The thesis analyzes the efficacy of debt relief as a solution to sovereign debt crises in Sub-Saharan Africa, using Ghana, Nigeria, and Zambia as case studies. It conducts debt sustainability analyses under various scenarios of partial or full debt reduction, cancellation, and standstills. Structural impulse response analyses show how macroeconomic factors like growth, interest rates, and exchange rates impact debt levels over time. The results suggest that debt relief can reduce debt burdens but economic reforms are also needed for long-term sustainability. Limitations include low frequency data and lower assumed interest rates.

1. The Sufficiency of Debt Relief as a Panacea to Sovereign
Debt Crisis in Sub-Saharan Africa: A Case Study of Ghana,
Nigeria, and Zambia
by
Pearl Chukualuka Etie
Supervisor: Ricardo Alfredo Mendes Pereira Vicente (PhD)
Tartu, 2022.
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2. Outline
Introduction
Current Sub-Saharan Sovereign Debt Facts
Sub-Saharan Africa Debt Overview and Literature Review
Data & Methodology
Analysis & Results
Conclusion & Recommendations
References
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3. Introduction
Motivation of the study
Rising debt accumulation in sub-Saharan Africa (SSA) spurred calls for debt
relief to alleviate the debt burden in the region.
The research objective
To determine the long run efficacy of stylized debt relief in resolving debt
crises.
Structure of the thesis
Current Sub-Saharan Africa Sovereign Debt Facts, Sub-Saharan Africa Debt
Overview and Literature Review, Data and Methodology, Analysis and
Results, Conclusions and Policy Recommendations.
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4. Current Sub-Saharan Sovereign Debt Facts
▶ Debt levels were already high pre-pandemic and have spiked
significantly from 2019 figures
▶ Fiscal deficits have risen, exchange rates have depreciated
▶ Debt relief (such as debt standstill, debt reduction/haircut and full
cancellation) has been used in the past and is now being requested for
to ease their debt burden.
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5. Sub-Saharan Africa Debt Overview and Literature Review
Causes and Impact of Debt crises in Sub-Saharan Africa
▶ Historical origin of debt crisis and today’s trends (Green and Khan
1990; Ezenwe 1993; Fole 2003; Brooks et al., 2014; Coulibaly et al., 2019;
Berensmann et al., 2020)
▶ Decreases FDI (Aguiar and Amador 2011)
▶ Encourages capital flight (Sachs and Williamson 1986; Ndikumana and
Boyce 2011)
▶ Leads to depreciation in exchange rate (Berensmann et al., 2020)
Types of debt reduction mechanism (Fole 2003)
▶ Debt conversion, in which debt is exchanged at a discount for
something else
▶ Debt buyback, in which the debtor country repurchases her debt from
the original creditors at a discount
▶ Debt relief involves giving some form of reprieve to the debtor by
stopping debt growth or by partial or full debt cancellation
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6. Sub-Saharan Africa Debt Overview and Literature Review Cont.
Effects of Debt Relief
▶ Obstfeld and Rogoff (1996); Arslanalp and Henry (2004); Easterly (2001,
2006); Freytag and Pehnelt (2009) give constrasting views on debt relief
▶ Cassimon et al., (2008, 2015) - estimated the effect of debt relief across
SSA countries, specifically the HIPC and MDRI initiative.
▶ Reinhart and Trebesch, (2016) - studied on short and long run effect in
both advanced economies and emerging markets
▶ Sachs, (1989); Arslanalp and Henry (2004) - debt reduction effects in
cases of debt overhang
▶ Buchheit and Gulati (2021)- debt relief risks of overshooting and
undershooting
▶ Berensmann et al. (2020) & Volz et al. (2020) - emphasized on
importance of case-by-case studies to achieving debt sustainability
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7. Data & Methodology
Data
▶ 31-year period (1990-2020) annual time series data
▶ Variables, Data sources & Countries (Ghana, Nigeria and Zambia )
Debt sustainability analysis (DSA)
▶ Deterministic approach
▶ Stochastic approach
The debt dynamics equation is applied to both approaches as follow:
dt = αdm 1 + rt
1 + gt
dt−1 + αex 1 + rt
1 + gt
et
et−1
dt−1 − pt
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8. Methodology Cont.
Deterministic Debt Projection
Escolano (2010) & Carone and Berti (2014)
Stochastic projections (SVAR model)
Sims (1980) & Kilian (2011)
Garcia and Rigobon (2004) & Medeiros (2012)
A1(L)yt = A0(Ik − B1L − B2L2
− ... − BpLp
)yt = A0ut = Bϵt
A =




