After COVID-19: Africa’s Sovereign Debt Crisis and a New ‘New International Economic Order’
The COVID-19 pandemic has taken a devastating economic toll on Sub-Saharan Africa as it reels from sharp declines in global commodity prices and tourism. Regional Gross Domestic Product (GDP) growth regressed by 2.4 percent in 2020, considered its worst contraction since the 1970s, pushing millions into poverty and prompting credit rating downgrades. African economies enter 2021 facing an epic sovereign debt crisis, threatening to undo decades of progress. In November 2020, Zambia, where copper sales represent 72 percent of its foreign exchange earnings, was forced to default on its debt, and others may follow. In Angola, where oil makes up one-third of its economy and 90 percent of exports, the debt-to-GDP ratio rose to 130 percent in 2020. The pattern is clear. Commodity-dependent African economies face a terrible choice as the pandemic kills commodity prices: use scarce resources to fight the coronavirus or service their debt to access loans for their recovery. At the heart of this crisis is a structural weakness laid bare by COVID-19: the commodity-dependence of Africa’s economies.
The international monetary system’s contribution to this structural weakness, and subsequent global poverty and indebtedness has been the subject of much debate for decades. Following the 1973 oil crisis, developing countries sought to change the world’s economic system, consolidating their demands in the Declaration for the Establishment of a New International Economic Order (NIEO), approved by the United Nations General Assembly in 1974.
The NIEO calls for the right of every state to choose its own economic system free of interference, to improve its terms of trade by managing commodity markets; to have full control over its natural resources, and regulations for multinational corporations (MNCs) to comply with local laws and promote technology transfer; and more.
It is astonishing that, in 2021, the structure of African economies has hardly changed from how they were created in the colonial era. The current sovereign debt crisis, like those preceding, is the symptom of a global economic order that impoverishes Africa. The continent will continue to oscillate between extreme poverty and stellar growth, in an endless cycle in which it is trapped, until we change the economic system itself. And thus, as we consider the “new normal” of a post-COVID world, it is perhaps time to re-imagine what a new New International Economic Order could look like.
Sovereign Debt and the Sub-Saharan African Economy
Let us first consider the current African economic structure and its links to sovereign debt. Sub-Saharan African countries have always had relatively higher levels of sovereign debt, than other regions of the world. Much of this debt has been used to finance infrastructure projects for development, totaling over $600 billion in loans since 2013. Considering countries’ debt-to-GDP ratio, trends over the past two decades reveal that little has changed, or has even worsened, in terms of countries who hold sovereign debt between one-third to upwards of 70 percent of their GDP. This precarious position makes sense when one considers the underlying reasons.
In his groundbreaking analysis, economist Alemayehu Geda suggests that the conventional explanations of the origins of Africa’s debt crises, such as the 1970s oil price shocks and rising public expenditure, are insufficient. Rather, Geda posits that the African debt crisis originated from the structuring of African economies by 17th century European mercantilism until decolonization.
He observes that in West Africa, the commodity sector was beholden to Europeans, in Central and Southern Africa “adventurer companies” dominated the mining, fishing, infrastructure, and taxation sectors, and in Eastern Africa, colonial authorities rounded up land-owning peasants and urban unemployed to supply labor for settler agriculture and mineral extraction. These policies created a commodity export-dependent Africa, and the “virtual monopoly of the African trade…by Europe.” This resulted in unfavorable terms of trade for Africa.
Moreover, 1980s protectionism against processed products in the Global North prevented Africa’s diversification out of commodities and structural adjustment programs caused declines in export revenue. Thus, the structure of the economic relationship between colonial powers and their former colonies was maintained after independence, explaining Africa’s high indebtedness by the late 1990s.
It was in this context that the London-based Jubilee 2000 campaign started a global movement for debt relief for the world’s poorest nations. Political economist Ann Pettifor later shared how the initiative won $100 billion in debt relief from the World Bank and the Paris Club for 35 nations — mainly African. Despite the 2005 Multilateral Debt Relief Initiative (MDRI) supplementing the Highly Indebted Poor Countries (HIPC) program, the International Monetary Fund (IMF) and World Bank returned with new loans for the newly fiscally stable nations. China also increased its lending in Africa, becoming its largest creditor. That is how we got here today.
The Tentacles of Debt
Sovereign debt has incredible power for development but is also used for exploitation and destruction. Debt’s insidious spread of influence touches many areas.
Discussions on debt focus on sovereign borrowing but overlook how trillions of dollars (that are used to service debt) are siphoned from the continent by MNCs, while creditors force African economies to open up to MNCs, creating a vicious cycle. Take our earlier example of Zambia. Recent research from Erasmus Rotterdam University shows that since 2005, mining sector MNCs have repatriated billions of dollars of wealth from Zambia— as much as 20 percent of GDP in 2012 — through unreported profit remittances. This has crushed Zambia’s ability to service debts, forcing the nation to increase sovereign borrowing to sustain these illicit outflows. The researchers note, “[t]he argument for this economic model… has been, to put it crudely, that Africans are better off being exploited than not being exploited at all,” considering the benefits brought by MNCs.
