and other countries are wary that such a relief could hurt their credit ratings, as happened with Zambia.

And so it seems that despite some debt relief initiatives — since the 1990s by the World Bank and since 2005 by the industrialized countries' club G7/G8 — the continent is once again on the brink of bankruptcy.

Fixing accountability and the burdens of the past

"Debt relief will always fizzle out unless there are also long-term reforms — in governance, the fight against corruption, transparency and the general political framework," said Matthias Adler, Africa expert at the German KfW development bank. Even if support in times of a pandemic makes sense: "The countries themselves are always at the center of the solution."

However, the causes of debt are older than people think and go back further than independence from the colonial powers, says Toby Green, lecturer in African history at King's College, London.

"For five centuries, Africa's relationship with capital has put it in a very disadvantageous position when it comes to its relationship with credit," Green told DW, adding that unlike in Western countries, credit to Africa has always been externally provided.

And the lenders were never concerned with local economic development, but rather with the most economical access to African raw materials — the consequences of which are well-known.

"Ghana, which is one of the wealthier countries in west Africa, spends five times as much on debt repayments than on its health care system," Green said. "If Ghana were able to source its credit from within a pan-African banking institution, the terms at which it did make those payments might very materially affect the way it was able to balance those obligations with social obligations within Ghana."

African diaspora to the rescue?

In addition to debt relief, Green is proposing that Africa creates a financial system of its own, with the help of the African diaspora and, above all, pan-African financial institutions. As an example, he cites Ecobank, which was founded in Togo in 1985 with funds from the West African Economic Community, Ecowas, and is now active in 36 countries south of the Sahara.

"In 2016, which is the latest year figures are available for, more than half of all private investment in Africa came in the form of remittances," Green says. If the African diaspora invested its money in African institutions, the entire continent would gain financial freedom.

"We suggested working intensively with the African diaspora, which is spread very widely around the globe but has accumulated its own stocks of credit and capital, to bank that money on the continent," says Green, who developed his proposals together with Carlos Cardoso, the director of the Centro de Estudos Sociais Amilcar Cabral in Guinea-Bissau.

"This would open up much bigger flows of potential credit and potentially mean that those governments were no longer so dependent on external credit markets and external credit ratings."

African companies, which often struggle to attract investments, would also benefit from a better supply of credit. The existing financial system simply does not cater to their needs, Green and Cardoso argue. As a result, there is less growth, fewer jobs and less tax revenue than would actually be possible.

A vicious cycle

Financing investments in infrastructure is particularly problematic. Bilateral donors usually pursue their own interests, such as the former colonial powers, or China today.

The risk is often too high for private investors.

"Everybody wants to chip in on the road that is already there," said Sifon-Arevalo from S&P Global Ratings.  But it's very hard to make people chip in to make a road where there isn't one — because there is likely a reason why there is no road."

This is where the governments are actually needed, but they often do not have enough money, especially in sub-Saharan Africa.

"So, you are in a vicious cycle that doesn't let you develop the tools you need to grow out of it. In many ways, it's quite perverse."

It remains to be seen whether "African" capital would ultimately be more risk-taking and less yield-hungry than that of traditional investors. It is at least likely that African investors would not be completely indifferent to the development of the continent.

Toby Green and Carlos Cardoso are convinced that it is worth a try. After all, things can hardly get much worse from here, they argue.

Adapted from German by Ashutosh Pandey