Since the first half of 2020, the novel coronavirus (COVID-19) has spread worldwide and had various impacts. Its effects have reached even the economies of Africa. African countries had long faced severe poverty, and their debt repayments had already reached a critical point. The pandemic has further worsened this already difficult situation. In March, African countries led by Ethiopia issued a document calling for debt reduction and restructuring. In response, the G20 decided to grant a one-year suspension of debt repayments to 76 of the poorest countries, many of which are in Africa.
IMF African Consultative Group (Photo: IMF / Flickr [CC BY-NC-ND 2.0]）
But will this alone put Africa’s debt problem on the path to resolution? Why did these countries come to accumulate so much debt in the first place, and why are repayments so burdensome? This article explores these questions.
Background and causes leading up to the current debt crisis
African countries, which gained independence one after another in the 1960s and were showing economic growth, saw a sudden shift with the oil crisis that occurred in the 1970s. Triggered by the 1973 Middle East war, the oil crisis caused a sharp rise in oil prices, placing a heavy burden on oil-dependent businesses and consumers and dealing a blow to African economies. The recession in high-income countries caused by the oil crisis also reduced demand for natural resources produced in Africa, further harming African economies. These factors reduced government revenues in Africa. In addition, Middle Eastern and other countries that profited from higher oil prices deposited vast sums in banks in high-income countries, and those banks aggressively promoted loans. In the midst of the Cold War, governments in high-income countries, eager to bring African nations into their camp, guaranteed those loans through their own banks and lent massive amounts to the authoritarian regimes then ruling many African countries, regardless of their ability to repay. African governments, struggling with revenue declines due to the oil crisis, borrowed as encouraged and ended up with enormous debts.
Underground gold mining in Mali (Photo: Dave Dyet/Flickr［CC BY-NC 2.0］）
In the 1980s, global interest rates rose following high interest rate policies in the United States, and African countries fell into debt crises one after another. According to the NGO Jubilee Debt Campaign, which works on global debt issues, a debt crisis refers to a situation where “debt takes priority over human lives themselves or leads to violations of human rights.” In response to the excessive debt in Africa, the World Bank and the IMF implemented policies known as Structural Adjustment Programs (SAPs). As conditions for new loans or lower interest rates, these policies imposed strict fiscal austerity, trade liberalization, and the promotion of privatization of state-owned enterprises. However, the UN Economic Commission for Africa (ECA) criticized these measures for leading to sluggish domestic investment, increased unemployment among civil servants, and the abandonment of the poor, and announced an alternative plan. In practice, spending cuts on education and health due to austerity ultimately accelerated impoverishment.
Following the failure of these structural adjustment programs, the World Bank and IMF established the Heavily Indebted Poor Countries (HIPC Initiative) (※1) in 1996, carried out debt relief, and reduced low-income countries’ debt service burdens. Furthermore, in 2005 the Multilateral Debt Relief Initiative (MDRI) (※2) was launched. Through HIPC and MDRI, 37 countries, including many in Africa, had more than $100 billion of debt resolved.
That same year’s G8 summit placed the debt issues of low-income countries on the agenda. Citizen movements gained momentum across several countries in tandem with the summit, including marches in the host city calling for debt cancellation and the Live8 concerts held in eight cities worldwide to demand wiping out Africa’s debts. The momentum from these movements also added pressure, and ultimately the G8 approved 100% cancellation of debts owed by 14 heavily indebted African countries to the IMF, the World Bank, and the African Development Bank.
People marching with “Debt Relief” signs in front of the U.S. Department of the Treasury in 2005 (Photo: Friends of the Earth International［CC BY-NC-ND 2.0］）
Why Africa’s debt has once again reached a critical situation
From the developments so far, various measures have been taken regarding Africa’s debt, and at first glance the problem may seem to be moving toward resolution. So why are African countries once again struggling with debt today?
There are several causes. The first is the financial crisis triggered by the 2008 bankruptcy of Lehman Brothers. The rapid economic downturn that began in the United States spread worldwide and brought recession to Africa as well. Demand for exports from Africa, foreign direct investment, tourism, remittances from migrant workers, and development assistance all declined. At the same time, lending from high-income countries to African nations increased. To respond to the financial crisis, banks in high-income countries lowered interest rates, and the U.S. Federal Reserve implemented quantitative easing, which pushed rates down even further. Lower interest rates made borrowing easier, and as a result, African countries’ borrowing increased. Additionally, as governments in Africa sought to weather the financial crisis by increasing public spending, their debt problems became even more serious.
The second cause is that African countries invested heavily in infrastructure. Due in part to long histories of colonial rule, infrastructure levels in Africa have historically lagged far behind those of high-income countries, creating an infrastructure gap. To close this gap, African governments increased investment in infrastructure development, financing much of that increase through debt.
Civil engineers building a road in Nigeria (Photo: Stanley 2321/Wikimedia［CC BY-SA 4.0］）
The third cause is the global decline in commodity prices and markets since 2014. Due to the slowdown in China’s economy and the shale gas revolution in the United States, prices for commodities such as oil and industrial metals fell. This price decline reduced revenues for countries that export these commodities. In addition, sharp depreciations in exchange rates caused debts denominated in foreign currency to balloon.