1 0 0 0
a21 1 0 0
a31 a32 1 0
a41 a42 a43 1



 B =




b11 0 0 0
0 b22 0 0
0 0 b33 0
0 0 0 b44




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9. Analysis & Results
IRGD sensitivity tests
▶ Turner & Spinelli (2013)
Stylized debt relief projections
▶ 25% and 80% external partial debt reduction (haircut)
▶ Total external debt cancellation
▶ External debt standstill
Structural impulse response function
▶ Structural impulse responses to interest rate, growth rates, primary
balance and REER
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10. IRGD Sensitivity test of +/- 2pp
Deterministic debt projection with IRGD sensitivity tests of +/- 2 percentage points.
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11. Debt Projection Under Partial External Debt Reduction
Deterministic debt projection with
25% and 80% partial external debt
reduction.
Dynamic debt projections with 25% and
80% partial external debt reduction.
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12. Debt Projection Under Total External Debt Reduction
Deterministic debt projection
with full external debt
cancellation.
Dynamic debt projections with full
external debt cancellation.
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13. Debt Projection Under Total External Debt Standstill
Deterministic debt projection
with debt standstill.
Dynamic debt projections with debt
standstill.
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14. Impulse Response Plot for Ghana
Structural impulse response graph of Ghana’s macro-economic determinants of debt
and debt level.
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15. Impulse Response Plot for Nigeria
Structural impulse response graph of Nigeria’s macro-economic determinants of
debt and debt level.
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16. Impulse Response Plot for Zambia
Structural impulse response graph of Zambia’s macro-economic determinants of
debt and debt level.
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17. Conclusion & Recommendations
Summary
▶ Motivation of the study
▶ Results under both approaches are similar
Limitations
▶ Low frequency data
▶ Lower interest rates
Recommendations
▶ Policy recommendations - growth reforms
▶ Future study recommendations – interest waiver, creditor profile
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18. References
▶ Arslanalp, S. and Henry, P.B., 2005. Is debt relief efficient? The Journal
of Finance, 60(2), pp.1017-1051.
▶ Berensmann, K., Shimeles, A. and Ndung’u, N., 2020. Covid-19 crisis:
How should the G20 support heavily indebted low-income countries?
T20 Policy Briefing Paper of Task Force, 8.
▶ Berti, K., 2013. Stochastic public debt projections using the historical
variance-covariance matrix approach for EU countries (No. 480).
Directorate General Economic and Financial Affairs (DG ECFIN),
European Commission.
▶ Cassimon, D. and Van Campenhout, B., 2008. Comparative fiscal
response effects of debt relief: An application to African HIPCs. South
African Journal of Economics, 76(3), pp.427-442.
▶ Escolano, J., 2010. A practical guide to public debt dynamics, fiscal
sustainability, and cyclical adjustment of budgetary aggregates (Vol.
2010, pp. 01-25). International Monetary Fund.
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19. References Cont.
▶ Medeiros, J., 2012. Stochastic debt simulation using VAR models and a
panel fiscal reaction function–results for a selected number of
countries (No. 459). Directorate General Economic and Financial Affairs
(DG ECFIN), European Commission.
▶ Reinhart, C.M. and Trebesch, C., 2016. Sovereign debt relief and its
aftermath. Journal of the European Economic Association, 14(1),
pp.215-251.
▶ Turner, D. and Spinelli, F., 2013. Interest-rate-growth differentials and
government debt dynamics. OECD Journal: Economic Studies, 2012(1),
pp.103-122.
▶ Volz, U., Akthar, S., Gallagher, K., Griffith-Jones, S., Haas, J. and Kraemer,
M., 2020. Debt Relief for a Green and Inclusive Recovery. CSF SOAS &
GDPC proposal.
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