The Re-emerging African Debt Crisis. Renewed IMF “Economic Medicine”

As economies face structural challenges due to continuing dependency the cost of borrowing is rising

23 November 2015 by Abayomi Azikiwe

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During the 1970s-1990s much attention was focused on the rising debt crisis in post-colonial Africa. Continental states after gaining national independence realized that there could be no genuine development while financial obligations to western-based lending institutions were rapidly escalating.

With the balkanization of the continent during colonialism, the national independence movements without political integration and economic unification faced formidable challenges in setting priorities related to social spending and sustainable planning.

Much of the instability led to a further fracturing of the political landscape which found its expression in military coups and other forms of anti-democratic practice. These seizures of power by the armed forces and the police were often prompted by economic crises engineered by the financial institutions and multi-national corporations whom were seeking to maximize their profits at the expense of the majority of workers, farmers and youth.

A Perfect Storm is Coming Soon

A recently-held Strategic Growth Forum in Johannesburg, South Africa examined these problems by presenting data on the increasing debt-to-Gross Domestic Product GDP
Gross Domestic Product
Gross Domestic Product is an aggregate measure of total production within a given territory equal to the sum of the gross values added. The measure is notoriously incomplete; for example it does not take into account any activity that does not enter into a commercial exchange. The GDP takes into account both the production of goods and the production of services. Economic growth is defined as the variation of the GDP from one period to another.
(GDP) ratios. This year, Africa’s sovereign debt Sovereign debt Government debts or debts guaranteed by the government. levels rose to 44 percent of GDP, a 10 percent rise from 2010 when Africa’s debt-to-GDP ratio stood at 34 percent.

The Director of Africa Research at Standard Charter Bank, Razia Khan, said of the expanding debt bubble during the Forum that on the continent “African countries have had notable access to capital markets, but the build-up of public debt in recent years is troubling. To give you an example, the benchmark GDP-to-debt ratio for African countries is generally 40 percent, but you have many countries like Ghana for example who far surpass these levels.”

Quartz Africa Weekly Brief covered the presentation made by Khan observing that “Until recently, Ghana was lauded as one of Africa’s fastest growing economies. But the West African country has had to battle with the depreciation of the Cedi, its currency, increased power outages and low commodity prices.” (November 5)

Following the patterns of previous years the same article recalls that “In April this year, the International Monetary Fund 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.
(IMF) approved a $918 million loan to help Ghana to boost economic growth and job creation,” while ostensibly protecting social spending. “To help refinance some of its existing debt, the country also launched a $1.5 billion Eurobond last month. Khan predicts that the IMF will increasingly play an extended role in African economies, as many will battle with debt management strategies.”

Another article published by Independent Online in South Africa pointed to both Ghana and Zambia as states which have accepted the IMF and 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.

financial prescriptions for dealing with the crisis of post-colonial states, with results today which contradict the choruses of praise by western analysts as the volume of debt in relations to GDP is growing exponentially. Zambia, a large-scale producer of copper, has suffered from the fluctuation of commodity prices which the government relies upon for its foreign exchange earnings.

According to Independent Online

“the Zambian economy is under siege. The country is battling with a host of issues, both domestic and external. On the external front, the slow-down in the Chinese economy, emerging market risk aversion and a plunge in commodity prices have taken their toll, while internally the country is facing a power crisis, fiscal pressures and an election next year. The combination of these issues has seen the Zambian kwacha become the worst performing currency over the past year, losing more than 80 percent of its value. Zambia’s situation bears similarities to those exhibited in Ghana around its 2012 election, which has raised alarm that it could be heading down the same path.” (October 20)

The Crisis of Neo-Colonialism Continues From the 1960s to the Present

The IMF and the World Bank as early as the 1960s began to provide credit and consequent economic plans for the reduction of African sovereign debt. In Ghana, after the Central Intelligence Agency (CIA) backed military and police coup of February 1966, the IMF extended credit to the West African state setting the stage for the reversal of the socialist experiment enacted under the First Republic led by Dr. Kwame Nkrumah and the-then ruling Convention People’s Party (CPP), which governed the country during the transition period of 1951-56 and independence between 1957-1966.

Ghana Business and Finance newsletter said of the period after the overthrow of Nkrumah that

“A long-standing relationship has existed between Ghana and IMF dating back to 1966. From that time, successive governments have signed separate loan arrangements with the IMF. Indeed, the relationship has suffered bitter divorces and ambivalent reconciliations over the years. For instance, when in 2006 the country was exploring other financing options, it pulled out from the IMF loans arrangement. But it came back in 2009 to borrow a whopping US$602 million from the international financial institution, thus reaffirming the important role that the Fund plays in the economic life of Ghana. “(April 24, 2015)

The hardships engendered by the IMF role in the post-CPP imposed political construct in Ghana created the social conditions which resulted in yet another military coup in January 1972. Instability continued with successive military seizures of power in 1978, 1979 and 1981.

By the mid-to-late 1980s Ghana had gone further than any other African state in adopting an Economic Recovery Program (ERP) as part of an overall 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).

Program (SAP) framework that served as a blueprint for other governments on the continent. Despite the progressive and revolutionary legacy of the Nkrumah-CPP period, the country has largely remained within the orbit of the western capitalist and imperialist systems.

These developments in regard to Ghana have been evaluated from two different perspectives. There are those who say that the IMF loans have provided stability to the otherwise turbulent economic situation. On the other hand, those within the country who have suffered from the impact of the imposition of austerity say that the western-based financial institutions have strangled the ability of Ghana to determine its own future in the 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. of the majority of people within society.

By the conclusion of the 1990s, significant portions of the debt had been written off and re-scheduled. Today this problem is re-emerging due to several factors including the decline in commodity prices, growing class divisions and reliance on foreign direct investment.

This financial crisis emanates from Wall Street and other centers of borrowing throughout capitalist states. Within the leading industrialized countries of the West, there has still not been a full recovery from the economic crisis of 2007-2009. Unemployment remains high and consumer spending is low due to the loss of wages and household wealth.

Consequently, the availability of credit to African states will be far more limited during the second decade of the 21st century than what prevailed in the 1980s, 1990s and the 2000s. Repressive measures by neo-colonial client states will intensify in efforts to suppress mass demonstrations and strikes which are erupting as workers and youth demand the enactment of government policies that are designed to stem the tide of currency devaluations and the imposition of austerity.

Moreover, the continuing dependency on the neo-colonial system will serve as an impediment to not only national but regional and continental integration and economic planning. These issues of course require more of a political response rather than economic.

The genuine political independence and sovereignty of African states must lead to the rejection of the conditions established by the IMF and World Bank. Such a position will place leaders and political parties on an automatic collision course with the imperialist system of international finance capital.



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