Then, the spread of COVID-19 in 2020 further accelerated the deterioration of the debt problem. Economic activity within the African continent dropped significantly. Massive sums have been poured into health care and economic measures, resulting in even more debt. The pandemic-induced fall in oil prices also worsened the debt situation. Major oil producers such as Nigeria, Angola, Gabon, and Algeria have been particularly affected. In Nigeria—where crude oil accounts for about 90% of exports and roughly one-third of government revenue—the national budget has been sharply cut and the naira has been devalued.
The specific state of Africa’s debt
To whom, and in what amounts, do African countries currently owe money?
As of 2017, African governments’ total external debt was estimated at US$417 billion. Looking at the share of debt relative to GDP in African countries, as of 2019 the figure is particularly high in countries such as Eritrea (184.7%), Cabo Verde (132.4%), Angola (132.2%), Mozambique (125.4%), the Republic of the Congo (119.9%), and Zambia (109.8%). In terms of what share of government budgets is devoted to debt service, as of 2017 the figure was about 12%, double the 6% figure from 2010. Moreover, in many African countries, spending on debt service exceeds spending on public health; as of 2020, 32 countries in Africa allocated more to debt service than to health care. This can rightly be called a debt crisis.
So, to whom is this debt owed? The breakdown of Africa’s external debt is 36% owed to multilateral institutions such as the World Bank and IMF (funded mainly by contributions from high-income countries), 32% to bilateral creditors (of which 20% is to China), and 32% to private creditors.
Let’s look at the debt composition of several African countries at risk of debt distress. In Chad, 49% is owed to private creditors, 24% to multilateral institutions, and 8% to China—roughly half is to private creditors. In Djibouti, 68% is owed to China, 20% to multilateral institutions, and 0% to private creditors—meaning a very large share is owed to China. By contrast, in The Gambia, 71% is owed to multilateral institutions, 6% to private creditors, and 0% to China—most borrowing is from multilateral institutions. The counterparties to which debts are owed vary greatly by country and region.
Toward solving the debt problem
What measures are available to solve Africa’s debt problem, and how effective might they be?
One approach is the moratorium on debt repayments decided by the G20 in April 2020. This measure allows heavily indebted countries to temporarily avoid allocating budgets to debt service and focus on rebuilding their economies. Another option is to inject funds into heavily indebted countries to stimulate their economies. However, these are only temporary fixes; it is unclear how much time and money will be needed to restore economies that have fallen into debt crises, and these measures will not lead to fundamental solutions. Furthermore, the measure applies only to the G20 and has no binding force over banks or private companies. Debt cancellation or forgiveness is another possible route, but it implies an inability to repay and can lead to the loss of a country’s creditworthiness—making it difficult to borrow in the future. In addition, active obstacles to cancellation include predatory vulture funds that buy distressed debt cheaply and pursue full repayment in order to extract even more money from countries that have defaulted.
For a long-term, fundamental solution to Africa’s debt problem, it is necessary to resolve the system that forces Africa to borrow—namely, global inequality. If we add up all inflows and outflows—trade, investment, debt and debt service, remittances from migrant workers, and official development assistance—more money leaves Africa than enters it. Major causes include illicit financial flows generated by tax avoidance via tax havens during import/export transactions, and the existence of unfair trade for African countries. Solving these problems is indispensable.
There is also the issue of climate change. The climate change occurring today is mainly caused by greenhouse gases emitted by high-income countries. Nevertheless, low-income countries such as those in Africa bear the brunt of natural disasters caused by climate change. This leads to a phenomenon known as “climate apartheid” (※3), which widens the wealth gap and worsens debt.
The current debt situation is not fair, and it is ethically problematic in that repayment is prioritized over human life. As one option, it has been proposed to refuse debt service in order to invest in medical care and public health.
These structural problems that have caused African countries to suffer under massive debts cannot be solved overnight. However, because lending is based on an assessment of repayment prospects, responsibility lies not only with the “borrowers” but also with the “lenders.” Fundamental solutions therefore require countries on both sides to engage proactively with this issue. If we end with the temporary measures currently in place rather than seeking more far-reaching solutions—across countries, and across the public and private sectors—the deep-rooted debt problem plaguing African countries will not be resolved.
※1 Initiative for Heavily Indebted Poor Countries (HIPC Initiative). A scheme under which heavily indebted countries struggling with debt repayment can receive debt relief by meeting certain conditions and committing to and demonstrating progress on policy changes for poverty reduction. Currently 40 countries are eligible or potentially eligible for support.
※2 Abbreviation of The Multilateral Debt Relief Initiative (MDRI). Within the HIPC framework, this scheme provides full debt relief for countries that qualify.
※3 A phenomenon in which the capacities of the rich and the poor to respond to various problems caused by climate change differ, thereby widening existing wealth disparities.
Writer: Hisahiro Furukawa
Graphics: Hisahiro Furukawa
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