The dependency conceptual debate and African underdevelopment historiography cannot be punditry dealt with without discourses on third world’s debt, debt crisis and debt relief. If there was any major factor that instigated stunted growth for Africa it was first the issue of debt and debt crisis. It suffices to recall the imposition of $59 billion external debt contracted by the hitherto colonial powers and bequeathed to the newly independent states through the decolonising and revolutionary processes of Africa. Africa was left with the burden of debt and debt servicing at a time it was struggling to start from the scratch in 1960. This subsequently precipitated the African debt crisis. In southern Africa, for example, the apartheid regime borrowed $18 billion specifically to maintain the apartheid system, and the neighbouring of South Africa borrowed $28 billion due to apartheid destabilisation and aggression.
The issue of debt relief emanates from the conditions that the debtor states can neither pay nor even service the debt due to economic incongruities. Consequently, the creditor states intervene to assuage the situation as usually requested by the debtor state. Debt relief might also come as a result of rewarding the debtor state for being compliant and or still needed strategically by the creditor state. In 1982’s Latin American debt crisis, for example, the approach of debt relief was used to address the debt overhang of developing countries. This approach was then applied in the handling of debt crisis in African countries. Major measures include traditional debt relief practices, the Heavily Indebted Poor Countries Initiative (HIPC), the Multilateral Debt Relief Initiative (MDRI) and the G20’s Debt Service Suspension Initiative (DSSI) of 2020. These debt relief mechanisms are mainly carried out under the guidance of Western creditor countries and Western-led international financial institutions.
Since the late 1950s and early 1960s when African nations began to earn independence, African relations with the colonial powers have not been favourable to Africa and other third world nations. This is largely because policies have been detrimental and debt relief mechanisms only perpetuate African over-dependence on the West. The major reason is that African countries often fall into the structural financial power of the West which perpetually benefits the West at the detriment of Africa. This has created unprecedented poverty level, unemployment, homelessness, and made the education system appalling. In terms of the participation of the G20 DSSI, as of December 2021, 25 of 73 countries eligible for debt suspension explicitly refused to join the Initiative as they perceived it dangerous to the survival of their economies and began to think inward or by cautiously selecting their partners now such as China, with whom they share win-win cooperation, mutual trust and respect to mutual sovereignty. This shows that it is still controversial whether the G20’s DSSI can fundamentally and truly solve the debt problems of African countries. The reasons for refusing to join the Initiative may lie in the strengthening of African countries’ financial awareness and may also be out of the need to maintain their credit rating, to reject international financial institutions’ sovereign debt relief conditions on their domestic politics and economy, to reduce their financing dependence on multilateral financial institutions, to balance the growth of official financing and market financing, and to maintain sovereign independence through sustainable and responsible development of sovereign debt.
It is against all odds that debt relief has become an issue of great concern not only the impact of debt crisis on developing nations. It is also pertinent to have an eagle view into the theory of debt overhang and Debt Laffer Curve, which explains the push and pull syndrome of debt relief. When a country’s debt burden is too heavy to be repaid in the normal way, the debt will dampen investment and increase uncertainties, thus hindering the country’s economic development. This is apparently hinged on the North-South relations, where Africa has not been able to pay off its debt, it is rather still servicing debt and getting more trapped by the creditors. China, for example, supports African development initiative and has been supporting Africa differently for real development to take place through the Forum on China-Africa Cooperation. Direct relief of debt burden can lift its dampening effect on investment and reduce uncertainties about future prospect caused by debt overhang, thus stimulating investment. The G8 Summit in 2005, for example, had put forward the Multilateral Debt Relief Initiative, which cancelled 100% of the qualified multilateral debts owed to the IDA, IMF and African Development Fund. In 2007, the Inter-American Development Bank also took part and offered 100% debt cancellation to five heavily indebted poor countries in Latin America.
Albeit, we cannot completely condemn debt relief, it is not always good for African nations especially as carried out by the advanced societies of Europe and America either by bilateral, multilateral or institutional creditors. It is conspicuous that debt relief can improve the overall balance of payments of debtor countries by reducing their external debt stock, alleviate the pressure of external debt and fiscal expenditure, to an extent. It therefore helps create an enabling external environment for debtor countries to adopt a more proactive fiscal policy in an effort to expand domestic demand for better development of their economies. The relationship between countries of the North and south is primarily exploitative and oppressive. Hiding under the guise of debt relief to further extort African countries is a strategic move for neocolonial consolidation where the rich gets richer and the poor gets poorer. Despite the creative steps in HIPC on traditional debt relief mechanisms, some low-income African countries still face a high debt burden in practice. It might be the case that, after debt relief, concessional refinancing from multilateral lenders does not bring down the debt stock of low-income African countries. Instead, multilateral debt makes up a larger proportion of total debt. Most of the debt relief schemes address only the symptoms not the root cause.
