Committee for the Abolition of Illegitimate Debt

In new analysis released ahead 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 and World Bank 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.

Annual Meetings in Bali, Indonesia, Jubilee Debt Campaign show that China accounts for one-fifth of external debt owed by African governments. Recent news reports have claimed that China is responsible for causing new debt traps on the African continent. The new figures show that China’s role as a lender on the continent has indeed been growing, but its relative importance is less than often stated, especially in regard to countries currently in debt crisis.

Street sellers in front of a mural in Lusaka, capital of Zambia. Zambia is one country in debt crisis where China is a significant lender, accounting for 30% of Zambia’s debt. But 50% is owed to private lenders, mainly under English law (Photo David Brown / Flickr).

The briefing,‘Africa’s rising debt crisis: Who is the debt owed to?’shows that debt problems are increasing rapidly for many African countries, with average government external debt payments doubling in two years, from an average of 5.9% of government revenue in 2015 to 11.8% in 2017.

The briefing also shows that of external debt owed by African governments, around 20% is owed to China, 35% is owed to multilateral lenders, 32% to private lenders and 13% to other governments. However, 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. tend to be higher on private sector loans, which therefore account for 55% of 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. payments, compared to China which accounts for 17% of interest payments.

The briefing also investigates who debt is owed to by the countries that currently have the greatest debt problems. Of the 16 African countries rated by the IMF as in debt distress or at high risk of being so, on average 15% of their debt is owed to China. China is therefore on average a less significant lender in debt crisis countries, than across the whole continent.

Tim Jones, Economist at the Jubilee Debt Campaign, said:

“Debt problems are worsening on the African continent, but many lenders bear responsibility, not just China. We need new rules to make all lenders publicly disclose loans to governments at the time they are given. Furthermore, the IMF needs to stop responding to debt crises by giving loans which bailout other lenders, from China to Western companies, incentivising them to continue lending recklessly. Instead, lenders need to be made to restructure and reduce debts.”

The data in the briefing comes from the IMF, World Bank and the China-Africa Research Initiative at John Hopkins University (CARI). The full briefing is available here.