1 December 2020

1. The fall in commodity prices

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

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 are indispensable as the sole means of providing the foreign currency required to ensure 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 of currencies of countries from the South compared with the US dollar.

Graph 1: Evolution of commodity prices between 1998 and 2018 (year of reference = 2015) [2]

We see a clear correlation between the evolution of commodity prices and DC’s external indebtedness. From 1998 to 2003, a period that saw backflow of DC’s 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 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 2015 the cycle suddenly collapsed.

2. The fall in foreign exchange reserves

With less export revenue, reserves fell rapidly (see graph 2) and indebtedness accelerated until 2018. As soon as the data concerning debt for 2019 and 2020 are available, we will probably find that the increase in indebtedness has carried on.

3. How dependence on exporting commodities is perpetuated

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 importance in the present system of indebtedness for DC. Colonialism followed by neo-colonialism, strikingly illustrated by the IFI’s structural adjustment programmes, have deliberately maintained the majority of DC 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. [3] 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.

Table 1: Dependence on commodities for low-income countries [4]

Dependence on exportation of agricultural production		Dependence on exportation of fuels		Dependence on exportation of minerals, ores and metals
Country	Foreign exchange reserves in 2018	Country	Foreign exchange reserves in 2018	Country	Foreign exchange reserves in 2018
Afghanistan	12.2	Sudan	0.2	Burkina Faso	NC
Central Africa	NC	Chad	NC	Burundi	0.9
Ethiopia	2.4	Yemen	NC	Erythrea	NC
Gambia	3.6			Guinea	3.3
Guinea-Bissau	NC			Liberia	4.9
Madagascar	3.9			Mali	NC
Malawi	2.9			Mozambique	3.5
Uganda	4.2			Niger	NC
Syria	NC			DRC	0.4
				Rwanda	4.3
				Sierra Leone	3.5
				Tajikistan	4.4
				Togo	NC

With the trade-war between the United States and China and the general slow-down in growth intensified by the multidimensional crisis of Covid-19, commodity prices have continued to fall dramatically during the 1^st semester of 2020.

4. The DC’s debt repayment calendar

The sums that the DC must repay are particularly high and the effects of the crisis will increase them even more in the coming years. (Obviously the table below cannot show this.) Governments are increasing public debt to alleviate the drastic situation of the year 2020.

Graph 3: Repayment of the DC’s external public debt – 2007-2026 (in billions of $US)

Graph 3 shows the amounts paid by the DC by type of creditor:

• In blue: bilateral creditors
• In yellow: multilateral creditors
• In green: private creditors. Dark green represents the amounts due for sovereign debt bonds; khaki represents repayments of bank loans; light green payments due to other kinds of private creditors.
  A considerable increase of payments can be seen between 2007 and 2018, with an increasing share allocated to repaying loans issued in the form of sovereign debt bonds. In 2015, with the fall in commodity prices (which was even worse in 2020), the rise in interest rates (especially loans in the form of sovereign bonds) and the global slowdown in economic growth, 9 DC defaulted on their payments. [5]

The trap of indebtedness is closing slowly but surely on a growing number of DC

As of 2019, note that the data are minimal projections, which are likely to increase. However the amounts are already considerable. You can see the tendency to rise of the part owed in the form of sovereign bond repayments. As well as the factors mentioned, the effects of the Covid-19 pandemic will need to be factored in.

Because of the pandemic, the G20 countries have granted a moratorium on repayments of the bilateral part for the period from May to December 2020. This moratorium may be prolonged in 2021. The operation consists of postponing the payments on the bilateral part owed in 2020 (and perhaps 2021) to between 2022 and 2024. So those amounts would be added to the repayments already scheduled for those two years and would make it even harder to find the money. Although 73 countries were selected, [6] only 42 countries have actually reached an agreement with the Paris Club. [7] Why so few? There are two reasons. The first concerns the inadequacy of the measure which simply postpones payment of a mere 0.67 % of the DC’s external public debt; and the second is that they are blackmailed by the private creditors and the rating agencies, the latter indicating that countries applying for a moratorium risk seeing rating agencies downgrading their rating, thus losing them access to the finance markets. [8] In other words, the creditors promise to increase interest rates for those countries, while the rating agencies promise to limit their possibilities of obtaining finance on the money markets. As a consequence, those countries will find themselves having to repay a greater amount with fewer resources. Returning to Table 1, such economic circumstances look like bringing back negative net transfers for the DC; in other words, they will find themselves repaying more money than they are getting in the form of new loans.

The trap of indebtedness is closing slowly but surely on a growing number of DC.

5. Other factors aggravated by Covid-19

Although the Covid-19 crisis cannot be blamed for all the economic difficulties countries are going through, it certainly has played a role in intensifying unprecedented financial speculation by the sheer extent of it, as well as a decrease in production from mid-2019 in economies as big as those of Germany and the United States

Although the Covid-19 crisis cannot be blamed for all the economic difficulties countries are going through, it certainly has played a role in intensifying unprecedented financial speculation by the sheer extent of it, as well as a decrease in production from mid-2019 in economies as big as those of Germany and the United States. [9] Finance vacillated significantly in Wall Street in Autumn 2019 [10] and again in February-March 2020 with the generalisation of lockdown followed by massive intervention on the part of the central banks. [11] The crisis which has spread catastrophically since March 2020 will have long-term consequences in terms of job losses, loss of revenue and difficulty in meeting debt payments.

