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 commercial 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.”
Exchanging the warm em-brace 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.”
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 out manoeuvred by politicians. Governments exploit the fungibility that is interchangeability – of financing. Pedersen describes how Uganda prefers Chinese loans for projects, but will revert to the World Bank and the IMF for balance of payments and basic public service finance.
When offered the job of central bank governor in his native Mozambique in 2016, Rogério Zandamela, a long-time official at the IMF, accepted on one condition: the ruling party would not interfere in the bank. “The central bank can operate under less pressure and fulfil its role if it has more political autonomy,” explains economist Waldemar de Sousa, one of Zandamela’s top administrators. The bank routinely comes under pressure to inject liquidity into the system as elections approach.
Most agree that Mozambique’s central bank is now well-managed; the problem is the finance ministry, which still takes orders from the ruling party on where to channel money. This angers civic activists who see the IMF, the World Bank, the African Development Bank and other financial institutions as complicit in a system that stops the ruling elite from being held accountable. A se-nior US diplomat who wished to remain anonymous says: “The IMF think they are doing good, but they are just furthering dependency.”
There are some signs that the IMF is getting tougher after its failures to act effectively on Mozambique’s $2 billion in hidden loans. Insiders say that the crisis, which prompted a showdown be-tween IMF managing director Christine Lagarde and Maputo, prompted a thorough going review. Investment manager Daly says the IMF is responding quicker to signals of debt-distress risk, often before the markets. “They are becoming aware of this role they have to play when it comes to how the markets assess the debt sustainability of these countries.”
After Mozambique, the Fund scrutinised government finances, declared and undeclared, more closely. For ex-ample, the IMF’s resident representative in Maputo was transferred to Gabon, taking over as mission chief. There, he discovered an additional $2.5bn of debt that was not on the government’s books. Similarly, in Equatorial Guinea the IMF discovered that the government had not declared billions of dollars of domestic arrears. Ratings agencies are also watching more closely, says Daly. “Moody’s have been much more aggressive than their peers lately, downgrading Gabon, and Zambia too.” Investors are asking more about the countries with which they do business, including questions about commercial loans.
And some governments are taking crisis measures. For Ghana, the government had to slash spending and re-structure, says deputy finance minister Boahen. “The economy had been totally mismanaged, and we had things that should cost $1 costing $3.”
This year, Ghana raised $2 billion in debt in the capital markets at the lowest interest rates yet, with some funds going to refinance domestic debt at cheaper rates. The government is still struggling with a hefty financing gap as it tries to pay for free secondary education, health service reforms and an ambitious industrialisation programme.
Although Zambia’s finances are far worse than Ghana’s, its government is taking no such actions. Trevor Simumba, an economist in Lusaka, accuses Pres-ident Edgar Lungu of having “no clue about economics” and presiding over poorly planned and unchecked borrowing that puts partisan and personal inter-ests before the country. Lungu’s motives are clear, says Simumba: “I’m doing projects, I’m going to win the elections.”
For now, the IMF refuses to offer Zambia a bailout unless the government curbs borrowing. Its predicament may be a test case for many other debt distressed economies. Zambia is running out of road. Like its debt-burdened peers, it faces harsh choices: take the long hard road to financial recovery, default on its obligations and be cut off from the international system, or, as it seems to be trying to do, mortgage its mineral wealth to pay for its profligacy.
- The above article is reproduced from The Africa Report, 26 September 2018.