Committee for the Abolition of Illegitimate Debt

In the first three parts we have observed the evolution of the DCs’ external debt over the last twenty years. The first part shows a dramatic increase of indebtedness, which multiplied by 2.5 with a steep acceleration from 2008 onward. The second part highlights the main threats on the DCs’ external debt, among which the growing significance of bonds, the evolution of interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation. and the depreciation of their currencies against the US dollar. The third part examines the various factors that lure DCs into the debt trap: dependence on commodities Commodities The goods exchanged on the commodities market, traditionally raw materials such as metals and fuels, and cereals. , drop in foreign exchange reserves, inflating repayments, conjuncture of a multi-dimensional crisis aggravated by the Covid-19 pandemic, etc.

We deepen our analysis by focusing on various regions, After Latin America and the Caribbean we continue with sub-Saharan Africa.

 1. All DCs - General focus

Graph 1: Comparison between loaned and repaid amounts per year (long-term total external debt – in billions of US$))

Graph 2: Comparison of the evolution of total debt stock Debt stock The total amount of debt with net transfers (long-term total external debt – in billions of US$))

Echoing table 1 in our first part, graph 1 compares borrowed amounts (in orange) and repaid amounts (in blue – also called debt servicing) on long-term total external debt per year. Graph 2 presents the evolution of the debt stock (in orange – scale on the right) and of net transfers (in blue – scale on the left).

As formerly mentioned, from 2000 to 2006, debt servicing outreached borrowed amounts while the debt stock increased only moderately. Net transfer was generally negative. In the following period from 2008 to 2019 net transfer became positive. We can notice an exception in 2015, when commodity prices plummeted. On the whole both debt stock and debt servicing have increased dramatically.

 2. Sub-Saharan Africa

In 2019, the population of Sub-Saharan Africa (where all countries are developing countries) was 1.107 million.

The 48 countries: [1]

• 23 low-income countries: Burkina Faso, Burundi, Central African Republic, Chad, Democratic Republic of Congo, Eritrea, Ethiopia, Gambia, Guinea, Guinea-Bissau, Liberia, Madagascar, Malawi, Mali, Mozambique, Niger, Rwanda, Sierra Leone, Somalia, Sudan, (with South Sudan), [2] Togo, Uganda
• 25 middle-income countries: Angola, Benin, Botswana, Cameroon, Cape Verde, Comoros, Congo, Côte d’Ivoire, Eswatini (formerly Swaziland), Gabon, Ghana, (Equatorial Guinea), Kenya, Lesotho, (Mauritius), Mauritania, (Namibia), Nigeria, Sao Tome and Principe, Senegal, (Seychelles), South Africa, Tanzania, Zambia, Zimbabwe.

Note that the WB World Bank
WB The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

classification can be questioned. However, we decided to use it to accommodate easier use of WB data. For a critical approach to the categories used by international institutions, see: ‘South/North / Developing Countries/Developed Countries – What is it all about?’ https://www.cadtm.org/South-North-Developing-Countries-Developed-Countries-What-is-it-all-about.

Graph 3: Comparison of the evolution of total debt stock by category of creditors (in billions of US$)

25 years after the launch of the HIPC initiative, Eritrea and Sudan have still not seen this conditional cancellation applied

In the graph above, we can see the two stages previously referred to, with a reduction of debts from 2004 to 2006 corresponding to an increase in revenues along with an increase in commodity prices. For this region in particular, one must also take into account the HIPC Heavily Indebted Poor Countries
HIPC In 1996 the IMF and the World Bank launched an initiative aimed at reducing the debt burden for some 41 heavily indebted poor countries (HIPC), whose total debts amount to about 10% of the Third World Debt. The list includes 33 countries in Sub-Saharan Africa.

