1.21 Evolution of Risk of External Debt Distress among SSA LICs

Among -IDA eligible countries in the region, eight countries are in debt distress while fourteen are at high risk of joining them. country lost access to international markets. It needs $1.5 billion in assistance from the IMF, which could help to shore up public finances and regain access to credit markets. Nevertheless, despite the negotiation with the IMF, investors remain nervous about the country’s debt sustainability. These concerns were expressed by the country’s local and foreign currency ratings downgrade from B-/B to CCC+/C. As a result, despite the news, the cedi fell further with ripple effects on inflation.

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The Democratic Republic of Congo, Kenya, Tanzania, and Uganda secured deals with the IMF, which freed up fiscal space and allowed these countries to navigate better through multiple shocks with limited concerns about reaching debt unsustainability. The classification of countries in terms of distress level has remained mostly unchanged from the April 2022 Africa’s Pulse (figure 1.21). Sixteen of 38 IDA countries are at moderate risk of distress, up from 15 previously. The number of those at high risk of distress went down to 14 from 15, while eight countries persist in debt distress.

Inflation and Exchange Rates Inflation in the region was trending upward before Russia’s invasion of Ukraine amid supply chain disruptions caused by restrictions to avoid escalation of COVID-19 cases, and the economic fallout from the pandemic. In addition, commodity prices, particularly food and oil prices, rose from a rebound in global demand, and oil prices rose from an OPEC+ agreement to cut production. These effects were amplified by the war in Ukraine. Food and fuel prices as well as the depreciation of domestic currencies are the dominant factors underpinning inflationary pressures in the region (figures 1.22 and 1.23). The worst performing currencies in the region since the beginning of the year include those of Ghana (with a depreciation of 60 percent), South Sudan (50.8 percent), Sudan (28.6 percent), Malawi (25.4 percent), and CFA Franc (13.3 percent).13 In addition, an increasing food and fuel pass-through made a large contribution to inflation. Food prices have increased sharply in Kenya (21 basis points), Uganda (20 basis points), and Zambia (14 basis points) since the beginning of the year (figure 1.23). In turn inflation erodes the purchasing power of poor people, increases poverty, amplifies

FIGURE 1.21: Evolution of Risk of External Debt Distress among SSA LICs 100 90 80 Percent of countries 30 40 50 60 70 20 10 2015 2016 2017 2018 2019 2020 2021 2022 Low Moderate High In debt distress Source: World Bank staff estimates as of June 2022. Note: The data cover joint World Bank–International Monetary Fund debt sustainability analyses for low-income countries in Sub-Saharan Africa. The number of countries varies by year.

13 The domestic currency appreciated from January to June in Angola (23.4 percent), the Seychelles (4.8 percent), and Zambia (3.4 percent). In Malawi, the parallel exchange rate at forex bureaus depreciated by 42 percent over the same period.