Africa and much of the developing world faces a credit crunch. That has manifested in both a debt crisis – which has frequently been in the media spotlight of late – and an investment crisis. How to square this circle? How could an Africa in debt crises and with a number of countries in the midst of complex restructuring negotiations also attract greater investment? Consultancy Development Reimagined have for a number of years argued for a major rethink about the way African countries’ national debt is handled. In particular, they have proposed a “debtors club” to help rebalance the power dynamics of global debt restructurings, which are typically dominated by creditors clubs such as the Paris Club.
Last month Panda Paw Dragon Claw had the opportunity to talk to Development Reimagined’s Jade Scarfe about the debt and investment crises in Africa, the “debtors club” proposal, and China’s unprecedented involvement in multilateral debt restructuring via the ongoing negotiations with Zambia.
Panda Paw Dragon Claw (PPDC): There has been lots of finger-pointing on the question of debt, particularly in media coverage of the debt crisis in Sri Lanka, and restructuring elsewhere. Unsurprisingly, much of the finger-pointing has been directed at China. But last month also saw a report highlighting that African countries’ debt to private Western financiers is far higher than to Chinese public financiers. What do you think of this finger-pointing? Is it even the right question to ask?
Jade Scarfe (JS): Indeed, China is often portrayed as the perpetrator of a so-called African debt crisis, but as we’ve been arguing, a large portion of current debt is owed to an array of private lenders as well as to multilateral institutions. We first argued this back in 2020 in our Africa Debt Guide, which analyzed the debt vulnerabilities and financing needs of 20 African countries and highlighted the diversity of debt portfolios across the continent.
Before we talk of any “debt crisis”, it’s important to think about this from a borrower perspective. First, we need to question the “African debt crisis” narrative. Africa’s debt in absolute terms has indeed been on the rise since 2000 and 2010, following the Heavily Indebted Poor Country (HIPC) debt relief initiative. But, pretty much every economic indicator in the world has increased in absolute terms since 2000 – that’s called inflation. If we look at debt as a percentage of Gross National Income (GNI) of African countries’ economies, there was a peak in the 1980s and 1990s. Now the majority of debt levels are back to the early 1980s level of debt exposure. Aid too has been rising over time in absolute terms, but because recipient economies have also been growing, aid is actually making a smaller contribution over time to their economies and development.
PPDC: So the question is whether these levels of debt or aid are good or bad? Are they “sustainable”?
JS: In our view, and in contrast to prevailing opinions, the level is far, far too low. What it suggests, despite African governments being able to get more loans from China, the private sector and so on, is that there is simply not enough finance flowing to meet the development needs of the continent. And if countries are having trouble meeting their debt servicing obligations, it is not because they have been on so-called “spending sprees” with Chinese or other finance, but because the debt they have is far too expensive. From the borrower’s perspective therefore, it is the lack of sufficient financing and expense of current debt, rather than an excess of debt, that is unsustainable.
Take Nigeria. Nigeria’s debt levels have risen rapidly since 2006, reaching USD 70.57 billion in 2020. However, Nigeria’s debt-to-GNI stood at just 16.9% in 2020, far below peak levels of 120.8% in 1993. That said, 16.9% is far from sufficient in terms of Nigeria’s development needs. Our recent calculations suggest that just to build the infrastructure to meet the SDGs – for example, to provide universal electricity access or universal internet access – Nigeria needs to be spending USD 53-70 billion per year up to 2030, that’s equivalent to a further 12-16% of its GDP each year.
In so many ways, this is a crisis of “too expensive” debt, not a crisis of too much debt. China has played a role in providing cheap debt, But definitely, every financier can do more, and no one should be turning off the taps, far from it.
PPDC: This conclusion of Africa needing more finance, not less, seems really fundamental. How does it square with the reality of debt crises in Sri Lanka, Zambia and elsewhere?
JS: Debt crises are as political as they are economic. That is, the choices and decisions of different actors matter a great deal. Sri Lanka and Zambia are defaulting primarily because their creditors didn’t suspend the need for payments when the external shock of COVID19 hit the world.
However, while COVID-19 might feel unprecedented, this isn’t new. There was a huge ‘debt crisis’ in the 1980s and 1990s, which, just like today, began due to a global shock – the oil shock of the late 1970s. At that time, key creditors allowed interest rates to rise without protecting developing countries’ debt, leaving the borrowers only to absorb the shock. It is this action that caused debt to rise over the years – not excessive borrowing or “irresponsible” borrowing. Unfortunately, the costs for borrowers were further amplified when they did default due to the fiscal austerity programs that were introduced through the IMF’s Structural Adjustment Plans (SAPs) with mass privatizations of country assets, and widespread spending cuts causing poverty levels to rise.
