By Huang Meibo and Niu Dongfang
For a long time, the West has placed Africa on the margin of global development. Even before the COVID-19 pandemic, African countries’ dependence on debt had been on the rise. During the 1982 Latin American debt crisis, 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. With the awakening of African countries’ independence awareness and the deepening of debt relief, it is gradually realized that while these debt relief mechanisms relieve some of the debt burden of debtor countries, African countries often fall into the structural financial power of the West and become subject to the power of the Western world. African countries’ creditors come from multiple sectors and are dispersed.
In dealing with the African debt crisis, the traditional bilateral and multilateral debt relief methods and the new multilateral debt relief methods were used at the same time. The former mainly involves the debt relief by the Paris Club and the traditional debt relief by multilateral creditors, and the latter was the HIPC and the MDRI. Fundamentally, the existing international debt governance system does not provide a long-term and ultimate solution to Africa’s debt problems, and worse still, even erode the sovereignty of African countries in some aspects at the cost of Africa’s development prospects. 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. By the end of December 2021, 48 out 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. The G20 DSSI and its Common Framework had brought much-needed funds for Africa while having many negative impacts.
First, undermine the credit ratings of African debtor countries. After the 2008 financial crisis, the strengthening of global financial supervision and regulation has resulted in the contraction of cross-border loan business of banks from developed economies. But international capital flows in the forms of bonds and investment portfolios have seen considerable development, followed by significant changes in the structure of sovereign debt in developing countries. An increasing number of African governments have been actively seeking new financing from private creditors. By the end of December 2021, 25 debtor countries still clearly indicated that they would not participate in the DSSI, though 17 of them were already at a medium to high risk of external debt. This means that a considerable number of debtor countries would choose fiscal austerity, cut back on other development expenditures, and continue to fulfill their sovereign debt service responsibilities even when faced with serious fiscal difficulties.
Second, offer a leverage for international financial institutions to interfere in the internal politics and economy of debtor countries. In September 1987, the 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. In 2020, the IMF and the World Bank continued with their customary conditional approach, requiring debtor countries to disclose all public debt information and placing their fiscal expenditures after debt reduction under oversight. They also made participation in the Common Framework a precondition for receiving matching funds. This will undoubtedly squeeze the policy space of those African countries who are in urgent need of addressing debt and financial difficulties. Macroeconomic policies, economic systems and development strategies of participating countries may be affected and restricted by these international financial institutions, which is equivalent to the transfer of part of their economic sovereignty.
Third, Increase the dependence of African debtor countries on international financial institutions. Since the pandemic, bilateral creditors, out of the need to control risks, tend to refrain from signing new loan agreements. African countries therefore become more dependent on the support of multilateral institutions and are pushed to turn to the IMF for financing. Debt crisis and sovereign debt relief are often major reasons for the increase of multilateral debt of African countries. In all previous debt crises, in order to solve debt problems, debtor countries with low solvency fell into the “debt spiral” of “repaying previous loans by borrowing new ones” from multilateral institutions.
Fourth, debt relief may cause a decline in overall flow of international development aid. In the 1990s, the two major debt relief mechanisms, the HIPC and the MDRI were also used as means of development financing for developing countries, which had led to additional problems of debt relief. For example, under the framework of E-HIPC, debt relief would contribute to poverty alleviation by freeing up additional resources, such as IMF’s fund-raising through gold sales and efforts by the international community to push some OECD countries to increase their budgets for aid, among others.
Therefore, even though the DSSI, made in response to the impact of the pandemic, can offer a respite for African debtor countries, those joining the Common Framework have to commit themselves to a package of macroeconomic or economic reform clauses expected by developed countries while labeling themselves as bearing “unsustainable debts”. In addition, they are 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. In the future African countries may still face challenges caused by cyclical fluctuation of debt and its harm to long-term economic growth.
• The authors are Current Affairs Commentators based in China