Facing coronavirus, Africa is facing debt difficulties. The finance ministers of the continent request the next debt relief. There are better ways out than always telling the bad old story.
Do you remember “Groundhog Day”? In this film starring Bill Murray playing a TV weatherman is caught in a time loop that forces him to relive each day the same day. I remembered this more than 25 years old movie when African finance ministers appealed to the International Monetary Fund, the World Bank and the EU for support for debt relief. They were asking for bilateral, multilateral and commercial debt relief.
Nobody denies coronavirus is hitting Africa particularly hard. In most countries public health systems are still underdeveloped and badly prepared for handling this crisis. But the request sounds like the same old song with slightly changing lyrics. Africa is facing debt difficulties, for sure. And the world has to make sure that they are not leading to a new debt crisis.
Facing debt difficulties
It is true, debt in Africa is enormous – 70% of African GDP by the end of 2017. However, the IMF considers a level of just 40% as portable for emerging countries. In the past, the continent was facing several financial crises. Due to the debt crisis in the 1980s, the GDP of sub-Saharan Africa shrunk from 200 billion USD in 1980 to 140 billion USD in 1990.
In 1982, Africa’s total debt stock stood at 140 billion USD. By the end of 1990 the region’s debt skyrocketed to more than 270 billion USD. Under the leadership of the IMF and the World Bank, the international community launched an initiative in favour of what they called the Heavily Indebted Poor Countries. 39 countries with high levels of poverty and debt overhang qualified for this HIPC initiative. Countries such as Ethiopia, Benin, Togo, Malawi, Mauritania, Guinea, Guinea-Bissau qualified for this programme, but also resource rich countries such as Mozambique, DR Congo, Congo-Brazzaville. According to Wikipedia, “the IMF estimates that the total cost of providing debt relief to the 40 countries currently eligible for the HIPC program would be around 71 billion USD (in 2007 dollars).”
Whose fault is it?
African leaders seem to see now a new opportunity for bringing down the debt they have contracted in the past. They ask for 100 billion USD (92.5 billion EUR) just for immediate relief from debt service obligations. The difficulties that hit Africa now are not an effect of the coronavirus crisis. As early as in 2018, the German public broadcaster Deutsche Welle asked the question: “Who is responsible for the African debt crisis?”
Good question. In some countries, the money from international loans disappeared without trace. In other countries it went into public infrastructure that was hardly needed. But the infrastructure did not earn hard currency for paying back the loans and credits. And some governmental programmes from the wealthy North, such as “Compact with Africa” launched by Germany, increased African debt.
In our view, Africa has two options in handling the debt difficulties and the economic slowdown.
The first option is to stay in the loop of the past and ask for another debt relief. The consequence will be that the African economy will be thrown back for years as numerous African countries will lose creditworthiness. There will not be many private financiers – funds, banks, manufacturers – who will be willing to invest anymore in Africa. Multilateral institutions will demand hard political reforms that might be useful. But they will not push democracy in Africa as they are imposed from the outside.
The second option is to push the development of African capital markets. This could create a regional pool of financial assets that can be invested on the continent. Finally, this will create investment opportunities for pensions funds, insurance companies and wealthy Africans to invest in Africa.
Gaining financial independence
Except South Africa and the financial centre Johannesburg, no stock exchange in Africa has developed its potential. This is even true for bigger and more developed places such as Nairobi, Lagos, Casablanca or Cairo. And it is true for the Bourse Régionale des Valeurs de Marché (BRVM). This stock exchange is a union of the stock exchanges of Ivory Coast, Senegal, Benin, Burkina Faso, Guinée-Bissau, Mali, Niger and Togo located in Abidjan.
The stock exchanges in Africa do not reflect the diversity of successful companies. Forex, bond trading and specific capital market instruments supporting smaller and medium-sized companies are not developed at all.
If Africa wants to break the vicious circle of repeating debt crises, the continent has to gain financial sovereignty from Europe, the US and the rising Asian financiers.
The crucial factor is time. We do not favour option 1, but we admit that option 2 needs time, the continent does not have. Therefore, we advocate a third option, using option 1 as a rescue option and using the time saved for developing option 2.
As the French use to say: Money is good a servant, but a bad master.