This chain of bad choices is what we think needs to be avoided. That said, we are very close to repeating history. In June 2022, to curb inflation the Federal Reserve raised interest rates by 0.75% – the largest increase since 1994. Countries like Ghana – which have been growing and developing relatively well with new financing from a wide range of sources until COVID hit – are now thinking about turning to the IMF even though they haven’t even defaulted. This is not positive. Far from reform of borrowers’ spending policies, our experience in the 1980s and 1990s tells us that there needs to be total reform of the international financial system alongside new, innovative mechanisms to ‘reimagine’ the system that works in Africa’s favor.
PPDC: One method you have proposed for managing debt challenges is a “borrowers’ club”. Can you outline the idea and how it could benefit African borrowers?
JS: The international financial system is currently designed with creditor needs in mind. This is not surprising, the system was created when most African countries were still colonized, but it’s clear this design isn’t working. Our Borrower’s Club seeks to “flip the orthodoxy”, by putting borrowers – not creditors – at the forefront.
The Club is centered around increasing African countries’ access to cheap, external capital – “debt” – for growth. As already explained, high-quality, cheap finance is needed to address development needs. Our own forecasting, as well as forecasting by the African Development Bank (AfDB), shows domestic resources – taxes or savings – will not be enough to address the gaps. Most African economies just haven’t grown large enough yet.
Our proposal is based on microfinance principles but applied at the macro level. In 1976, Nobel Prize winner Mohammed Yunus created the Grameen Bank in Bangladesh – which enabled the rural poor, the majority of whom were locked out of the financial system due to their lack of collateral or low projected incomes, to club together to take loans and make slower, affordable repayments together. The Bank enabled people to lift themselves out of poverty by providing one of the key necessary tools – capital.
The same challenge the rural poor found themselves in applies at the macro-level. Country-level debt is too expensive, and many African countries are totally locked out of international capital markets due to low or no credit ratings at all. However, clubbing together for loans, applying for finance as a group, and using each other’s growth prospects as collateral alongside accountability to each other and their citizens, can raise new cheaper finance. This would even have payoffs for creditors, just as microfinance did, as loans would have lower risk, but would still provide strong returns as growth continues.
Borrowers in the Club would be responsible for the prioritization of projects, based on clear eligibility criteria – for example, the projects might be required to be climate-friendly or show a clear predicted level of growth. Borrowers would agree to their relevant thresholds or criteria for internal defaults (for example, falls in commodity prices) as opposed to being subject to arbitrary rules set by creditors.
The borrowers would also appoint representatives to interact with creditors, and appoint an independent trustee based on criteria such as the trustee’s capital, rating level and reputation, to whom Borrower’s would make equal small, low-interest regular payments. Repayments would be designed to be small and with very low-interest rates to “build in” ease of repayment, but also designed to build in a “cushion” for temporary collateral. If a project faces challenges or a borrower faces repayment issues, the borrower committee can agree for the cushion to be made available to support temporarily.
Overall, by flipping the orthodoxy, the Club would empower borrowers and offer a longer-term, sustainable approach to increasing access to much-needed capital for those who need it most.
PPDC: How feasible is such a borrowers’ club? Are there precedents for such a borrowing model? Can we expect to see the necessary political and economic coordination among African governments and institutions?
JS: The precedent in the microfinance industry has been extremely successful. At the macro level there has also been precedent. The most relevant is the example of the European Commission, which is enabled by the European Union (EU) treaty to borrow from international markets on behalf of the EU, and therefore can raise external financing on behalf of all EU member states.
A borrowers’ club in Africa is feasible, and the demand from borrowers is there. Of course, there is the need for political and economic coordination, but it’s not unrealistic. Africa’s response to COVID-19 is testament to this – African countries and African institutions have coordinated, convened, and worked together, resulting in some of the lowest numbers of cases and deaths in the world. The borrowers club would by its existence also provide space to exchange experience, build capacity, and increase negotiation skills.
In terms of building blocks, engaging major African-led institutions is key – including the AU, UNECA and the AfDB, as well as the eight regional blocs. Moreover, important roles must be filled including the independent trustee, which African institutions could fill – the AfDB has an ‘AAA’ rating, with a strong reputation, so this is a possibility.
Further, the Club could be combined with other innovations, including as a means to restructure and bring the costs of existing debt down. For example, the Club could be a means to utilize Special Drawing Rights (SDRs), including reallocated SDRs. A partial allocation of these committed SDRs could provide the necessary capital to launch the Club. There are also opportunities to collaborate with UNECA’s Liquidity Sustainability Facility (LSF), which increases African stakeholders’ access to the international market through pooling credit to pay off private sector debt.
PPDC: Are we already seeing coordination among debtor countries?
