The North’s New Debt Trap for the South
Part 3
26 April 2021 by Eric Toussaint , Milan Rivié
The coronavirus pandemic and other aspects of the multidimensional crisis of global capitalism are enough to fully justify suspending debt repayment. Indeed priority must be given to protecting people against ecological, economic and public health disasters.
In the context of the current emergency, we have to assess longer trends that make it necessary to implement radical solutions to the issue of DCs’ debt. This is why we develop our analysis of factors that currently increase the unsustainability of the debt repayments claimed from countries in the Global South. We shall consider in turn the downward trend in commodity prices, the reduction of foreign exchange reserves, continued dependence on revenue from commodity export, the DCs’ debt payment calendar, with major repayments due between 2021 and 2025, mainly to private creditors, the drop in migrants’ remittances to their countries of origin, the backflow to the North of stock market investments, the perpetuation of capital flight. [1] Payment rescheduling granted in 2020-2021 because of the pandemic by creditor countries that are members of the Paris Club and of the G20 only accounts for a small portion of repayments owed by developing countries.
At the beginning of the 1980s, the fall in commodity prices was the second main factor triggering the Third World debt crisis. History repeats itself today for those vulnerable countries that remain dependent on their export revenues. Commodities Commodities The goods exchanged on the commodities market, traditionally raw materials such as metals and fuels, and cereals. are indispensable as the sole means of providing the foreign currency required for external debt payments. Yet since 2014-2015 they have been exported at prices far lower than those previously reached (see Graph 1). The reversal causes serious financial hardship for a number of countries dependent on revenues from oil, agriculture or minerals. This factor has been aggravated by the devaluation Devaluation A lowering of the exchange rate of one currency as regards others. of currencies of countries from the South against the US dollar. Oil exporting countries are particularly badly hit as oil prices have plummeted.
Graph 1: Evolution in commodity prices between November 2010 and November 2020 [2]
We can observe a clear correlation between the evolution of commodity prices and DCs’ external indebtedness. From 1998 to 2003, a period that saw backflow of DCs’ capital towards the countries of the North, commodity prices were relatively low. From 2003-2004 on, those prices began a steep increase culminating in 2008. This phenomenon attracted investors and lenders from the North who were looking for countries offering guarantees Guarantees Acts that provide a creditor with security in complement to the debtor’s commitment. A distinction is made between real guarantees (lien, pledge, mortgage, prior charge) and personal guarantees (surety, aval, letter of intent, independent guarantee). based on their resources in commodities and their export revenues. Thus, starting from 2008, there was a period of inflowing capital from countries of the North towards the DC. The governments and big private companies of the South were incited to take on more debt taking advantage of the super-cycle of commodities. Nevertheless there was a fall in 2009 due to the global crisis triggered by the major financial crisis of 2008 in the United States and Western Europe. Commodity prices rose again in 2010. In 2014 the cycle suddenly collapsed.
At the beginning of the 1980s, the fall in commodity prices was the second main factor triggering the Third World debt crisis. History repeats itself today for those vulnerable countries that remain dependent on their export revenues
From 2015 to 2020 commodity prices fluctuated upwards from year to year without ever recovering the peaks reached during the ’super-cycle’. In the wake of the economic and financial crisis aggravated by the health crisis, prices literally collapsed during the first half of 2020. Despite the rebound in prices in the second half of the year, the trend is clearly negative for a range of commodities between 1 January and 1 December 2020: -8.30% for all commodities (fuels: -31.21%; lead: -7.67%; cotton: -5.17%; cocoa beans: -11.92%; tea: -13.54%; coffee: -3.21%). Gold, a safe-haven asset Asset Something belonging to an individual or a business that has value or the power to earn money (FT). The opposite of assets are liabilities, that is the part of the balance sheet reflecting a company’s resources (the capital contributed by the partners, provisions for contingencies and charges, as well as the outstanding debts). , especially in times of crisis, rose by 21.76%.
With less export revenue, reserves fell rapidly (see graph 2) and indebtedness accelerated. 2020 ended on a strong increase of the debt.
