Africa's "Western" Debt Crisis
African debt crisis system rigged, SWIFT transition to BRICS+ pay, Africa debt crisis originates in the “West”, Africa's US$824 billion debt burden,
African debt crisis system rigged
By Carlos Lopes
The debt situation in many African countries has escalated again to a critical juncture. Twenty are in, or at risk of, debt distress.
Three pivotal elements significantly contribute to this.
Firstly, the rules governing the international banking system favour developed countries and work against the interests of African countries.
Secondly, multilateral financial institutions such as the International Monetary Fund (IMF) and the World Bank focus on poverty alleviation. This is commendable. But it doesn’t address the liquidity crisis countries face. Many don’t have the necessary readily available funds in their coffers to cover urgent development priorities due to their dependency on volatile commodity exports. As a result governments turn to raising sovereign debt under conditions that are among the most unfavourable on the planet.
This perpetuates a debt dependency cycle rather than fostering sustainable economic growth.
Thirdly, there’s the significant influence of biased credit rating agencies. These unfairly penalise African countries. In turn, this impedes their ability to attract investment on favourable terms.
The convergence of these three factors underscores the imperative to implement effective strategies aimed at mitigating the overwhelming debt burden afflicting African nations. These strategies must address the immediate financial challenges facing countries. They must also lay the groundwork for long-term economic sustainability and equitable development across the continent.
By tackling these issues head-on, a financial environment can be created that fosters growth, empowers local economies, and ensures that African countries have access to the resources they need to thrive.
Rules of the banking game
The Bank for International Settlements is often called the “central bank for central banks”. It sets the regulations and standards for the global banking system.
But its rules disproportionately favour developed economies, leading to unfavourable conditions for African countries. For instance, capital adequacy requirements – the amount of money banks must hold in relation to their assets – and other prudential rules may be disproportionately stringent for African markets. This limits lending to stimulate economic growth in less attractive economies.
The bank’s policies also often overlook developing nations’ unique challenges.
Following the 2008/2009 financial crisis, the bank introduced a new, tougher set of regulations. Their complexity and stringent requirements have inadvertently accelerated the withdrawal of international banks from Africa.
They have also made it increasingly difficult for global banks to operate profitably in African markets. As a result, many have chosen to scale back their operations, or exit. The withdrawals have reduced competition within the banking sector, limited access to credit for businesses and individuals, and hampered efforts to promote economic growth and development.
The limitations of the new regulations highlight the need for a more nuanced approach to banking regulation. The adverse effects could be mitigated by simplifying the regulations. For example, requirements could be tailored to the specific needs of African economies, and supporting local banks.
Focus on poverty alleviation
Multilateral financial institutions like the IMF and the World Bank play a crucial role in providing financial assistance to many countries on the continent. But their emphasis on poverty alleviation and, more recently, climate finance often overlooks the urgent spending needs.
Additionally, the liquidity squeeze facing countries further limits their capacity to prioritise essential expenditure.
Wealthy nations enjoy the luxury of lenient regulatory frameworks and ample fiscal space. For their part African countries are left to fend for themselves in an environment rife with predatory lending practices and exploitative economic policies.
Among these are sweetheart tax deals which often involving tax exemptions. In addition, illicit financial practices by multinational corporations drain countries of their limited resources.
Research by The ONE Campaign found that financial transfers to developing nations plummeted from a peak of US$225 billion in 2014 to just US$51 billion in 2022, the latest year for which data is available. These flows are projected to diminish further.
Alarmingly, the ONE Campaign report stated that more than one in five emerging markets and developing countries allocated more resources to debt servicing in 2022 than they received in external financing. Aid donors have been touting record global aid figures. But nearly one in five aid dollars was directed towards domestic spending hosting migrants or supporting Ukraine. Aid to Africa has stagnated.
This leaves African countries looking for any opportunities to access liquidity, which makes them a prey of debt scavengers. As noted by Columbia University professor José Antonio Ocampo, the Paris Club, the oldest debt-restructuring mechanism still in operation, exclusively addresses sovereign debt owed to its 22 members, primarily OECD countries.
With these limited attempts to address a significant structural problem of pervasive indebtedness it is unfair to stigmatise Africa as if it contracted debt because of its performance or bad management.
Rating agencies
Rating agencies wield significant influence in the global financial landscape. They shape investor sentiment and determine countries’ borrowing costs.
However, their assessments are often marked by bias. This is particularly evident in their treatment of African countries.
African nations argue that without bias, they should receive higher ratings and lower borrowing costs. In turn this would mean brighter economic prospects as there is a positive correlation between financial development and credit ratings.
However, the subjective nature of the assessment system inflates the perception of investment risk in Africa beyond the actual risk of default. This increases the cost of credit.
Some countries have contested ratings. For instance, Zambia rejected Moody’s downgrade in 2015, Namibia appealed a junk status downgrade in 2017 and Tanzania appealed against inaccurate ratings in 2018. Ghana contested ratings by Fitch and Moody’s in 2022, arguing they did not reflect the country’s risk factors.