The idea at the back of the initiative is as follows: a country on the HIPC list can start an SAP programme of twice three years. At the end of the first stage (first three years) IMF experts assess the ’sustainability’ of the country’s debt (from medium term projections of the country’s balance of payments and of the net present value (NPV) of debt to exports ratio.
If the country’s debt is considered “unsustainable”, it is eligible for a second stage of reforms at the end of which its debt is made ’sustainable’ (that it it is given the financial means necessary to pay back the amounts due). Three years after the beginning of the initiative, only four countries had been deemed eligible for a very slight debt relief (Uganda, Bolivia, Burkina Faso, and Mozambique). Confronted with such poor results and with the Jubilee 2000 campaign (which brought in a petition with over 17 million signatures to the G7 meeting in Cologne in June 1999), the G7 (group of 7 most industrialised countries) and international financial institutions launched an enhanced initiative: “sustainability” criteria have been revised (for instance the value of the debt must only amount to 150% of export revenues instead of 200-250% as was the case before), the second stage in the reforms is not fixed any more: an assiduous pupil can anticipate and be granted debt relief earlier, and thirdly some interim relief can be granted after the first three years of reform.

Simultaneously the IMF and the World Bank change their vocabulary : their loans, which so far had been called, “enhanced structural adjustment facilities” (ESAF), are now called “Growth and Poverty Reduction Facilities” (GPRF) while “Structural Adjustment Policies” are now called “Poverty Reduction Strategy Paper”. This paper is drafted by the country requesting assistance with the help of the IMF and the World Bank and the participation of representatives from the civil society.
This enhanced initiative has been largely publicised: the international media announced a 90%, even a 100% cancellation after the Euro-African summit in Cairo (April 2000). Yet on closer examination the HIPC initiative turns out to be yet another delusive manoeuvre which suggests but in no way implements a cancellation of the debt.

List of the 42 Heavily Indebted Poor Countries: Angola, Benin, Bolivia, Burkina Faso, Burundi, Cameroon, Central African Republic, Chad, Comoro Islands, Congo, Ivory Coast, Democratic Republic of Congo, Ethiopia, Gambia, Ghana, Guinea, Guinea-Bissau, Guyana, Honduras, Kenya, Laos, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Myanmar, Nicaragua, Niger, Rwanda, Sao Tome and Principe, Senegal, Sierra Leone, Somalia, Sudan, Tanzania, Togo, Uganda, Vietnam, Zambia. initiative launched in 1996, an initiative that “cancels” 90% or more of non-ODA ODA
Official Development Assistance Official Development Assistance is the name given to loans granted in financially favourable conditions by the public bodies of the industrialized countries. A loan has only to be agreed at a lower rate of interest than going market rates (a concessionary loan) to be considered as aid, even if it is then repaid to the last cent by the borrowing country. Tied bilateral loans (which oblige the borrowing country to buy products or services from the lending country) and debt cancellation are also counted as part of ODA. Apart from food aid, there are three main ways of using these funds: rural development, infrastructures and non-project aid (financing budget deficits or the balance of payments). The latter increases continually. This aid is made “conditional” upon reduction of the public deficit, privatization, environmental “good behaviour”, care of the very poor, democratization, etc. These conditions are laid down by the main governments of the North, the World Bank and the IMF. The aid goes through three channels: multilateral aid, bilateral aid and the NGOs. bilateral external debt (see Box 1) under the constraint of austerity policies imposed by the IMF IMF
International Monetary Fund Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org . Of the 38 countries concerned, 34 are in Sub-Saharan Africa. It should be noted that 25 years after its launch, Eritrea and Sudan have still not seen this conditional cancellation applied, mainly because of payment arrears to the Bretton Woods institutions. From 2006 onward, public external debt increased moderately before spiraling out of control from 2008. We may also distinguish four categories of creditors:

• in blue: bilateral creditors (loans between States);
• in yellow: multilateral creditors outside the IMF (loans from international financial institutions such as the World Bank and Development Banks);
• in red: loans from the IMF; [3]
• in green: private creditors; (dark green, loans on financial markets as sovereign bonds mostly sold on Wall Street; khaki, bank loans; light green, loans from other types of private creditors).

