Debt Crisis and Austerity could Worsen Extremely High Inequality in SADC Region

By Anthony Kamande

Southern Africa is the most unequal region in Africa and the most unequal subregion in the world. Decades of colonial legacy, corruption, elite power and poor governance have hampered inclusive development in the region as wealth and income are increasingly concentrated in the hands of a tiny few. The richest 1% of the population in SADC member states own nearly half (48%) of the region’s wealth. In the first two years of the pandemic, the six richest billionaires in the region saw their wealth increase by 42% in real terms.

Finding themselves between a rock and a hard place of reduced revenue on one side and high debt risk and fiscal deficit on the other, most countries in SADC plan to cut their public spending massively.

SADC countries vary considerably in their commitment to tackling inequality

So, then what are the SADC member states doing to fight this extreme inequality and achieve the SDGs? Well, by one measure of its kind, all countries are doing much less than they could. But some are doing much better than others. This is according to a new report by Oxfam, Norwegian Church Aid and Development Finance International. Having worked on this report, I find that the wealthier, much less populous countries (except South Africa) perform much better in most of the indicators than the poorer, highly populous countries.

The report, “The Crisis of Extreme Inequality in SADC: Fighting austerity and the COVID-19 pandemic,” covers the 15 SADC member states. It is based on the Commitment to Reducing Inequality (CRI) index.  The CRI measures and ranks 158 countries’ commitment to fighting inequality through three broad areas that have been shown to have immense power in reducing inequality and poverty: public services (health, education and social protection), progressive taxation and labour rights. The index looks at the polices on paper, whether these policies are being implemented, and finally their impact on inequality.  

Let’s go directly to what SADC member states were doing, as measured by the CRI, that could have helped them and their citizens withstand such shocks as COVID-19. Take health and social protection first. Before the pandemic, spending on health averaged 11.2% of the government's total budget in SADC countries, below the AU recommended 15%. Only the Seychelles, Botswana and Namibia exceeded the targets.

This resulted in low health coverage and high impoverishing catastrophic out of pocket health spending. A staggering 192 million people (53%) in SADC went into the pandemic with no primary healthcare coverage. Another 7% (24 million) were spending a catastrophic proportion of their budget on healthcare.

COVID-19 has us shown how effective social protection and welfare payments can be in responding to shocks, mitigating vulnerability, and reducing inequality. Spending on social protection averaged 12.8% of the government's budget in each country, but with remarkable between-country disparities. Five countries were spending more than 15%, while six under 10. Using old-age pensions as a proxy for measuring whether spending on social protection reaches the most vulnerable, the report shows that old-age pension coverage is, or close to universal in seven countries. But it’s under 5% in Malawi, Tanzania and Madagascar. 

Space is limiting me from spending a lot of time on the tax and labour rights pillars; there is a lot more in the report. I hope you’ll spare a moment to read it for the more mind-boggling details. But suffice to say the following. As in most other African countries, the region has a progressive tax structure on paper; the rich theoretically pay more tax than the poor. But in reality, tax collection averages 36%. This low tax collection is limiting sufficient government spending on the universal public services.

On labour rights, most workers are not enjoying the existing labour rights like the minimum wage, paid parental leave, sick pay, unionisations etc. In five countries where about 63% of the SADC population resides, more than 80% of the population is in precarious employment. Only the wealthier and less populous Mauritius and Seychelles have more than 80% of the workers enjoying labour rights. 

COVID-19 has hit the SADC region the hardest in Africa

As we have seen above, most of the population went into the pandemic with very weak coping mechanisms, while governments' purses were slimmer preventing them from responding sufficiently to the pandemic. The region has been severely hit by the health and the economic twin impacts of the pandemic. 

Start with the health impact. Most countries have had to deal with surging Covid-19 cases and deadly variants, especially in 2021. By official count, SADC accounts for a little more than half of all COVID-9 deaths in Africa despite having 26% of the African population. South Africa alone accounts for 40% of the total COVID-19 deaths in Africa. And even that is hugely an undercount. COVID-19 related deaths in SADC countries could be five times higher than officially reported, according to a tally based on The Economist COVID-19 excess deaths estimates. 

Global vaccine inequality experienced especially in 2021 meant that just 19% of the population had been fully vaccinated by 7 May 2022, with four countries vaccinating well below 10%. 

Economically, the pandemic has taken a heavy toll on the region. About 35.5 million jobs are estimated to have been lost in 2020 alone, according to one study. Due to a lower-than-expected economic growth, SADC member states lost about $80bn in 2020. Governments increased spending on health and social safety nets to protect the most vulnerable and businesses from the worst of the pandemic, spending 4.6% of GDP on average. But due to a tight fiscal environment, these interventions were inadequate and temporally. 

Pandemic accelerated debt distress, now being worsened by the hike in interest rates and elevated risk levels

Increased pandemic spending and reduced tax revenue have in turn led to elevated levels of the debt crisis. In four countries (Angola, Mozambique, Zambia, and Seychelles), public debt is larger than their economies. Debt service, which averages 42.2% of tax revenue, is hamstringing investment in the pro-poor sectors of the economy. Zambia, which defaulted in 2020 and Mozambique which is in debt distress, are some of the worst hit countries.

Debt servicing is also set to increase, due to the triple impacts of increased interest rates, weakening local currencies and high risk of possible defaults all driving up the cost of borrowing and servicing existing debts.  

The poor will suffer the most as governments move to cut public spending 

Finding themselves between a rock and a hard place with a reduced revenue on one side and high debts and fiscal deficit on the other, most countries in the region plan to cut their public spending massively. All countries except three (DRC, South Africa and Zimbabwe) will cut their public expenditure cumulatively by nearly $30bn for the five years to 2026. This will certainly come at a cost to the most vulnerable population who rely on public services like health and education, and will have a disastrous impact on inequality.

With a decisive and realistic plan, SADC countries can tackle inequality and achieve SDGs

But all is not lost. The report offers a set of practical recommendations that the governments, SADC and the international community could take to tackle inequality and achieve SDGs.  Governments need to set clear targets to reduce inequality levels, with timebound plans to reach these targets.  To do this governments should prioritize investment in universal quality public services including health, education and social protection, and small-scale agriculture, raise taxes progressively by taxing more those who can afford to pay, strengthen accountability, and fight embezzlement of public funds. And as most of the countries in the region are resource-rich, appropriate policy and governance measures should be taken to ensure that the extractive sector contributes to social development both at the national and local levels. 

On their part, the international community should help in addressing the debt situation including through debt cancellation, ensuring the participation of all creditors, public and private, between 2020 and 2022 to free up the government’s budget for spending in pro-poor sectors. In addition, we need to see more aid to the region and the rechannelling of the Special Drawing Rights (SDRs) to the countries most in need. Finally, SADC should prioritize and support its member states in policy formulation on tackling inequality.

Anthony Kamande is the inequality research coordinator at Oxfam International, Twitter @Tonywamuya..