There’s also another issue with external debt: interest. African governments spend far more on interest payments than they do on healthcare. In private debt markets, African governments are charged 2.9 percent interest higher than what ratings and risk assessments support, called the “Africa Premium”, resulting in losses of an estimated additional $2.2 billion over ten years. Even with high economic growth, rating agencies don’t upgrade African countries’ credit. Over the last decade, interest payments on sovereign loans in Sub-Saharan Africa increased at a rate 33 percent more than that of principal payments.
Debt also brings serious environmental concerns. Sussex University scientists found that financial crises significantly damage African ecosystems and biodiversity, as debt incentivizes “[increased] forest product exports, illegal logging, commodity driven agriculture, and population pressures into natural and protected land”, resulting in 820,000 additional metric tons of CO2 emissions. Indeed, Angola has been pressured by China to offer it increased equity in its oil fields and give the Chinese-Angolan oil venture favorable access to “discovered resource opportunities” and “undeveloped acreage” for debt relief. In other words, Angola is forced to extract more fossil fuels for its survival.
Solutions or Dead Ends?
Global efforts to address the sovereign debt crisis have failed to recognize the core structural issues. Last May, G20 countries implemented the Debt Service Suspension Initiative (DSSI), a moratorium on debt payments for HIPCs to respond to the pandemic. In addition, China has dropped $3.4 billion and restructured or refinanced $15 billion of debt for Africa over the last decade with no penalties or asset expropriation, suggesting leniency from the continent’s largest creditor.
However, debt restructuring remains complicated. Debt relief policies force legal defaults on borrowers, the IMF is pressured into bailing out private creditors over addressing poor countries’ solvency, and organizing negotiations between different creditors is difficult. There is also no mechanism to prevent future debt problems if poor countries borrow to fight COVID. Additionally, a European Network on Debt and Development report on the DSSI found that less than 2 percent of debt payments from developing countries due in 2020 were covered by the initiative. By the end of its term in June 2021, only 44 percent of the debt payments of DSSI-participants will be rescheduled. On top of that, the rescheduled 2020 payments of DSSI-eligible nations are due in 2022–2024, when they are already scheduled to pay $115 billion. Also, while it has been easier to negotiate with China than with private creditors, Chinese loans represent only 20 percent of Africa’s sovereign debt.
Holistic recommendations by a UN policy brief on sovereign debt in the pandemic include expanding the debt moratorium to include private and multilateral lenders; debt write-offs for highly indebted nations; facilitating SDG investments; and the creation of a sovereign debt restructuring apparatus based on the Addis Ababa Action Agenda’s principles of a “fair, orderly, timely, and efficient” process.
Another interesting proposal is that of “debt-for-nature” swaps, which partially cancel a developing nation’s debt if it commits to conserving ecological resources within its borders, thus “swapping” the nation’s debt payments for environmental stewardship. While useful, these swaps do not provide a meaningful solution to either the debt or climate problem. Although, debt-for-SDG swaps and debt relief are preferable to debt rescheduling and are a net positive.
Overall, these solutions, while important, do not address the heart of the issue, which is structural in nature.
Turning a New (or Forgotten) Page
Our ability to meaningfully address the African debt crisis isn’t in question rather it is a question of our political will. Indeed, reforming a global system where Africa was relegated to supplying raw commodities in what are well known to be structurally disadvantageous terms of trade, resulting in the continuous need for debt, was central to calls in the 1970s for a New International Economic Order. This movement preoccupied African leaders like Thomas Sankara, Leopold Senghor, and Julius Nyerere.
What became of this initiative? In response, the U.S. Federal Reserve raised interest rates in 1977, in effect, intensifying Africa’s debt burden. Conservative Margaret Thatcher’s election to British parliament in 1979 solidified Western powers’ opposition to the proposals. The NIEO suffered its final death blow in President Ronald Reagan’s speech at the Cancún Economic Summit in 1981, where he declared that free markets and private investment, not amending the global monetary system, would herald development. This was followed by structural adjustment and Africa’s “lost decade” in the 1980s.
The idea was killed and forgotten.
Fast forward to 2021. In the wake of a raging pandemic, with the West’s economic hegemony waning and a billion-strong African population that is young and restless for change, can we imagine a new, post-COVID international economic order that addresses the root structural causes of Africa’s chronic indebtedness? Yes, and we have no choice.
What could this new New International Economic Order look like? It would have to address first and foremost the issue of African commodity dependence. One element would be to manage volatile commodity prices, through various market and non-market mechanisms to stabilize Africa’s revenues. Another necessary element would be to eliminate predatory pricing in global debt markets, currently to the detriment of African economies. Another measure would be to improve data collection and communication to dispel risk perceptions from investors and rating agencies. Another element would involve conclusively managing illicit financial flows, to prevent the capital flight that requires Africa to take on unnecessary debt to begin with. As importantly, there is no doubt that African countries must greatly accelerate efforts to diversify their economies from commodity exports, and harness the power of innovation, to sustainably build industrial and technological capacity. This is reliant on the continent’s revenue consolidation from commodity exports, lowering structural barriers in international trade such as tariffs, and political factors.
Fundamentally, debt is about power; this agenda should be pursued under a vision to rectify the imbalance of global economic power. One that, as Kwame Nkrumah advocated, prevents “the financial power of the developed countries being used in such a way as to impoverish the less developed.” One that restores Africa’s policy autonomy and transforms global economic institutions away from extractive debt and towards sustainable development. One that addresses past injustices and demands a future of mutually beneficial cooperation between nations.