Graph 4: Comparison between the evolution of the total debt stock and of the net transfers on the public external debt for Sub-Saharan Africa (in $billion)

Remember that net transfer refers to the difference between what a country receives as loans and what it pays out in debt servicing (capital and interests included). If the amount is negative that country has paid out more than it has received.

In the graph columns in orange refer to net transfer.

From 2000 to 2019, the region’s public external debt multiplied by 2.43. Over the same period the net transfer was positive (+$217.54 billion). From 2000 to 2006 net transfer was negative to the tune of $19.35 billion, i.e. 2.15% of the region’s DCs GDP GDP
Gross Domestic Product Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another. in 2006. Financial crises in the North and capital flowing to countries of the South largely account for the positive net transfer over the following years (see part 1).

Over twenty years these countries borrowed $40.8 billion from the IMF and have since reimbursed $21.8 billion, of which, 19% is interest and fees

It is revealing of how critical these countries economic situation is that while their GNP Gross National Product
GNP The GNP represents the wealth produced by a nation, as opposed to a given territory. It includes the revenue of citizens of the nation living abroad. tripled between 2000 and 2008 (from $395 billion to $1.208 billion), it increased no more than 50% between 2008 and 2019 ($1.751 billion), with a sharp contraction in 2015-2016 echoing the end of the period of commodity market buoyancy.

The number of countries that have called on the IMF for funds over the same period is also telling. Forty-seven of them did so, in other words all of them except Eritrea, which has been awaiting HIPC measures since 1996. Over twenty years these countries borrowed $40.8 billion from the IMF and have since reimbursed $21.8 billion, of which, 19% is interest and fees.

Sub-Saharan Africa is the region of the World that is the hardest hit by the IMF and its austerity policies imposed through structural adjustment Structural Adjustment Economic policies imposed by the IMF in exchange of new loans or the rescheduling of old loans.

Structural Adjustments policies were enforced in the early 1980 to qualify countries for new loans or for debt rescheduling by the IMF and the World Bank. The requested kind of adjustment aims at ensuring that the country can again service its external debt. Structural adjustment usually combines the following elements : devaluation of the national currency (in order to bring down the prices of exported goods and attract strong currencies), rise in interest rates (in order to attract international capital), reduction of public expenditure (’streamlining’ of public services staff, reduction of budgets devoted to education and the health sector, etc.), massive privatisations, reduction of public subsidies to some companies or products, freezing of salaries (to avoid inflation as a consequence of deflation). These SAPs have not only substantially contributed to higher and higher levels of indebtedness in the affected countries ; they have simultaneously led to higher prices (because of a high VAT rate and of the free market prices) and to a dramatic fall in the income of local populations (as a consequence of rising unemployment and of the dismantling of public services, among other factors).

IMF : http://www.worldbank.org/ plans since the 1980s, the HIPC initiative since 1996 and since April 2020 the Debt Service Debt service The sum of the interests and the amortization of the capital borrowed. Suspension Initiative (DSSI). Among the worst hit countries are Côte d’Ivoire, Madagascar, Niger, Senegal, Congo (Democratic Republic) Togo [11] and numerous Central African countries. [12]

In absolute values, the foreign debt of Sub-Saharan DCs has followed the same course as the general course that DCs’ foreign debt has followed, with a rapid acceleration of indebtedness from 2008.

On the other hand what is distinctive of the region’s foreign debt is the nature of its creditors. First particularity is that the bilateral part although declining is still a full quarter of the total.
At one time largely preponderant, the Paris club members have seen their part dwindle to the advantage of, in particular, China which has become the principal creditor for the region. The multilateral part has remained fairly stable, varying between 36% and 42% over the period, with the IMF continuing to be well involved.

The second particularity is the part in bonds. Although increasing, it has still not come to the levels of the rest of the World (see other parts). There are two elements that explain this: a number of these countries are low income countries and the rating accorded by the notation agencies very often makes their borrowing conditions on the financial markets prohibitive. Those countries that do manage to borrow on the financial markets do so at high interest and costs, around 5.75 %, plus risk premiums.

