The dark side of infrastructure investment in Africa

How the Compact with Africa pushes Africa towards its next debt crisis

12 June by Collective

Essouira, Morocco (CC - Flickr - Davidlohr Bueso)

With its Compact with Africa the German G20 G20 The Group of Twenty (G20 or G-20) is a group made up of nineteen countries and the European Union whose ministers, central-bank directors and heads of state meet regularly. It was created in 1999 after the series of financial crises in the 1990s. Its aim is to encourage international consultation on the principle of broadening dialogue in keeping with the growing economic importance of a certain number of countries. Its members are Argentina, Australia, Brazil, Canada, China, France, Germany, Italy, India, Indonesia, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, USA, UK and the European Union (represented by the presidents of the Council and of the European Central Bank). presidency is actively promoting private loans and investment as solutions to infrastructure deficiencies on the African continent. The Compact aims at using public resources in order to improve the investment climate and mobilize private capital to finance investment critical to achieving sustainable development.

A position paper by the African Forum and Network on Debt and Development (Harare), European Network on Debt and Development (Brussels) and Jubilee Germany (Düsseldorf).

The need to invest in infrastructure is very much a consensus among all parties concerned with African development. There is also broad consensus that conditions to actually implement development efforts need to improve. However, the discussion about potential risks of such an investment initiative is limited to the risks for the investors and, therefore, only the improvement of investment conditions in African countries is discussed, so that (institutional) investors from industrial countries feel save to invest. There is no discussion about the risks to the debt sustainability of receiving countries. The German G20 G20 The Group of Twenty (G20 or G-20) is a group made up of nineteen countries and the European Union whose ministers, central-bank directors and heads of state meet regularly. It was created in 1999 after the series of financial crises in the 1990s. Its aim is to encourage international consultation on the principle of broadening dialogue in keeping with the growing economic importance of a certain number of countries. Its members are Argentina, Australia, Brazil, Canada, China, France, Germany, Italy, India, Indonesia, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, USA, UK and the European Union (represented by the presidents of the Council and of the European Central Bank). presidency entirely ignores that rising debt levels are the inevitable downside of any loan push into the Global South.

The initiative comes in a context of an already deteriorating global debt situation. Since the global financial crisis, there has been a steady rise in debt levels in African countries. The debt sustainability assessments of 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
show that currently, out of 37 African low-income countries, only 6 have a low risk of debt distress. 19 will get into trouble if external shocks materialize. Nine countries are classified as having a high risk of debt distress; three countries already are in debt distress. Research by Jubilee Germany shows that the debt situation deteriorated heavily between 2014 and 2015 and that currently, 43 countries in Africa have debt indicators above critical thresholds.

In such a situation, promoting a massive expansion of commercial borrowing is only responsible if reliable resolution mechanisms for debt distress situations are in place. Historical data prove that capital boom episodes are often followed by a wave of sovereign debt Sovereign debt Government debts or debts guaranteed by the government. crises, especially in developing countries. According to Reinhart, Reinhart and Trebesch, all the major spikes in sovereign defaults in the last 200 years “came in the heels of surges in capital inflows, especially those followed by ‘double busts’ in capital and commodity markets”. |1|

The last such default wave, often called the “Third World Debt Crisis”, took place in the 1980s and 1990s. The crisis was preceded by massive capital exports in the form of commercial bank lending to developing countries, a reaction to the investment plight caused by a low-interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. environment in the Western economies. However, debt crises soon followed as the global economic environment changed and international 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.
rose, commodity prices collapsed and capital flows reversed. Due to a lack of mechanisms that could provide for timely, orderly and effective debt restructuring, it took more than 20 years to resolve the crisis, in many cases with catastrophic economic and social costs.

Given this historical evidence and past experiences of protracted and costly crisis resolution, the Compact with Africa should only be promoted if the downside of resource mobilisation will be as much considered as the positive side. This means that countries that are hit by debt crises need to be able to receive timely and effective debt relief.

In March 2017, the G20 finance ministers adopted the position that for restoring long-term debt sustainability, it is important that debt restructurings are “conducted in good faith in a timely, orderly and effective manner, facilitating appropriate burden-sharing”. |2| Present debt relief schemes are neither timely, nor orderly, nor do they facilitate appropriate burden-sharing, which is why debt restructurings were and still are in many cases ineffective. As a consequence, it is imperative that the discussion in the context of the Compact with Africa includes how to improve the current debt crisis resolution architecture.

However, such discussions are entirely missing. In the Compact with Africa, the term “debt sustainability” only appears in relation to a better IMF monitoring of potential debt distress risks. While a more thorough monitoring makes sense, this does not mean that an eventual crisis can be better resolved. In the past, even when the IMF criticized individual investments or pointed to broader debt sustainability risks, this usually neither had substantial influence on the respective borrowing or lending decision, nor did the IMF manage to create a more timely and efficient debt crisis resolution framework.

This means that besides better risk monitoring, it is absolutely essential that the G20 promote the establishment of a fair and comprehensive sovereign debt workout mechanism if the Compact is not to become the starting point of the next African debt crisis.


Source: Pambazuka

Footnotes

|1| Reinhart, C. M., Reinhart, V., Trebesch, C. (2016) Global Cycles: Capital Flows, Commodities, and Sovereign Defaults, 1815-2015. CESIFO Working Paper No. 5737, p. 9.

|2| German finance ministry (2017) G20 Operational Guidelines for Sustainable Financing, http://www.bundesfinanzministerium.....

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