Africa's debt yoke

 

“The gods had condemned Sisyphus to ceaselessly rolling a rock to the top of a mountain, whence the stone would fall back of its own weight. […] Then Sisyphus watches the stone rush down in a few moments toward that lower world whence he will have to push it up again toward the summit. He goes back down to the plain.” *

This endless punishment of Sisyphus in ancient Greek mythology reminds us of the development endeavor of African countries and, as part of it, the spiral of foreign debt they are in.

African countries are now on the eve of a major debt crisis due to accumulating impact of the global pandemic and Russia’s invasion of Ukraine. However, this is not the first time they faced an immense debt burden. It was first piled up in the 1960s and 1970s in the ensuing two decades of their independence. The borrowings in this period were due to the global abundance of liquidity, as well as the deliberate effort to make African countries financially dependent on the Western bloc under the Cold War conditions. African countries did not see any harm in borrowing. The debt stocks were considered sustainable thanks to the high prices of raw materials produced and exported by African countries.

However, the oil crises of the 1970s turned this positive picture upside down. While commodity prices collapsed, interest rates rose due to the deflationary monetary politics of the USA. As a result, the foreign trade balances of African countries deteriorated, their sovereign debt stocks multiplied, and public finances collapsed. To overcome this multi-faceted economic crisis, the IMF and the World Bank imposed structural adjustment programs on African countries under harsh conditions. Yet, these programs caused a new wave of borrowing in the late 1980s and 1990s. 

Finally, thanks to the pressure from civil society, the external debt stock of 35 Sub-Saharan African countries, reaching up to 100 billion dollars, was canceled in the framework of the Heavily Indebted Poor Countries (1996) and the Multilateral Debt Relief Initiative (2005). The positive impact of these initiatives, though, did not last long. The average debt stock of African countries swelled almost 10% annually after its lowest point in 2006. The accumulation in this period is attributed mainly to the low global interest rates, high commodity prices, and China’s entering into the global financial market as a strong alternative to traditional creditors. 

How much do they owe?

The economic crisis triggered by the COVID-19 pandemic aggravated the situation. According to World Bank data, the total external debt stock of Sub-Saharan African countries increased by 10.7% in 2020, reaching 705 billion dollars. This figure corresponds to 60% of Sub-saharan Africa’s GDP. However, the IMF recommends that the debt-to-GDP ratio of low and middle-income countries not exceed 45%. Currently, debt stocks of at least 23 Sub-saharan countries are described as 'high risk' or in 'distress'. In Eritrea, Cabo Verde, Mozambique, Angola, Mauritius, and Zambia, the debt-to-GDP ratio is above 100%. Here, one might ask why this is seen as a big problem for African counties but not for othercountries with the same level of external debt stock, such as Greece, Italy, Portugal, and Belgium. One of the main differences between the two groups is that the latter do not have a problem borrowing from domestic and foreign markets at low-interest rates by virtue of their relatively high sovereign credit ratings. As for African countries, they cannot borrow by issuing Eurobonds due to their low (or inexistent) credit ratings. At best, they can take loans with interest rates well above the market due to their high-risk premiums.

Sovereign credit ratings have become decisive in the ability to and the cost of borrowing, particularly since 2008. For example, due to the economic difficulties during the pandemic, the G20 countries decided to postpone the 2020 debt repayments of the Least Developed Countries to 2022-2024. However, some African countries which could benefit from this initiative were reluctant to take advantage of the scheme. Because debt postponement would automatically result in downgrading their credit ratings. As a matter of fact, Ethiopia’snote was downgraded following the country taking advantage of the initiative and deferring its debt repayments. 

On the other hand, notably in the last ten years, the debt structures of African countries have also changed. The ratio of loans received from international organizations decreased. Most of the bilateral loan is held by China. The share of commercial banks and private funds also increased, making the multilateral initiatives to cancel, restructure or reschedule the debt stocks of African countries more complicated since these private lenders are disinclined to participate in such schemes. 

Why are they borrowing?

Funding requirements of African countries are frequently attributed to the fragile economic structures that depend mainly on commodity exports, weak domestic resource mobilization, and poor economic management. While these are valid arguments, the unfair trade (and its consequences) between African countries and their primarily European trading partners play a decisive role in the current economic outlook of Africa. 

Starting with the arrival of European traders to the western coast of Africa in the 15th century, the direction of trade shifted slowly towards the Atlantic coast. Local African rulers met the European traders’ demand for gold and enslaved people. In the aftermath of the industrial revolution in Europe, agricultural products such as palm oil, peanuts, and cotton are also included in the trade basket. When the colonial powers effectively dominated the continent at the end of the 19th century, local manufacturing industries were crushed, confining the continent to being a supplier of commodities needed by European industries. 

On the other hand, within the framework of the principle of self-sufficiency of the colonies, the administrative expenses of the colonial administrations and all kinds of investments made in the colonies were financed by loans from the metropole. The repayment efforts made African economies dependent on commodity exports before they gained independence in the 1960s. Even though colonialism ended, these loans were inherited by the independent states, as was the case in the Democratic Republic of the Congo, Nigeria, and Mauritania.

Several African leaders, who took over a dependent economy, did not attempt economic diversification. Those who tried strengthening political sovereignty with economic independence, like the first Prime Minister of the Democratic Republic of the Congo, Patrice Lumumba, were eliminated by external powers and their local associates. As a result, the unhealthy and unjust commercial relations between Africa and its traditional partners persisted up to the present. This dependency is one of the main factors responsible for the ongoing debt impasse of African countries.

How much financing is needed?

The current global circumstances are regrettably not in favor of African countries. Even before mitigating the economic repercussions of the COVID-19 pandemic, they are now fully exposed to the severe economic fallout of the increase in food, hydrocarbon, and fertilizer prices caused by Russia's invasion of Ukraine. In addition, Africa is among the regions affected the most by the mounting impact of climate change. It is argued that Africa needs 1.3 trillion dollars of financing annually to mitigate and adapt to climate change. Moreover, 150 billion dollars is needed each year to address the chronic infrastructure bottlenecks many African countries suffer from. On the other hand, annual capital flight from the continent reaches up to 90 billion dollars. In this respect, it is very challenging for African countries to manage their debts while needing enormous additional financing. As a result, it is not realistic to expect them to reduce poverty, improve infrastructure, make progress on the path of development and adapt to climate change.

Conclusion

As long as it can be managed, there is no harm in meeting the investment-oriented public expenditures with loans. In fact, this is a financing tool that almost all countries resort to. When carried out within a sound and consistent economic policy, borrowing can help achieve sustainable development. However, perceiving the problem in African countries exclusively as an economic management issue is hardly justifiable. Even though the considerable responsibility of African politicians and the elite can not be overlooked, it is necessary to acknowledge that the debt problem of the continent is essentially based on the structural relations of dependency that have fully grown in the last five centuries.

In this regard, as noted in the United Nations Conference on Trade and Development (UNCTAD) report of 2004, it is essential that developed countries take into account their historical moral responsibilities and contribute genuinely and significantly to the structural transformation and development of African countries. On the other hand, while preventing corruption and nepotism, African leaders should adopt and implement sound policies to ensure macroeconomic balance, reduce poverty, increase employment, and address income disparities. Otherwise, similar to the punishment of Sisyphus, it might not be possible for African countries and populations to break the burden of the vicious debt circle.

* Albert Camus. The Myth of Sisyphus (1942). p. 72-73.