Table 1: Evolution of the public external debt of Sub-Saharan African countries by category of creditors between 2000 and 2019, in absolute and relative value

Eighty-nine percent of the countries in the region are economically dependent on commodity exports; [15] eighteen countries are dependent on the export of agricultural products; eight are dependent on fossil fuel exports; seventeen on mining ores. Some, such as Ghana, which exports cacao and gold, are exporters in several categories.

Table 2: Commodity export dependence of Sub-Saharan African countries [16]

In the space of two decades, the region’s debt service has reached new records, quadrupling from $9.87 billion to$34.13 billion

In the period between 1^st March 2020 and 1^st January 2021, [17] countries of the region had their currencies sharply depreciated against the US dollar and the euro, i.e. the main foreign exchange reserves. True, twenty-five currencies did gain value against the dollar but mostly, because of their fixed parity rates (notably the 15 countries of the Franc CFA zones, that gain no real advantage from their situation) [18]. The others depreciated between 0.04% and 78.05 %. The average depreciation was 11.5 %. Against the euro and not counting fixed parities, except for Liberian money which gained 7.90%, the currencies lost between 4.95% and 80.37%, on average 16.76 %.

It should also be noted that under pressure from the IMF, and its creditors in order to see, after 25 years, the HIPC initiative implemented, Sudan devalued its currency on 21 February 2021. By aligning the Sudanese pound to the black market rate, reducing its value from 55 pounds for 1 US dollar to 375 pounds for 1 US dollar, Sudan again bowed to its creditors and the IMF. This is another example of the political blackmail inherent in the debt system. This devaluation Devaluation A lowering of the exchange rate of one currency as regards others. sounds like another blow to the people, who will see the cost of servicing the debt rise, as well as the prices of a range of essential imported foodstuffs. [19] It was the high cost of bread that started the popular movement that eventually led to the overthrow of President Omar El Béchir on 11 April 2019.

Graph 5. Debt service for DCs in the Sub-Saharan Africa region (US$ billion))

In the space of two decades, the region’s debt service has reached new records, quadrupling from $9.87 billion to$34.13 billion, with a peak $37.48 billion in 2018. In 2019, more than 60% of these DCs spent more on debt service than on health expenditure. Debt servicing in these 10 countries absorbed between 5.3% and 42.6% of government revenue. [20].

 Conclusion

Sub-Saharan African countries’ foreign public debt has very much increased. The current worldwide economic crisis makes it ever more difficult for these countries, many of which are in situations of overindebtedness or already in default, to continue on established debt repayment schedules. The latest payment default country is Zambia in November 2020.

In a region where health spending and human development levels are in dramatic condition, even compared to other developing countries, there is a stronger case than ever for unilateral suspensions of debt payments based on arguments recognized in international law, such as state of necessity and fundamental change of circumstances

Even if, according to official data, [22] the region seems to be less touched than elsewhere by the Covid-19 pandemic, the figures are rising steeply, aggravated by the South-African variant and the lack of vaccines. [23] The region is badly hit by other diseases such as malaria, tuberculosis, VIH, diarrheal diseases, and, cases of Ebola have again been identified in Guinea and Congo (Democratic Republic ). [24]

In a region where health spending and human development levels are in dramatic condition, even compared to other developing countries, [25] there is a stronger case than ever for unilateral suspensions of debt payments based on arguments recognized in international law, such as state of necessity and fundamental change of circumstances. This is a sine qua non condition for urgently reallocating public expenditure and creating the means to relieve some consequences of the pandemic. Such suspensions of payments must spur governments to take further steps to liberate human development, namely to move away from the neo-liberal framework while repudiating debts identified, through a process of citizen debt auditing, as illegitimate.

Further articles in this series will examine the tendencies of the debt burden in other regions of the global South.

Translated by Snake Arbusto, Vicki Briault, Mike Krolikowski and Christine Pagnoulle (CADTM)