In the wake of the crisis, we are seeing repatriation of financial resources from the Periphery to the Centre which is causing among other things the collapse of stock-markets in countries of the South, while those of the North have rallied since mid-March. Thus the stock-exchange of Sao Paulo (Brazil) has fallen by 16 % since the beginning of the year, that of Mexico has lost 15.6 % over the same period, the Santiago stock-exchange in Chile has fallen 24 %, Nairobi’s has lost 15.6 %, South Africa’s 4.5 %, Morocco’s 17 %, the stock-exchange in Mumbai (India) has fallen by 4 %. (All percentages shown correspond to the period between 1 January 2020 and 5 October 2020.)

Other elements are instrumental in drying up the financial resources available for the DC, alongside a rise in expenditure (to deal with the pandemic) and a fall in revenue. With instruments of monetary control conveniently placed where they can “do no harm” by the International Financial Institutions (IFI), and their structural adjustment policies, the DC are suffering major capital flight. In 2015, the Global Financial Integrity think-tank estimated illicit financial flows leaving the countries of the South at between 438 and 600 billion dollars per annum, i.e. 20 % of the total external public debt of the countries of the South. [12] For Africa alone, UNCTAD estimates that illicit financial flows represent an annual loss of 89 billion dollars, which is the equivalent of Official Development Assistance and direct foreign investments combined. [13] The shortfall is so great that Africa and many other developing countries are actually net creditors of the countries of the North, all the more since these estimates are based on minimal projections.

Africa and many other developing countries are actually net creditors of the countries of the North

In their quest for safe placements, investors are also likely to shun issues of sovereign bonds by the DC in most difficulty unless they agree to an increase in interest rates and risk premiums, which will add to the already heavy bill for debt repayment.

As for Direct Foreign Investments (DFI), UNCTAD predicts a decline of 40 %. With the closing of borders and airports, several countries are bound to lose revenue linked to tourism, which is considerable for some.

6. The drop in remittances from migrant families to their countries of origin

The expected drop of 20 % of these remittances will translate into an increase of poverty and ever greater difficulty in repaying external public debt

Another significant factor is the net drop in remittances from the diaspora, which have always accounted for far more funding than that provided by Official Development Assistance (ODA). [14] (See Graph 4). Now those remittances mostly arrive in hard currency, enabling States to put the dollars or euros or other hard currencies towards repaying their external public debt. The fall in income for households in the South due to the reduction of the amounts they receive from family members working abroad has the effect of reducing their consumption and automatically of diminishing their ability to pay direct or indirect taxes. This will reduce public revenue and weaken their capacity to make debt repayments. It will also force already impoverished families to borrow money to survive.

Graph 4: Remittances from the diaspora and Official Development Assistance received by DC (in billions of $US)

Graph 4 compares remittances from the diaspora (in blue) to ODA (in orange) received by DC. Over a period of 18 years, ODA has tripled in absolute value, going from 48.36 billion to 165.59 billion dollars. But in fact that increase is a smokescreen. In relative value, ODA has fallen to 0.3 % of gross national income (GNI) of contributing countries, far short of the objective of 0.7 %. [15] Moreover, one has to question the quality of this “assistance”, for although it is partly donations, most of it consists of loans which may be affected to some extremely dubious uses such as border control, the costs incurred in detaining migrants or debt cancellation. Over the same period, remittances from the diaspora have been multiplied by 6.5, going from 73.95 billion to 485.27 billion dollars. In 2019, a new record was reached with 554 billion dollars remitted. [16] Furthermore, to avoid paying commissions claimed by banks and firms specialized in international money transfers, a significant percentage passes through informal circuits invisible to the statistics of institutions. [17] Remittances from the diaspora represent at least 3 times ODA, probably a lot more. Above all, they are indispensable income for the DC’s populations, who often lack the means to pay for health and education expenses, and even food. Often sent in hard currencies, (dollar, euro, etc.), for the State they also constitute a significant part of the foreign exchange reserves at its disposal. Due to the Covid-19 crisis, the World Bank expects a drop of 20 % of these remittances in 2020. [18] In other words, this will translate into an increase of poverty and ever greater difficulty in repaying external public debt.

7. Countries with payment difficulties

At the moment 20 % of DC are in a situation of over-indebtedness, that is 1 country out of 5: it is a lot. And there are just under 15 % of DC in suspension of payment

Table 2 illustrates the elements analyzed in this chapter. According to the IMF, 20 % of DC are at present in a state of over-indebtedness. In both cases, Sub-Saharan Africa is the most represented region. Then come East Asia & the Pacific, followed by Latin America & the Caribbean.

Table 2: List by region of DC in a situation of over-indebtedness or suspension of payments [19]

8. Summary

To summarize parts 2 and 3, we have:

• A massive increase in DC debt starting in 2008, meaning a massive inflow of private capital;
• An unprecedented increase in the part of debt taking the form of sovereign public bonds with bigger repayment terms beginning in 2020 ;
• The beginning of backflow of the financial resources that had been sent from the North to the stock-markets of the South;
• Interest rates on public loans made by the South on the rise, which is likely to further compound the worsening indebtedness of DC already announced;
• Severe degradation of exchange terms due to the brutal and continuous fall of commodity prices accompanied by devaluation of DC’s currencies as against the US dollar;
• Covid-19 dominating the news and uncertainty hovering over the DC economies;
• A reduction in foreign exchange reserves;
• A fall in migrants’ remittances towards their countries of origin;
• 9 countries in suspension of payments since 2015 and 19 countries in all. To which must be added 28
  countries at high risk of over-indebtedness.
  A new debt trap is closing on the countries of the South. It is high time to act.

Translated by Vicki Briault and Christine Pagnoulle (CADTM)

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