A new trap of indebtedness of the South to the North - Part 3

Developing Countries caught in the vice-like grip of indebtedness

1 December 2020 by Eric Toussaint , Milan Rivié

We continue our analysis of the present-day factors that contribute to the unsustainable nature of debt repayments demanded of the countries of the Global South. We shall examine the following topics: the downward evolution of commodity prices; the reduction of foreign exchange reserves; how dependence on revenue procured by exporting commodities is perpetuated; the DC’s debt payment calendar which indicates that large repayments will fall due between 2020 and 2024 mainly to private creditors; the fall in migrants’ remittances to their countries of origin; the backflow to the North of stock-market investments; the perpetuation of capital flight. [1]

 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 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 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 Devaluation A lowering of the exchange rate of one currency as regards others. 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 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 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 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 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 productionDependence on exportation of fuelsDependence 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 1st 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:

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 Bond A bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. 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 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). 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 Paris Club This group of lender States was founded in 1956 and specializes in dealing with non-payment by developing countries.

. [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 Rating agency
Rating agencies
Rating agencies, or credit-rating agencies, evaluate creditworthiness. This includes the creditworthiness of corporations, nonprofit organizations and governments, as well as ‘securitized assets’ – which are assets that are bundled together and sold, to investors, as security. Rating agencies assign a letter grade to each bond, which represents an opinion as to the likelihood that the organization will be able to repay both the principal and interest as they become due. Ratings are made on a descending scale: AAA is the highest, then AA, A, BBB, BB, B, etc. A rating of BB or below is considered a ‘junk bond’ because it is likely to default. Many factors go into the assignment of ratings, including the profitability of the organization and its total indebtedness. The three largest credit rating agencies are Moody’s, Standard & Poor’s and Fitch Ratings (FT).

Moody’s : https://www.fitchratings.com/
, 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 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. 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 Stock-exchange
The market place where securities (stocks, bonds and shares), previously issued on the primary financial market, are bought and sold. The stock-market, thus composed of dealers in second-hand transferable securities, is also known as the secondary market.
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 UNCTAD
United Nations Conference on Trade and Development
This was established in 1964, after pressure from the developing countries, to offset the GATT effects.

estimates that illicit financial flows represent an annual loss of 89 billion dollars, which is the equivalent of Official Development Assistance ODA
Official Development Assistance
Official Development Assistance is the name given to loans granted in financially favourable conditions by the public bodies of the industrialized countries. A loan has only to be agreed at a lower rate of interest than going market rates (a concessionary loan) to be considered as aid, even if it is then repaid to the last cent by the borrowing country. Tied bilateral loans (which oblige the borrowing country to buy products or services from the lending country) and debt cancellation are also counted as part of ODA. Apart from food aid, there are three main ways of using these funds: rural development, infrastructures and non-project aid (financing budget deficits or the balance of payments). The latter increases continually. This aid is made “conditional” upon reduction of the public deficit, privatization, environmental “good behaviour”, care of the very poor, democratization, etc. These conditions are laid down by the main governments of the North, the World Bank and the IMF. The aid goes through three channels: multilateral aid, bilateral aid and the NGOs.
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 World Bank
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.

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 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.

, 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)


[1Unless otherwise indicated, all the data used in the graphs come from the World Bank website.

[2“State of commodity dependence 2019”, UNCTAD, p.8. Accessible at: https://unctad.org/en/PublicationsLibrary/ditccom2019d1_en.pdf

[3Gerard Le Puill, « Speculations permanentes sur les matieres premieres » (Permanent speculation on commodities), (in French only), l’Humanite, 26 June 2019. Accessible at: https://www.humanite.fr/speculations-permanentes-sur-les-matieres-premieres-674133

[4“State of commodity dependence 2019”, UNCTAD, p.25-30. Accessible at:

[5These were Argentina, DRC, Gambia, Grenada, Mozambique, Sao Tome and Principe, South Sudan, Venezuela and Yemen.

