Unlike previous debt crises, this time the creditors are mostly commercial entities or state financial organizations, observes *Cate Reid.
Debt levels are rising dangerously – reaching 45.9% of GDP in sub-Saharan Africa in 2017, nudging the 50% ceiling recommend-ed by the International Monetary Fund (IMF) – and many governments face tough decisions on spending cuts. Unlike previous debt crises where the IMF and the World Bank played a leading role, this time the creditors are mostly com-mercial entities or state financial organisations. And they have little appetite for write-offs or restructurings.
The roots of Africa’s new debt emergency grew out of the US financial crisis a decade ago. As global markets roiled after the exposure of incompetence and corruption at the heart of some of the world’s biggest financial institutions in 2008, African finance ministers reassured their colleagues that their economies, with their limited links to the international system, would not suffer much direct damage.
Rather, African economies, propelled by Asian demand for their commodities, were on a roll, growing at historic rates. A few years earlier, many African governments had cleaned up the books, slashed fiscal and trade deficits, and cut deals with the International Monetary Fund and World Bank to write off most of their debts under the Heavily Indebted Poor Countries (HIPC) scheme.
In many African treasuries, the expectation was that, after a few sneezes in the Asian markets – symptoms of the rampant influenza in the West, the commodity boom would continue. With tough monetary policies and rising foreign reserves, African finance ministers wanted to fire up growth again. Unfortunately, their Asian customers were cutting commodity imports, side-swiped by the Western economic chaos. Determined to step up investment in the roads, railways, power and communications needed to modernise their economies, African governments sought new finance, especially in the capital markets.
With interest rates falling across the West after the US crash in 2008, the timing looked good. Just months after it completed its debt-reduction deal, Ghana issued a US$750 million eurobond, inspiring many others to rush to the markets. Ratings agency Standard & Poor’s (S&P) says commercial debt will make up $392 billion of Africa’s total debt stock of $514bn by the end of 2018.
For some, it paid off, says Elizabeth Uwaifo, a lawyer specialising in structured finance at Radix Legal and Consulting: “The debt capital market is very powerful. If you get into it and succeed, you are in a better position.” Countries build a credit history, then become eligible for cheaper finance as they show they are lower-risk. “Over time, they become more attractive to investors and can borrow more.”
But with the opportunities come risks, warns Uwaifo. “With bilateral loans, you can go to the lender and negotiate new terms. Restructuring capital market debt is much more laborious and expensive. The note holders could be anywhere. You have a contract with an indeterminable number of persons, not just one.”
Mozambique defaulted in early 2017 after it emerged that the government had tried to conceal some $2 billion of loans from the IMF and other creditors (see TAR101). It has still not agreed a restructuring with the bondholders. They believe that Mozambique could pay them in full when its gas fields start to produce revenue after 2020. Whatever burden the servicing of debts for spurious and fraudulent projects imposes on Mozambicans is not their concern.
“The minute you default you take 10 steps back,” says Uwaifo, who trained officials in Ethiopia with the African Le-gal Support Facility (ALSF). The ALSF helps governments navigate increasingly complex commercial transactions. Many governments lack the experience and technical knowledge to strengthen their negotiating position, she adds.
Kevin Daly, who runs the emerging markets portfolio at Aberdeen Asset Management, says Africa’s first ever 30-year bond, issued by Nigeria last November, was a key marker, as was the over-subscription of paper such as Kenya’s 30-year bond in February. Kenya has high debt levels but it can access the markets because lenders are not “taking a 30-year view on default risk,” says Daly. “I think we’re just buying the bonds be-cause they’re cheap.”
Charles Adu Boahen, Ghana’s deputy finance minister, tells The Africa Report that the government changed its borrowing strategy after its economy was reclassified as lower-middle-income and was no longer eligible for concessional lending. “A lot of countries who used to give us donor funding had struck us off the list,” he says. This encouraged the shift to commercial borrowing.
Exchanging the warm embrace of concessional lenders such as the World Bank for the commercial realities of the capital markets has been problematic. Countries bailed out under the HIPC scheme were meant to establish “a track record of reform and sound policies”, as well as implement a poverty-reduction strategy, according to the IMF. The idea
was to free up money for social spending, putting countries on a path to “pursue cautious borrowing policies and strengthen public debt management.”
It did not work. S&P reckons that the HIPC scheme failed in 11 countries, whose debts are now at crisis level although they collectively received $99 billion in bailouts. These governments now face debt-¬service costs equivalent to or higher than the prebailout levels. ‘We are seeing a higher share of borrowing from more costly commercial sources as well as from new, often more expensive, lenders such as China,’ said S&P in a re-port this year.
China is now the largest single lend-er to Africa, accounting for about 14% of the debt. It offers fast access to big loans, often with long repayment schedules and low interest – though not as often as many assume.
The IMF has been criticised for being slow to see the writing on the wall. “The development of rapidly increasing debt, both foreign and domestic, should be reason for high concern among African leaders and also in the World Bank and IMF. But this is not always the case,” says Mogens Pedersen, Denmark’s former ambassador to Mozambique. He sees no chance of another HIPC to fix the problem.
Researchers at the Center for Global Development (CGD) in Washington DC accuse the IMF of ‘a perennial bias toward optimism – and hence inaction
– in the face of Africa’s recent debt accumulation’. In a recent essay, Justin Sandefur writes that the Bank-Fund forecasts of debt levels for Ghana and Mozambique were ‘comically wrong, year after year’.
Some Fund officials seem surprised that governments routinely and deliberately ignore their advice. Often, the IMF conflates policy commitments with implementation. Countries know that even if they miss targets, the IMF often continues disbursements.
Critics say the Fund should have been more demanding and has been outmanoeuvred by politicians. Governments exploit the fungibility that is interchangeability – of financing. Pedersen describes how Uganda prefers Chinese