The reasons for the burden
Pandemic, the war in Ukraine, collapsing demand for raw materials, out-of-control energy prices, and the food crisis have originated in the northern hemisphere across the planet, but the heaviest repercussions are being felt in the so-called developing countries and particularly in the poorest region-Africa.
The economic recession due to the convergence of multiple planet-wide crises brings back the recurring ghosts of default on sovereign debts and the collapse of currencies across the continent.
- One structural reason is the pure volume of loans taken out, sums too large compared to the economies of the various countries, whose public budgets neither have the reserves nor can generate resources to repay them to international lenders. Obviously, having difficult access to capital markets, these loans, in countries with weak states, are one of the few ways they can finance government spending, although sometimes, tragically end up financing the expenses of local elites.
- Another motivation, related to the weak statehood of African countries and the poor central control of the territory, it is the chronic inability to raise the taxation that should support these loans
- A contingent concause is theappreciation of the U.S. dollar with which these debts are denominated, which combined with the depreciation of local currencies make it much more expensive to repay debts incurred.
Beijing's partial withdrawal
As is well known, the main player as the financier and implementer of the works in the pipeline is the state-owned enterprise system of the People's Republic of China. Beijing has an extensive presence on the continent, but many receiving countries are now being forced to renegotiate loan terms with Chinese entities, with drastic measures such as cutting interest payments and suspending non-viable projects.
Despite reasonable criticism of the policy approach and usefulness of many of the works, if Beijing pulls out, it is unclear what other country could take its place. At the moment. Western projects remain on paper and Development Banks are unable to address a chronic lack of fundingdue to poor political stability, African markets that do not guarantee economic returns, and a general disinterest in the region except in terms of raw material extraction.
With the related economic repositioning of China, which needs to focus financial resources in post-COVID recovery, is threatened by a real estate bubble, and has announced an extraordinary infrastructure plan, many African countries have turned to the traditional lender of last resort, the International Monetary Fund, which has extended or renewed multiple credit lines.
The return of the Monetary Fund to Africa
In early 2022 the IMF, through its Managing Director Georgieva, issued a report stating that in both 2021 and 2022 Africa's projected growth was below the world average.
It is against this background that the IMF has taken steps to support countries on the continent in a project called "Stepping up with and for Africa, lending money at low interest rates (0.05%) and 20-year debt repayment terms. Nevertheless, Africa's presence in the IMF portfolio remains rather limited with loans of $33 billion against $650 billion total.
These interventions, however, will not be earmarked for investment, but presumably to plug holes in the public budgets of African states. The African debt spiral more closely resembles a growing tsunami that could strangle the continent's economies if not addressed.
The overview is alarming: consulting IMF data on countries eligible for a loan, we find that already several African states, such as Mozambique, Somalia, Chad, Sudan and Zimbabwe are already nearly insolvent. Some of them are classifiable as "failed states" but others abound in raw materials.
According to estimates by the Monetary Fund most of the countries in East-Central Africa are in serious difficulty in repaying their international debts, in a way that jeopardizes their development. West Africa, with the significant exception of Ghana, is at lower debt risk, but only because, due to chronic political instability and underdevelopment, there has been less investment.
The most alarming aspect is that economic depression and isolation brought on by the pandemic, tipped precarious economic balances even in some of the continent's most diverse and dynamic economies, raising the specter of an external debt crisis from the Maghreb to South Africa.
In the medium to short term, due to the amount of maturities relative to reserves and fiscal challenges in terms of stabilizing debt burdens, as well as a long list of sub-Saharan African countries, the vulnerabilities of some of the region's economic engines have emerged.
Observing the geopolitical and military issues gripping the continent, it is necessary to consider that the ballast of debt, which, along with other factors, contributes to holding African economies at a level insufficient to sustain demographic development.
"...address the burden of unsustainable foreign debts with a comprehensive commitment to expand and extend debt suspension initiatives to countries facing fiscal and liquidity challenges, as well as full cancellation for countries facing the most severe challenges."
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