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Africa’s New Debts
by ajohnstone
23 March 2017

Mozambique is the first major African nation in recent times to become unable to meet obligations to international creditors. In 2012, Mozambique’s obligations to its creditors amounted to 40 percent of Gross Domestic Product (GDP), they now total 130 percent. Banks and investment funds were keen to lend Mozambique money believing it would be safe because the country possesses huge reserves of coal and natural gas. Those investors have been left empty-handed.

A decade after the last major debt write-down, African states are again in difficulties.

The German NGO Erlassjahr.de (Jubilee Germany), which campaigns for debt relief, has identified as many as 40 African countries which are showing signs of heavy indebtedness.

“This is not surprising because today’s economic indicators are telling a story very similar to the situation in the late 1970s and early 1980s which led to the Third World debt crisis,” said J├╝rgen Kaiser, political coordinator at Jubilee Germany. In the wealthy industrialized countries, interest rates are very low, but in Africa investors can fetch returns of between seven and 15 percent. 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 subsequent decline in tax revenue in economies that are dependent on oil, natural gas, coal or other raw materials.

This latest debt crisis may come as a surprise to some people because numerous developing countries had a large share of their debts written down under the Heavily Indebted Poor Countries (HIPC) Initiative. However, commentators who were convinced at the time that that this initiative launched by the World Bank, the International Monetary Fund and the G-8 group of leading industrialized nations, including Germany, would solve the developing nations’ debts problems turned out to be wrong.

“Mozambique is a very dramatic case. It is the first country to cease repayments in such an abrupt significant manner since HIPC debt relief,” said Jürgen Kaiser. “But countries such as Gambia or Ghana, which also have an abundance of natural resources, are in a very critical situation as well. Senegal, which does not have much in the way of natural resoures, is also in difficulties once again,” he added. On analyzing World Bank data of African nations’ indebtedness with foreign countries, it quickly becomes apparent that a large number of African economies have recently acquired dramatic levels of new debt. Between 2005 and 2015 - the most recent year for which figure are available - Angola, Ghana, Kenya and South Africa have witnessed a threefold increase in their debt levels. Smaller countries such as Cape Verde also borrowed fresh capital during this time frame.


ajohnstone