Graph 2: DCs’ foreign exchange reserves in months of import [3]
The end of the ‘super cycle’ coincided with a steady drop in DCs’ foreign exchange reserves in months of import. Whereas countries dependent on commodities are advised to hold at least three months of import in foreign exchange reserve, low income countries are now well below this threshold. With the new fall in oil prices in 2020, the drop in export revenues, the higher amounts to be repaid from 2020 onward, a number of countries, particularly oil exporting countries, may not be able to repay their public external debt.
If you take the 29 low-income countries , with the exception of North Korea and Haiti, all depend on the evolution of the price of one commodity or another. We could extend the exercise to middle-income countries and find similar results
The price of commodities is of fundamental significance in the present system of indebtedness for DC. Colonialism followed by neo-colonialism, strikingly illustrated by the IFI’s 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/
programmes, have deliberately maintained the majority of DCs in an “extractivist” model: exporting commodities. Inadequately provided with infrastructures of transformation, they are extremely sensitive to volatility of prices. That volatility is sustained by speculation on the major international stock-markets. [4] If you take the 29 low-income countries (see Table 2), with the exception of North Korea and Haiti, all depend on the evolution of the price of one commodity or another. We could extend the exercise to middle-income countries and find similar results. For example in 2017, fossil fuels represented between 50 and 97 % of exports for the Democratic Republic of Congo (50 %), Gabon (70 %) and Angola (97 %); agricultural produce represented 80 % of exports from Grenada; mining products 75 % of exports from Zambia and 92 % from Botswana.
Box: What is an extractivist export-oriented model? This model consists of a set of policies that aim to extract from the soil and subsoil a maximum of primary goods (such as fossil fuels, minerals or timber) and to produce a maximum of agricultural produce intended for foreign market consumption, in order to export them on the global market. This model has numerous harmful effects: environmental destruction (open-air mines, deforestation, contamination of running water, salinization/ depletion/ poisoning/ erosion of soils, reduction of biodiversity, greenhouse gas emissions, etc.); destruction of the natural habitat and way of life of entire populations (first peoples and others); depletion of unsustainable natural resources; dependency on global markets (stock-markets for raw materials and agricultural commodities) where the prices of export products are determined; salaries kept low to remain competitive; dependency on technologies owned by the highly industrialized countries; dependency on inputs (pesticides, herbicides, seeds whether transgenic or not, chemical fertilizers…) produced by major transnational companies (mostly from highly industrialized countries); subjection to international financial and economic conditions. Source : Éric Toussaint, “Ecuador: From Rafael Correa to Lenin Moreno”, https://www.cadtm.org/Ecuador-From-Rafael-Correa-to-Guillermo-Lasso-via-Lenin-Moreno |
Table 1: Dependence of low-income countries on commodities (in months of import) [5]
Dependence on export of agricultural products | Dependence on export of fuels | Dependence on export of minerals, ores and metals | |||
---|---|---|---|---|---|
Countries | Reserves in 2019 |
Countries | Reserves in 2019 |
Countries | Reserves in 2019 |
Afghanistan | 12.02 | Sudan (2017) | 0.19 | Burkina Faso | Nc |
Central African Republic |
Nc | Chad | Nc | Burundi (2018) | 0.88 |
Ethiopia | 1.8 | Yemen | Nc | Eritrea | Nc |
Gambia (2018) | 3.59 | Guinea | 3.26 | ||
Guinea-Bissau | Nc | Liberia | 2.99 | ||
Madagascar | 4.38 | Mali | Nc | ||
Malawi | 2.82 | Mozambique | 4.36 | ||
Uganda (2018) | 4.18 | Niger | Nc | ||
Syria | Nc | DRC (2018) | 0.41 | ||
Rwanda | 4.28 | ||||
Sierra Leone (2018) | 3.47 | ||||
Tajikistan | 1.68 | ||||
Togo | Nc |
Table 2: Developing countries with foreign exchange reserves under 3 months of import
Low income countries | Lower middle income countries | Upper middle income countries | |||
---|---|---|---|---|---|
Ethiopia | 1.80 | Djibouti | 1.22 | Belize | 2.38 |
Liberia | 2.99 | Eswatini | 2.11 | Belarus | 1.86 |
Malawi | 2.82 | Ghana | 2.73 | Ecuador | 0.77 |
Tajikistan | 1.68 | Laos | 1.57 | Guyana | 1.79 |