JS: There have been past examples of debtor coordination, such as the HIPC Debt Strategy and Analysis Capacity-Building Program where debtors worked together to share information on negotiation practices to drive further relief from creditors. Recently, there have been several coordination examples. There have been calls by African officials for an African Credit Rating Agency after the “Big Three” agencies downgraded several African countries. Additionally, Dr. Folashade Soule is leading a series of Africa-China workshops on negotiation practices and strategies by African governments when engaging with China.
At Development Reimagined, we’ve been organizing roundtables and dialogues to bring together key African stakeholders – including African Ambassadors to China – to discuss financing needs and debt vulnerabilities vis-a-vis Chinese partners, as well as to discuss how to operationalize commitments made at the Forum on China-Africa Cooperation (FOCAC).
Borrower coordination matters, it exists – and the borrowers club is simply a strong form of it.
PPDC: Looking at China as a creditor now, there has been some talk recently about a “Shanghai Model” of debt relief, modelled off the Brady Bonds initiative of the late 1980s. What is the model and is it gaining ground as a means of debt restructuring in 2022?
JS: Several scholars have proposed the idea of using Brady-like bonds for debt restructuring, including Dr. Ying Qian and Dr. Yan Wang who produced in-depth reports on how this could work in practice. The Shanghai Model is based on the 1980s Brady Bond initiative, which, in a nutshell, is restructuring debt into bonds. It was first used in Latin America to restructure debt and essentially make debt tradable. However, one major downside is that this was conditional on SAP policy reforms, including liberalizing developing countries’ trade regimes and financial markets.
As Dr. Ying Qian has explained, the Shanghai Model would do exactly the same, except it would be China not the US in the lead, and could work with green and climate change finance. How it would link to the IMF is unclear right now. While there are some key challenges to iron out, for example how to ensure that the bonds are at investment grade level, especially as several African countries have already experienced downgrades throughout the pandemic, despite spending on socioeconomic measures for recovery, generally it seems to be gaining ground in China. That said, for us, the challenge with it is that it takes the existing financial system as a given. It doesn’t acknowledge the inherent problems of it, just papers over. We’re not sure it will be enough.
PPDC: What do we know about China’s approach to the ongoing negotiations on debt restructuring in Zambia?
JS: This is a complex question. And it’s important to be clear about where Zambia is itself. In October 2021, the government published debt statistics revealing debt-to-GDP stood at 112%, a 27% increase from 2020. However, this was not unexpected. Spending had to increase for socio-economic protection throughout COVID-19, as in so many other countries. Further, this 112% is much lower than the 261% debt-to-GDP Zambia experienced in the 1990s. Nevertheless, the new Zambian government felt this 27% increase was alarming and decided to stop paying one of its private sector loans – it defaulted, and also applied to join the “G20 Common Framework”.
The first meeting was held in June in Paris and we understand Zambia made its case for debt restructuring. Whilst the entire set-up of this meeting is problematic for reasons too long to discuss here, this was the first time China attended and co-chaired a meeting with other creditors in the room. It is important to note that China wasn’t pressured by creditors but joined the committee at the request of the Zambian government, reflecting China’s commitment to non-interference. Indeed, it makes sense for Zambia to try to renegotiate debt with China. Zambia has sought Chinese loans for more than 69 projects from 2000-2018.
One of the biggest challenges facing Zambia’s rescheduling plan is that with multiple different creditors, it may be difficult to satisfy all parties. Traditional Paris Club lenders will be interested in Zambia’s plans for cutting spending and the IMF’s Debt Sustainability Assessment, which may include austerity policies – as in the 1980s and 1990s. An Oxfam report highlighted that 13 out of the 15 IMF programs negotiated in 2021 required austerity measures. Cutting spending in a country where 77% of the population do not have access to clean drinking water, and where road infrastructure would have to improve by 234% just to reach the same levels as China will not have a good impact on growth prospects.
And this is where China really differs from other creditors. Most projects that China has funded require a growing economy to provide returns to channel into debt repayments. Chinese lenders will be looking for growth plans, which implies more spending, such as building more infrastructure to create jobs, increasing productivity and tax revenues. Given that China’s domestic approach to economic shocks has often been to increase spending to stimulate growth, it may be of benefit to Zambia for China’s involvement, although it’s still unclear what approach the Zambian government may opt for.
These are some of the challenges, not just for Zambia, but all countries facing restructuring. Debt restructuring is focused on lowering debt quantity, even though the quality of debt matters just as much. Our hope is that Zambia and other borrowers will realize this and stop internalizing the idea that they have spent badly. They haven’t. But they can do better in future – and the starting point is working together as borrowers to get more out of the system. That’s why we think that a key next step for Zambia should be to meet with Ethiopia and Chad, who have also now taken part in creditor meetings – and even Sri Lanka – to review the G20 process to date, and strategize on next steps together. That will bring us closer to the only real long-term solution – reimagining the debt system.
*Special thanks to Rugare Mukanganga, an Economist at Development Reimagined, who contributed to this report.