Finance ministers and central bankers from the G20 group of the world’s most industrialised and emerging economies met in Baden Baden, Germany, on Friday and Saturday last week.
The German nongovernmental organisation Erlassjahr.de (Jubilee Germany), which campaigns for debt relief, saw this as an opportunity to draw attention to the growing debt problems of many developing countries.
The NGO has identified as many as 40 African countries that show signs of heavy indebtedness.
“This is not surprising because today’s economic indicators tell a story similar to the situation in the late 1970s and early 1980s which led to the Third World debt crisis,” said Jürgen Kaiser, political co-ordinator at Jubilee Germany.
In the wealthy industrialised countries, interest rates are low, but in Africa investors can fetch returns of between 7% and 15%. This leads to large capital flows from the North to the South.
“The low interest rates encourage countries to take out big loans, which they then have difficulty paying back,” Kaiser said.
The situation becomes particularly precarious when commodity prices fall. This leads to a decline in tax revenue in economies that depend on oil, natural gas, coal or other raw materials.
This latest debt crisis may surprise some because many developing countries had a large share of their debt written down under the heavily indebted poor countries (HIPC) Initiative. But commentators, who were convinced that this initiative — launched by the World Bank, the International Monetary Fund (IMF) and the G8 group of leading industrialised nations — would solve the developing nations’ debt problems turned out to be wrong.
Figures released by Jubilee Germany show how unsustainable the HIPC initiative was. Among the 40 African states where the indebtedness indicators were flashing red, 26 went through the HIPC programme.
One of those countries was Mozambique. In January 2017, it ceased paying back its debts on time. In 2012, Mozambique’s obligations to its creditors amounted to 40% of gross domestic product. They now total 130%.
Banks and investment funds were keen to lend Mozambique money, believing it would be safe as it has huge reserves of coal and natural gas. Those investors have been left empty-handed.
“Mozambique is the first country to cease repayments in such an abrupt, significant manner since HIPC debt relief,” said Kaiser. “But countries such as Gambia or Ghana, which also have abundant natural resources, are in a critical situation as well. Senegal, which does not have much in the way of natural resources, is also in difficulties once again.”
World Bank data of African nations’ indebtedness to foreign countries show many African economies have recently acquired dramatic levels of new debt. Between 2005 and 2015 — the most recent year for which figures are available — Angola, Ghana, Kenya and South Africa have seen a threefold increase in their debt levels.
Smaller countries such as Cape Verde also borrowed fresh capital during this time frame.
There are no internationally recognised procedures to settle the affairs of a country that has become insolvent. Many countries have such mechanisms for individuals and companies, but all attempts to create insolvency procedures for sovereign states have been blocked by a lobby consisting of banks and nation states.
IMF managing director Anne Kruger proposed a sovereign debt restructuring mechanism in 2001. It would have been administered by the IMF, but the proposal was blocked by the United States.
In 2014, the United Nations General Assembly adopted a resolution to establish “a multilateral legal framework for sovereign debt restructuring processes”. There were 124 votes in favour, 41 abstentions and 11 votes against. This resolution was nonbinding and the chances of it being implemented are slim. One of the 11 states that voted against it was Germany.
“That could have helped us move forward now,” said Kaiser. “Insolvency proceedings would mean that it wouldn’t be just the creditors who would decide when debts should be written down or not. In the past, that practice has led to debt relief being dispensed too late, on too small a scale or not at all.”
Sovereign debt restructuring was not on the agenda of last weekend’s G20 meeting, but if more developing countries default on loan repayments, the G20 may be forced to tackle the issue of debt levels. — Deutsche Welle