With the IMF and World Bank spring conference approaching, research underlines need to bail out world’s poorest countries.For more than two years the World Bank and the International Monetary Fund have warned that sub-Saharan Africa stands on the verge of a debt crisis. Ever since commodity prices began to fall in 2015, the public finances of nations stretching from Nigeria to Kenya and Chad to South Africa have deteriorated. If China is the manufacturing centre of the world, Africa is its chief supplier of essential materials, from oil and copper to the rare-earth minerals used in mobile phones. As China’s manufacturing waned in the middle of the last decade, so did the crucial foreign earnings that keep African nations afloat.
Making matters worse, an investment binge to build much-needed infrastructure left the continent with spiralling debt costs. The high rate of interest that sub-Saharan governments pay on their debts means that the cumulative stock of loans can be modest in relation to national income but still be unaffordable.
This week, with the Covid-19 pandemic starting to have an impact on the African continent, senior officials at the IMF, the G20 and the World Bank will meet online for their spring conferences. To help them review the situation, research conducted by King’s College London and the Australian National University for the aid charity Oxfam found that more than half a billion more people could be pushed into poverty unless urgent action is taken to bail out the world’s poorest countries.
Oxfam said the impact of shutting down economies to prevent the virus spreading would wreck vital industries and risked setting back the fight against poverty in sub-Saharan Africa by up to 30 years.If those governments attempt to intervene, as developed-world governments have, to support industries and communities suffering a sudden loss of income, then their public debts will soar and the world financial system will ultimately be threatened by debt defaults.
Health systems in Africa are expected to be overwhelmed and what welfare systems that are in place will buckle under the strain. Even better-equipped systems in China, the US, UK and much of Europe have struggled to cope. For this reason, whichever way they turn, sub-Saharan governments are threatened by a financial collapse. Aid charities have already called for the IMF and World Bank to engineer a debt write-off to prevent such a situation arising. So far, the answer has been extra loans, albeit at low or zero interest rates, to bridge funding gaps in healthcare provision expected once the virus begins to make inroads.
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One of the reasons for resisting write-offs can be found in the way debts have built up over the past 15 years. Almost from the moment the G7 wrote off a large slice of developing-world debt at the Gleneagles conference in 2005, African nations have allowed their debt-to-GDP ratios to inch upwards. Encouraged by the World Bank, they have sought loans from major commercial banks and the bond markets.
In the past six or seven years, the emphasis has switched to borrowing from China, in part to benefit from “free” advice on infrastructure projects, built by Chinese contractors. So a debt write-off by international public bodies like the IMF merely allows developing-world countries to keep paying their exorbitant private-sector debt bills and Chinese-backed development loans.
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Another barrier is the lack, with a few exceptions, of any transformation in the governance of sub-Saharan states, despite 20 years of solid (albeit debt-fuelled) growth. Many of the executives in aid agencies involved in debt relief make the point that corruption remains rife and inequality has increased, aided by developed-world lawyers, accountants and bankers who help African oligarchs stash their gains overseas tax-free. Then there are the pre-colonial tribes and nations, which cut across today’s borders and remain strong. They prevent post-colonial nations from developing strong governance and tackling corruption.
A repeat of the Gleneagles deal is difficult when so little appears to have changed in the meantime. Fatigue among donors, and a sense that money hasn’t solved much so far, add to a sense of despair and fuel inaction. Yet, this is not a time for considering the moral hazards. The G20 must act quickly, even out of self-interest. This is an interconnected world, and debts rebound if they are not dealt with as part of a programme that maintains confidence in the financial system.
To wait for another debt default in sub-Saharan Africa will serve no one’s purpose. A rescue should be put in place now, before Oxfam’s dire predictions become reality.
Kelechi Deca
Kelechi Deca has over two decades of media experience, he has traveled to over 77 countries reporting on multilateral development institutions, international business, trade, travels, culture, and diplomacy. He is also a petrol head with in-depth knowledge of automobiles and the auto industry