As debt swells weigh on global economic growth, experts warn that Sub-Saharan Africa, where many countries are defaulting, is experiencing its worst crisis on record.
High interest rates and excessive leverage reduce countries’ ability to finance their development, as a number of African leaders stressed in their speeches at the World Economic Forum in Davos.
Origins of the crisis
In the wake of the global economic crisis of 2007-2009, central banks in industrialized countries generally kept interest rates low, and countries of the Global South, which were mostly borrowing bilaterally or from international financial institutions, were given unprecedented access to financial markets.
Kenyan economist Atiya Waris, who also works as an independent expert at the United Nations, said, “Many developing countries that were in dire need of pumping money into their economies quickly used these low-cost loans, in markets that are not subject to rules or regulation.”
She added, according to Agence France-Presse, that the International Monetary Fund encouraged her to do so. This money helped give a much-needed boost to many African economies. But countries that depend on exporting raw materials such as oil, metals and wood came under severe pressure when commodity prices began to fall in 2015, and then the Covid pandemic worsened the situation.
The decline in commodity prices has reduced the foreign exchange revenues these countries need to service their loans. Many countries obtained new loans to pay off their old debts, which plunged them into a debt spiral that prevented investment in infrastructure, health systems, and education.
The World Bank estimated last year that 22 countries were at risk of over-indebtedness, including Ghana and Zambia, which defaulted on their foreign debt.
The list also includes Malawi and Chad, which have an assistance program from the International Monetary Fund. Ethiopia, whose credit rating agency Fitch declared partial bankruptcy in December, is negotiating a rescue package.
Creditors block deals
In 2022, African public debt will reach $1.8 trillion, registering a 183 percent jump over 2010, after growing at a rate 4 times more than economic output, according to United Nations figures.
Western public creditors in the G20 and many partners are seeking to reach a restructuring of the debts of 40 African countries. Among them is China, which is accused of providing soft loans for infrastructure projects, which these countries cannot repay.
These debt deals were built on the principle of equal treatment and participation of all creditors. But it is difficult for African countries to conclude agreements, because private lenders often reject the terms.
In recent years, private investors – including investment and pension funds – have become the largest creditors of African countries.
In 2022, they owned 42 percent of Africa’s external public debt, compared to 38 percent for multilateral institutions, such as the International Monetary Fund and the World Bank, and 20 percent for other countries.
Of the 20 percent owned by other countries, China was Africa’s largest lender, and alone owned 11 percent.
“China is often presented as the bad guy, but it has realized the importance of providing a breath of air to countries suffering from debt,” said Mathieu Paris, coordinator of the French Debt and Development Programme, which brings together more than 20 civic groups to push for sustainable debt restructuring. Deep problems, and she is now participating in the effort, even if it takes some time.”
It is useful here to look at the case of Zambia. After two years of difficult negotiations, in June 2023, it reached an agreement presented as “historic” to restructure its debts. But it concerns only $6.3 billion of its external debt, which amounts to $18.6 billion.
Worse still, it will only come into effect if private lenders agree to similar terms, while US asset manager BlackRock, a major holder of the private debt borrowed by Zambia, has refused.
Economist Waris said: “BlackRock has obstructed the entire negotiation process” for Zambia.
Inflation and poverty
Ghanaian economist Charles Abugre said, according to Agence France-Presse, that with the increase in interest rates burdening the suffering due to accumulated debt, “African countries are witnessing serious fluctuations in currency rates while inflation continues to increase.”
He added, “The daily impact is tragic for the poor. We are witnessing inflation in transportation, food, and housing costs, while real wages are stagnant.”
Amin Idris Adom, a senior director at the African Union Development Agency, said: “The real issue now is not knowing how to get out of debt, but rather how to borrow intelligently.” While debt restructuring is important, “it should not be done at the expense of investment in infrastructure, health and energy” to support the development of economies and societies.
2024-01-21 05:03:49
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