Halting the spawn of foreign debt

Indebted countries that receive a debt relief continue to return to square one, a poignant lesson in the history of debt that should encourage progressive economic solutions to indebtedness presented in this contribution by economist Fanwell Bokosi

Photo: iStockphoto by mattjeacock

African countries debt indicators are reaching thresholds that are not sustainable, where the ratio between external debt to Gross Domestic Product (GDP) is 90 per cent, despite having large share of their debts written down under the World Bank/International Monetary Fund debt relief programmes, the Heavily Indebted Poor Countries (HIPC) Initiative of 1999 and Multilateral Debt Relief Initiative (MDRI) of 2005.

According to the IMF list of Debt Sustainability Analysis (link in English), 11 African countries are already in debt distress or at high risk of debt distress. These are Burundi, Cameroon, Carpe Verde, Central African Republic, Chad, Djibouti, Ghana, Mauritania, Sao Tome and Principe, while Sudan and Zimbabwe are already in debt distress. The fall in commodity export prices, the devaluation of the local currencies against the US dollar and revelations about previously hidden debts have led to a significant increase in external debt in many of these countries.

During the G20 Summit in Hamburg, representatives from indebted countries discussed with G20 members how to deal with debt crisis. At the event “Let’s talk: Debt20 meets G20” partners from critically indebted countries together with the Alliance for debt relief erlassjahr.de/Jubilee Germany, Bread for the World, Friedrich-Ebert-Stiftung (FES) and World Economy, Ecology and Development (WEED) discussed possible solutions on how future debt crisis can be resolved in a quick and efficient manner.

FES Connect reached to one of the events participants, Fanwell Bokosi, executive director of the African Forum and Network on Debt and Development (AFRODAD) who together with the AFRODAD team regularly contributes to the Sustainable Economics Forum—a policy dialogue platform organized by Friedrich-Ebert-Stiftung in Zimbabwe for young progressive economists and socio-economic rights activists. In this contribution for FES Connect, Bokosi summarizes five factors behind the rising foreign debt crisis and steps to overcome it.

What lies beneath the rising and emerging debt crises

Rise in commercial loans
Bond issuances have been rising in countries such as Mozambique, Zambia, Kenya, Côte d’Ivoire, South Africa, Senegal, Ethiopia and Ghana. Mozambique has over 2.32 billion US dollars of new commercial debt to pay back after the country`s latest default on commercial loans worth 2 billion US dollars. This current Mozambican case reveals how easily the new development finance paradigm, centred on private capital, can be disastrous.

Eligibility after Debt Relief
After receiving debt relief African countries found themselves eligible to borrow on the international capital markets. Between 2005 and 2015, countries such as Angola, Ghana, Kenya Carpe Verde, Rwanda, Kenya, and Zambia have witnessed a threefold increase in their debt levels, as a result of “bond issuances”. Given that the wealthy industrialized countries, interest rates were very low, but in Africa investors can fetch returns of between 7 and 15 per cent. This leads to large capital flows from the North to the South. The low interest rates encourage countries to take out big loans which they are now have difficulty paying back, in countries such as Mozambique, Senegal, Gambia, Ghana, and Zambia.

The balance of payment situation has become precarious because of the commodity prices fall
This leads to a subsequent decline in tax revenue in economies that are dependent on export of natural resources such as oil and natural gas, or raw mineral materials.

Slump in commodity prices
Since 2014, commodity prices (minerals, oil and gas) have fallen significantly. For countries, such as Angola, Zimbabwe, Zambia, and Democratic Republic of Congo, the loss of expected export income has caused currency devaluations and increased the relative cost of debt in foreign currencies. There is vulnerability to currency risk increases if the borrowing country is dependent on the exports of on commodities for revenue and foreign exchange.

Budget deficits against slowing economic growth
Unsustainable increases in government expenditure are getting quite common in African states, with some spending being non-investment driven. The budget deficits should not go beyond the real GDP growths to enable them to be sustainable.

Steps to overcome the current and future debt crises being implemented or that await

Setting clear priorities in loan contraction
Both borrowers and lenders, public and private, should comply with responsible lending and borrowing principles. Since international bonds can prove to be more costly in the face of currency depreciation, countries should try and go for concessional loans to finance infrastructure development.

Developing and maintaining strong institutions to control spending manage debt and maximise domestic revenue collection
This will go a long way in curbing against financial mismanagement and creating certainty that loan issues earmarked for infrastructure are not utilised used for general budgetary purposes. Countries such as Botswana conduct feasibility studies to evaluate proposed loans with a proper cost-benefit analysis of the projects to be undertaken and analyse whether the benefits will service the debt.

Parliamentary oversight
State legislators need to exercise vigorous oversight and demand transparency about debt terms and spending plans such as in Tanzania through the Public Affairs and Budget Committees. The parliaments, together with the media and civil society can scrutinise loans in borrowing countries before they are signed.

Domestic resource mobilisation, through increasing efficiency in tax collection
Tax collections needs to be maximised, particularly in countries with high budget deficits. If such countries manage to increase their tax-to-GDP ratio then they would not necessarily need to borrow heavily on international markets.

Establish new debt restructuring mechanism
The lack of an international debt restructuring mechanism for sovereign debtors is a severe gap in the international financial architecture. A fair and orderly mechanism could prevent debt crises by addressing unsustainable debt situations early, or at least mitigate the damage done when debt crises are addressed late. It is critical to halting predatory creditor behaviour, preventing crises, promoting stability in the financial system, reducing debt burdens, and encouraging responsible lending and borrowing.

Enacting responsible lending and borrowing in the financial system
Responsible lending and borrowing principles prevent future debt crises and increase transparency and accountability, allowing citizens to be involved in economic decisions that impact their lives. If we are to prevent reckless lending and borrowing from fuelling debt crises and poverty, then it is clear that a step-change is required in the standards that both creditors and borrowers must follow, and how these are implemented.

Raising revenue and curbing tax avoidance and evasion
Developing countries lose very significant tax revenues, running into hundreds of billions of dollars per year, due to failings of the international system.

This happens for three main reasons:

  • International tax avoidance, where multinationals subvert the spirit, if not always the letter, of the law to avoid tax. International Monetary Fund (IMF) researchers estimate that developing countries lose more than 200 billion US dollars per year (link in English);
  • International tax wars, which describes the harmful competition between countries to capture private investment, by reducing tax rates, offering incentives or negotiating unfair treaties resulting in sub-optimal outcomes;
  • International tax evasion. This includes that motivating or resulting from illicit financial flows (IFFs), though there are, as yet, no estimates of the tax lost to IFFs. Poor countries lose 170 billion US dollars in tax revenues every year because of tax havens (link in English).

Fanwell Kenala Bokosi is the Executive Director of the African Forum and Network on Debt and Development (AFRODAD).

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