Nigeria and Kenya rejected Moody’s rating downgrades. Both cited a lack of understanding of the domestic environment by rating agencies. They asserted that their fiscal situations and debt were less dire than estimated by Moody’s.
Recent arguments from the Economic Commission for Africa and the African Peer Review Mechanism highlight deteriorating sovereign credit ratings in Africa despite some posting growth patterns above 5% for sustained periods. Their joint report identifies challenges during the rating agencies’ reviews. This includes errors in publishing ratings and commentaries and the location of analysts outside Africa to circumvent regulatory compliance, fees and tax obligations.
A recent UNDP report illuminates a staggering reality: African nations would gain a significant boost in sovereign credit financing if credit ratings were grounded more in economic fundamentals and less in subjective assessments.
According to the report’s findings, African countries could access an additional US$31 billion in new financing while saving nearly US$14.2 billion in total interest costs.
These figures might seem modest in the eyes of large investment firms. But they hold immense significance for African economies. If credit ratings accurately reflected economic realities, the 13 countries studied could unlock an extra US$45 billion in funds. This is equivalent to the entire net official development assistance received by sub-Saharan Africa in 2021.
These figures underscore the urgent need to address the systemic biases plaguing credit rating assessments in Africa.
Next steps
Debates about Africa’s debt crisis often lean towards solutions centred on compensation. These advocate for increased official development aid, more generous climate finance measures, or the reduction of borrowing costs through hybrid arrangements backed by international financial systems.
These measures may offer temporary relief. But they need to be more genuine solutions in light of the three structural challenges facing African countries.
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Africa debt crisis originates in the “West”
By SCMP (Repost from July 2022)
African countries owe three times more debt to Western banks, asset managers and oil traders than to China, and are charged double the interest, according to a study released on Monday by British campaign charity Debt Justice.
This is despite the growing accusations by the US and other Western countries that China's lending is behind the debt troubles faced by some African countries.
The study said just 12 per cent of the continent's external debt was owed to Chinese lenders, compared to 35 per cent owed to Western private creditors, according to calculations based on World Bank data.
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Interest rates charged on private loans were almost double those on Chinese loans, while the most indebted countries were less likely to have their debt dominated by China, the study found. The average interest rate on private sector loans is 5 per cent, compared to 2.7 per cent on loans from Chinese public and private lenders.
The study was released ahead of the G20 finance ministers meeting from July 15-16 in Indonesia. Campaigners are calling on Western countries, particularly Britain and the US, to compel private lenders to take part in the Common Framework - the G20's latest debt relief scheme.
The study found a dozen of the 22 African countries with the highest debts were paying more than 30 per cent of their total external repayments to private lenders. These included Cabo Verde, Chad, Egypt, Gabon, Malawi, Morocco, Rwanda, Senegal, Tunisia and Zambia.
South Sudan is one of the hardest hit in this category, with 81 per cent of its debt repayments going to private creditors, and just 11 per cent to China. Ghana is also paying more than half of its external debt obligations to the private sector, with 11 per cent going to China and the rest to multilateral lenders and other governments.
Chinese lenders accounted for more than 30 per cent of loan payments in six of the 22 most indebted countries - Angola, Cameroon, Republic of the Congo, Djibouti, Ethiopia and Zambia.
The study calculations showed 59 per cent of Angola's foreign debt payments serviced Chinese lenders. And Djibouti - where China has poured billions of dollars into building ports and free trade zones, and also set up its first overseas military base - makes 64 per cent of its external debt payments to Beijing.
Debt Justice policy head Tim Jones said Western leaders blamed China for debt crises in Africa, "but this is a distraction".
"The truth is their own banks, asset managers and oil traders are far more responsible but the G7 are letting them off the hook."
Jones said China had taken part in the G20's Debt Service Suspension Initiative during the pandemic, while private lenders did not. "There can be no effective debt solution without the involvement of private lenders. The UK and US should introduce legislation to compel private lenders to take part in debt relief," he said.
The G20 initiative, unveiled in May 2020, provided 48 economies with temporary cash-flow relief, delivering about US$12.9 billion in debt service payments by the end of December when it ended.
But the exclusion of private and multilateral lenders meant countries that applied to take part in the initiative saw just 23 per cent of their external repayments suspended.
In 2020, Zambia became - on US$3 billion in dollar-denominated bonds - in the pandemic era. It is now in the process of restructuring about US$17 billion in external debt as a precondition to securing IMF loans of US$1.4 billion.
Lusaka owes Chinese lenders about US$6 billion, which has gone into building mega projects including airports, highways and power dams.
The initiative's replacement, the G20 Common Framework, allows participating countries to agree to restructure debt with bilateral lenders and the International Monetary Fund (IMF). The nations are then supposed to seek similar debt treatment from private sector creditors.
Only Chad, Zambia and Ethiopia have so far applied for help through the Common Framework, but all are still waiting for debt relief.