[6These are the countries of the World Bank’s IDA. See: https://ida.worldbank.org/about/borrowing-countries

[7See World Bank, “COVID 19 : Debt Service Suspension Initiative” (updated once a week) https://www.worldbank.org/en/topic/debt/brief/covid-19-debt-service-suspension-initiative See also Milan Rivié, “6 months after the official annoucements of debt cancellation for the countries of the South : Where do we stand?” 18 September 2020. Accessible at: 18948

[8See especially Aurelie M’Bida, « Dette africaine : Moody’s face aux foudres de l’ONU et de la Banque mondiale », JeuneAfrique, 22 July 2020. Accessible at: https://www.jeuneafrique.com/1018565/economie/dette-africaine-moodys-face-aux-foudres-de-lonu-et-la-banque-mondiale/ and Nelly Fualdes, « Dettes africaines : pourquoi les prêteurs privés se rebellent », JeuneAfrique, 18 May 2020. Accessible at: https://www.jeuneafrique.com/946163/economie/dettes-africaines-pourquoi-les-preteurs-prives-se-rebellent/ Both articles in French.

[9See Eric Toussaint, “The Capitalist Pandemic, Coronavirus and the Economic Crisis”, 19 March 2020. Accessible at 18230

[10See especially Eric Toussaint, “The Credit Crunch is Back and the Federal Reserve Panics on an Ocean of Debt”, 25 September 2019. Accessible at: 17707

[12See “Global Financial Integrity”. Accessible at: https://gfintegrity.org/data-by-country/

[13See UNCTAD report “Tackling Illicit Financial Flows for Sustainable Development in Africa”, 28 September 2020. Accessible at: https://unctad.org/system/files/official-document/aldcafrica2020_en.pdf

[14Julien Bouissou, « La diaspora est devenue le bailleur de fonds le plus fiable : l’indispensable argent des migrants », 15 December 2019, Le Monde. Accessible at: https://www.lemonde.fr/economie/article/2019/12/15/l-indispensable-argent-des-migrants_6022957_3234.html (in French only)

[15See CNCD-11.11.11, Rapport 2020 sur l’Aide belge au developpement, (2020 Report on Belgian Development Aid, in French), September 2020. Accessible at: https://www.cncd.be/IMG/pdf/2020-cncd-11.11.11-rapport-aide-belge-au-developpement-web.pdf

[16World Bank, “World Bank Predicts Sharpest Decline of Remittances in Recent History”, Press briefing on 22 April 2020. Accessible at: https://www.worldbank.org/en/news/press-release/2020/04/22/world-bank-predicts-sharpest-decline-of-remittances-in-recent-history

[17{{}} See Léonce Ndikumana and James K. Boyce, Africa’s Odious Debts: How Foreign Loans and Capital Flight Bled a Continent, London: Zed Books, 2011.

[18Ibid footnote page n° 15.

[19“List of LIC DSAs for PRGT-Eligible Countries. As of June 30, 2020”. Consulted on 31 July 2020. Accessible at: https://www.imf.org/external/Pubs/ft/dsa/DSAlist.pdf

Eric Toussaint

is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège, is the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France.
He is the author of Greece 2015: there was an alternative. London: Resistance Books / IIRE / CADTM, 2020 , Debt System (Haymarket books, Chicago, 2019), Bankocracy (2015); The Life and Crimes of an Exemplary Man (2014); Glance in the Rear View Mirror. Neoliberal Ideology From its Origins to the Present, Haymarket books, Chicago, 2012, etc.
See his bibliography: https://en.wikipedia.org/wiki/%C3%89ric_Toussaint
He co-authored World debt figures 2015 with Pierre Gottiniaux, Daniel Munevar and Antonio Sanabria (2015); and with Damien Millet Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. He was the scientific coordinator of the Greek Truth Commission on Public Debt from April 2015 to November 2015.

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Milan Rivié

CADTM Belgium
milan.rivie @ cadtm.org
Twitter: @RivieMilan

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