Covertly or overtly, the international creditors have been trying to provide debt relief to nations in need. What is significant in our foregoing discussion is that, debt and debt relief are not always good to poor nations. The G20, a combination of developed and developing economies, has been trying to ease debt crisis among poor nations, but the felt impact by the poor nations especially Africa and Latin America is too severe. For example, the Paris Club, G20 finance ministers and central bank governors agreed on the DSSI in April 2020, where bilateral official creditors agreed to, during a limited period, suspend debt service payments from the poorest countries (73 low- and lower middle-income countries) that request the suspension. Afterward, G20 bilateral official creditors agreed on three rounds of extension, with the final round extended through the end of December 2021. At the G20 meeting in November 2020, finance ministers and central bank governors approved the Common Framework for Debt Treatments beyond the DSSI to further assuage the negative impact of the COVID-19 on developing economies. At the meeting on April 8, 2021, G20 finance ministers and central bank governors announced that they would hold the “first meeting of the first creditor committee” and start negotiations on the debt reduction agreement under the Common Framework. By the end of December 2021, 48 of 73 countries eligible for debt relief had participated in the Initiative and the Common, Framework, and repayment of maturing debts to the tune of $12.9 billion had been suspended. However, there were still 25 countries that did not participate and the reasons for their non-participation should be looked into and analysed.
Developing countries always seek more creditors and lenders to deal with budget deficit and capital projects. Among the largest economies of Africa, Nigeria is one major debtor nation which always seek to accumulate more debt due to inefficiency in revenue generated or stolen due to corruption. This is also prevalent among other developing nations. Increasing number of African governments have been actively seeking new financing from private creditors. From 2000 to 2019, 18 African countries entering the international capital market for the first time issued 125 types of Eurobond, with a total value of more than $155 billion. According to the Signaling Theory, if a debtor country, in the international financial market, joins the DSSI or the Common Framework, it will trigger default clauses in the bond agreements. This, to some extent, mirrors the country’s debt predicament, and undermines its credit rating, thus affecting its market stability, leading to the outflow of foreign capital and currency depreciation, weighing on its future financing in the market and damaging its long-term development. To avoid credit rating downgrade, debtor countries will try to fulfill their debt service obligations. Therefore, in 2020, 50% of developing countries carried a high risk of debt distress due to the pandemic, yet by the end of December 2021, 25 debtor countries still indicated they would not participate in the DSSI, though 17 of them were already at a medium to high risk of external debt.
The predicament faced by developing nations is the enormity and gravity of external debt, which does not alleviate suffering even with the so called debt relief, conditions are usually imposed by the creditors for the third world nations to restructure their economies and sometimes with intervention in the political and socio-economic aspects of such societies. In September 1987, for example, IMF launched Special Program of Assistance (SPAs) for low-income countries facing debt difficulties in sub-Saharan Africa, which marked the first coordinated action of the international community on Africa’s prolonged debt problem. Among the six available financing channels, four involved structural adjustment, which means debtor countries must accept IMF’s structural adjustment program to receive preferential financing. Another example, under the HIPC, a comprehensive debt reduction mechanism of multilateral lenders, debtor countries that received debt reduction or exemption should have their policy reforms and structural adjustments/subject to monitoring by IMF and World Bank. There is even “Double Tying” in debt ‘relief, which means when a loan is issued, the creditor sets certain conditions, and when the loan repayment needs a relief, the creditor imposes additional conditions.
The debt crisis is still lingering in Africa as governments do not execute proper and adequate programs for sustainability but continue to subject their nations to perpetual debt engagements which jeopardise their economies and their leverage to pilot their socio-economic and political programs. It is notable that in September 2021, IMF had provided Africa with about $24 billion of funds, including $16.5 billion of emergency aid, and provided $596 million debt relief for 22 countries. Among the sovereign debts of African countries, the bilateral loans of official creditors have decreased, and the lending of multilateral institutions has once again become the mainstay of net financial flows. This is not good for Africa as corruption has continued to devour the borrowed money and the poor subsidising the rich.
The pedigree of the Bretton Woods monetary system was not to salvage the poor countries of Africa and Latin America from economic woes, but to correct the mishaps of the 1920s of Europe that affected the global economy. Internal contradictions of the poor nations such as embezzlement and corruption are some of the grave areas that perpetuate poverty and economic dependence on the west, becoming increasingly reliant on the financing supply of multilateral institutions, which enables developed countries to further entrench the unequal relationship between debtor and creditor countries in the international sovereign debt market through the sovereign credit rating system and the multilateral framework based on it. This might be the underlying reason why 25 debtor countries refused to participate in G20 debt relief programs.
China has been a true friend and partner, engaged in development cooperation with sister states in Africa and around the world. China builds infrastructure for development not giving cash to Africa, which ultimately mitigates the level of corrupt practices as the flow of cash has been reduced not to get into the hands of politicians who easily divert the cash. The centuries of relationship with the West has not been as good as the decades of relations with China. It is obvious that only China can competitively salvage the poor nations of Africa from the crisis of debt as it check-mates African leaders’ thirst for corruption and directly provide the desired infrastructure for development. This curtails perpetual indebtedness and subsequent debt servicing that calls for debt relief.
Ibrahim writes from Department of Political Science and International Relations, University of Abuja, Abuja-Nigeria via [email protected]