The G7 countries have blamed China for the failure of the debt relief programme to help heavily indebted countries avoid default, doubling down in May with a statement from the finance ministers of the world's seven most advanced economies.
"With regards to the implementation of the Common Framework, it remains essential that all relevant creditor countries - including non-Paris Club countries, such as those like China, with large outstanding claims on low-income countries facing debt sustainability challenges - contribute constructively to the necessary debt treatments as requested," they said.
Yungong Theo Jong, head of programmes at the African Forum and Network on Debt and Development (Afrodad), said multilateral and private lenders remained the biggest creditors to African governments.
"Loans from China have increased Africa's indebtedness, but by far less than Western lenders. All lenders must participate in debt relief. Western governments must lead the way by making private lenders cancel debts," he said.
This article originally appeared in the , the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the or visit the SCMP's and pages. Copyright © 2022 South China Morning Post Publishers Ltd. All rights reserved.
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Africa's US$824 billion debt burden
By Dr Akinwumi Adesina (African Development Bank)
Africa's immense economic potential is being undermined by non-transparent resource-backed loans that complicate debt resolution and compromise countries' future growth, African Development Bank President Akinwumi Adesina said on Thursday.
"I think it's time for us to have debt transparency accountability and make sure that this whole thing of these opaque natural resource-backed loans actually ends, because it complicates the debt issue and the debt resolution issue," Adesina told journalist Yinka Adegoke at the Semafor World Economy Summit taking place on the sidelines of the International Monetary Fund and World Bank2024 Spring Meetings.
Adesina highlighted the challenges posed by Africa's ballooning external debt, which reached $824 billion in 2021, with countries dedicating 65% of their GDP to servicing these obligations. He said the continent would pay $74 billion in debt service payments this year alone, a sharp increase from $17 billion in 2010.
While acknowledging the fiscal pressures faced by African nations due to the Covid-19 pandemic, infrastructure needs, and rising inflation, Adesina emphasised the need to address the structural issues in Africa's debt landscape. He pointed out the shift from concessional financing to more expensive and short-term commercial debt, with Eurobond debt now accounting for 44% of Africa's total debt, up from 14-17% previously.
He also criticized the "Africa premium" that countries pay when accessing capital markets, despite data showing that Africa's default rates are lower than those of other regions. He called for an end to this risk perception, which he said leads to higher borrowing costs for African nations.
The African Development Bank head stressed the importance of putting in place an orderly and predictable way of dealing with Africa's debt, urging for faster implementation of the G20 Common Framework.
He also highlighted the need for increased concessional financing, particularly for low-income countries. “What's particularly interesting in Africa is that the level of concessional financing itself has actually gone down, has shrunk significantly,” he said, adding that the African Development Fund—the Bank Group’s concessional lending arm to low-income countries—is providing long-term financing at low interest rates to the 37 most vulnerable countries.
Adesina discussed various instruments and initiatives employed by the African Development Bank to de-risk projects and attract institutional investors, such as partial credit guarantees, hybrid capital, and synthetic securitisation.
Looking ahead, Adesina expressed optimism about the opportunities in Africa, particularly in renewable energy, given the continent's vast solar potential. He also highlighted the Africa Investment Forum, a platform created by the Bank and its partners, that brings together investors from around the world to facilitate large-scale investments in key sectors like infrastructure, digital, and renewable energy.
"Africa is the best investment destination in the world," Adesina concluded, emphasizing the African Development Bank's commitment to creating an enabling environment for investments to thrive.
The Semafor summit session —titled “Rising Global Middle Class: Is Rising Developing Nation Debt a Blessing or a Curse?”—brought together a range of participants for conversations on the increasing debt burden faced by developing countries as borrowing costs have risen.
Other notable participants included Xavier Becerra, U.S. Secretary of Health and Human Services; Raj Shah, President of the Rockefeller Foundation; Andrew Steer, President and CEO of the Bezos Earth Fund; and Brent Neiman Assistant Secretary for International Finance, U.S. Treasury.
Shah emphasised the importance of balancing developing countries economic needs with the need for climate action. He said that to assist the South African government in efforts to decommission the country’s coal-fired Komati power station, the Rockefeller Foundation, through the Global Energy Alliance for People and Planet, had developed a plan that would retrain workers at the plant while also creating new jobs and upgrading transmission infrastructure so that renewable energy could empower local businesses. “It's an unrealistic conversation to just ask people to shut down their only real source of prosperity and cause job losses," Shah said.
Neiman addressed the U.S government’s efforts to assist African countries in reducing debt loads. He noted that Côte d'Ivoire, Benin, and Kenya, had issued almost $5 billion in bonds since the beginning of 2024, at interest rates ranging from 8 to 10 percent. He said this was evidence that emerging economies remain able to tap capital markets. He also cited the Global Sovereign Debt Roundtable as instrumental in bringing together creditors and debtors to tackle rising debt burdens in developing countries.
Adesina is in Washington to attend the 2024 International Monetary Fund/World Bank Spring Meetings.
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