This year is a symbolic in many regards for the advocates of global economic reforms. It marks the 80th anniversary of the Bretton Woods system and the 50th anniversary of the New International Economic Order agenda of the United Nations.
Equally important is the G20 Summit on November 18-19 hosted by Brazil. After having secured the position of permanent member last year, the African Union will be representing the continent alongside South Africa.
Like other regions of the Global South, Africa has been facing several external shocks that require an effective multilateral response that has been lacking, so far.
Developments induced by aggressive lending by yield hungry private bond investors, the Covid-19 pandemic and two major wars—one in Europe and other in the middle East—have plunged most of the continent’s countries into a debt and development crisis.
When governments have not defaulted on their foreign debt, their external debt service are reaching socially unsustainable levels, as it often exceeds public spending on health or education.
This situation not only jeopardises the development efforts made by African countries over the last two decades, but it also postpones the urgent investments that need to be made in terms of adapting to and mitigating the already visible effects of climate change.
The recurrence of debt crises in the continent is no accident. It is, unfortunately, a quasi-inevitable outcome of the way the international monetary and financial system works.
To spurt their economic development, low and middle income countries need to have access to critical imports—machinery, equipment and technology, among others—which they have to purchase in hard currency. In principle, from a developmentalist perspective, most of them should be net importers.
However, these developmental trade deficits, as once observed in a country like South Korea during its industrial development, have ultimately to be financed by increasing their export earning capacity and/or by attracting foreign finance—aid, debt and foreign direct investment.
African countries are mostly commodity producers and, as such, they are usually handicapped by the price volatility of commodities.
They also suffer from the lower returns from these exports due to an asymmetrical global tax system, which allows multinationals to legally repatriate huge profits and dividends, increasing further the financial bleeding of the continent through tax avoidance and evasion, trade misinvoicing and other fraudulent practices.
If African countries managed to retain nationally a larger share of their export revenues, they could reduce their external financing needs. But that is often not the case. To make things worse, they suffer from an inadequate supply of development financing in foreign currency.
With the drying up of concessional finance, African countries have become severely exposed to high costs of access to foreign private finance compounded by the unchecked power of credit rating agencies and an unfavorable adjustment model of the International Monetary Fund (IMF) to which they are subjected.
In a fair global system, developing countries should be able to run developmental trade and current account deficits through the provision of adequate financing and exchange rate support mechanisms. As these latter multilateral schemes are either lacking or deficient, developing countries are usually punished by IMF and World Bank policies when they are in debt crisis.
Indeed, the IMF wrongly interprets developmental deficits as instances of fiscal profligacy. That’s why it imposes austerity policies on debtor countries—namely detrimental primary surpluses that kill their growth prospects—and conditions its assistance on policies such as capital account liberalisation, a move that leads to increased financial volatility and net financial outflows. As for the World Bank, it usually promotes privatisation, namely of the sectors that generate export income.
The overall result is that debtor countries, instead of being helped to emerge stronger from crises, are penalised on the short run by lower economic growth and mass impoverishment and on the medium to long run by a weakening of their foreign earning capacity.
In other words, whenever countries are in debt distress, the best they can expect from the Bretton Woods Institutions is a cautery on a wooden leg, meaning that their national export earning capacity is further damaged, making them more vulnerable to future debt crisis.
The G20 meeting will have done a great service to Africa and the world if it includes and reflects these concerns and priorities Africa shares with most of the Global South.
This has been the story of many African countries at least since the 1980s. Zambia is a paradigmatic case.
Zambia’s external public debt was written-off from 128 percent of GNI in 2000 to 7.4 percent of GNI in 2006. However, in 2020, the country was obliged to default on its external public debt. Three factors were at play.
First, the country did not profit from the commodity boom to accumulate foreign exchange as transnational corporations captured most of the export revenues.
Second, the country issued costly Eurobonds to finance development and address climate shocks.
Third, as the flows of foreign finance went into infrastructure projects that did not stimulate its export capacity, its external solvency quickly deteriorated. Covid-19 accelerated an entry into debt distress that was to happen one day or later.
Unfortunately, the restructuring process under the aegis of IMF was protracted, inadequate and did not address the root causes.
The international development community should realise that the external debt situation of most African governments is simply not sustainable for their peoples and the environment.
Urgent relief is needed in the form of rapid and significant debt cancellations. We all know that this is not an affordability issue for the richest countries but a matter of political will.
Beyond relief, achieving development and climate goals will require adequate external financing through the provision of (i) cyclical liquidity to deal with negative shocks such as terms of trade deterioration, climate events, etc. (ii) long term affordable development finance in foreign currency that ensures that the debt service does not represent a heavy burden relatively to the national export earning capacity; (iii) grants and technology transfers to address climate and environmental issues, not loans.
Last but not least, there is the critical imperative to submit the IMF Debt Sustainability Analysis to greater transparency and accountability. Millions of lives across the world are dependent on this political rather than technical analysis.
Ndongo and Abugre are Africa Head of Research and Policy and Executive Director at the International Development Economics Associates respectively
