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Back to the Future: Africa’s debt crisis is the new Grim Reaper

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Picture: Tiksa Negeri / REUTERS – African heads of state pose for a group photo with Antonio Guterres, Secretary General of the United Nations, during the opening of the 36th Ordinary session of the Assembly of the Africa Union at its headquarters in Addis Ababa, Ethiopia February 18, 2023.

By Ashraf Patel

On February 17, 2023, UN Secretary General Antonio Guterres made an impassioned plea to donor nations and Northern creditors to end the high debt costs plaguing Africa. During the Covid pandemic the African continent faced vaccine nationalism and was marginalised. In the current war economy, it faces massive headwinds of high inflation, rising food prices and rising unemployment.

“The high cost of debt and increasing risks of debt distress demand decisive action to make at least $500 billion dollars available annually to developing countries and convert short term lending into long term debt at lower interest rates.”

Halfway to the 2030 Agenda deadline, progress on the Sustainable Development Goals (SDGs) – our roadmap out of crises – is not where it needs to be. To reverse course and make steady progress on the Goals is now under severe threat in a post-Covid world.

A few years ago, the narrative of ‘Africa rising’ – a reference to the strong economic performance across the Continent in the period 2000 to 2014 was a cause for hope. At the time, a high commodity boom, tech-enabled growth, and investment in fiscal-taxation systems, ensured a growth of middle classes. According to the IMF regional economic outlook ”Rising food and energy prices are impacting the region’s most vulnerable, and public debt and inflation are at levels not seen in decades”.

“Against this backdrop, and with limited options, many countries find themselves pushed closer to the edge. Sub-Saharan African countries find themselves facing severe exogenous shock. The effects of the war will be deeply consequential, eroding standards of living and aggravating macroeconomic imbalances, thus growth is expected to decline.” (IMF, 2022)

Take for example, Ghana – a rising star of Africa. Although it has recently discovered and is producing oil and gas, it has yet to achieve fiscal sustainability and has approached the IMF for a $3 billion bailout package. In February 2023, Nigeria plunged into monetisation crisis, even though it is a leading oil exporter and oil prices are at record levels. South Africa also faces anaemic growth, even though it has been a recipient of a R500 billion IMF loan-stimulus package in 2020 during the Covid pandemic.

However, it was unable to invest it for sustainable growth. With a high debt to GDP ratio, as well as high cost of servicing debt, South Africa has seen deeper levels of inequality, with the latest report by the World Bank ranking her as the most unequal nation in the world. (World Bank, 2022)

In an attempt to find a more sustainable solution to the financial crisis, the United Nations (UN) has developed an SDG stimulus framework. “Today’s poly-crises are compounding shocks on developing countries – in large part because of an unfair global financial system that is short-term, crisis-prone, and that further exacerbates inequalities,” warned Guterres on the occasion of the launch of the SDG Stimulus.

“We need to massively scale up affordable long-term financing by aligning all financing flows to the SDGs and improving the terms of lending of multilateral development banks,” he said.

The current global financial system – originally created to provide a global safety net during shocks – is one in which most of the world’s poorest countries saw their debt service payments skyrocket by 35 percent in 2022.

As of November 2022, 37 out of 69 of the world’s poorest countries were either at high risk or already in debt distress, while one in four middle-income countries, which host the majority of the extremely poor, were at high risk of fiscal crisis. As a result developing countries don’t have the fiscal resources needed need to invest in recovery, climate action and the SDGs, making them poised to fall even further behind when the next crisis strikes.

It should be noted that since year 2000, very few nations in the Developing South have achieved their Millennium Development Goals MDGs.

G20 – A case of too little too late

The G20 was formed to deal with the great financial crises of 2008, induced by Northern nations and banks. During the pandemic most nations faced multiple challenges. In April 2020, with the global economy going into free fall, the risk of developing countries defaulting on their debts grew acute.

The leaders of the G20 members, a group of the world’s largest economies, quickly put in place an initiative that would suspend debt service payments for the government-to-government loans of 73 poor countries. The support afforded poor countries breathing room during the pandemic. That initiative ended in December 2021, succeeded by a programme called the Common Framework, which brings G20 governments together with the 22 members of the Paris Club.

The Common Framework could bring private creditors together with G20 and Paris Club governments to manage jointly the debts of the same 73 poor countries. Yet this bold and long-overdue process is teetering on the brink of collapse. One can infer that the same old prescriptions from Northern nations, the Paris club and large banks have little interest in the sustainable development pathways of African nations.

BRICS nations, Global South and new financial architecture

The BRICS groups of nations have recently sought to create a new financial architecture to addressing these challenges, one of which is the establishment of the New Development Bank (NDB). The BRICS nations are exploring establishing a new reserve currency to better serve their economic interests.

“It will be based on a basket of the currencies of the five-nation bloc. The possibility and prospects of setting up a common single currency based on a basket of currencies of the BRICS countries is being discussed,” according to Pavel Knyazev.

In this context, the different approaches to resolving the debt crisis by the North and new superpowers in the Global South are emerging. According to writer and analyst Deborah Boutigam, China is showing responsible leadership.

“But research I have conducted with my colleague Yufan Huang shows that China actually played a responsible role in the G20’s earlier initiative, providing 63 percent of the total $13.1 billion in suspensions despite holding only 30 percent of all debt service claims. Other researchers note that even when China is not involved, delays in the restructuring of sovereign debts are unfortunately common, lasting on average eight years. To keep China on board, other G20 countries need to support a more equitable sharing of financial burdens among private, public, and perhaps multilateral creditors.”

As more African nations face large debt defaults and depend ever on new rounds of G7 and IMF bailouts with high interest repayment rates, leading to more inter-generational indebtedness, BRICS nations and China’s approach is proving more relevant, well thought out, responsible and sustainable, ushering in a new era of financial and economic and social development possibilities and pathways.

Ashraf Patel is a digital economy associate at the Institute For Global Dialogue (IGD).