Thank you AFRODAD and partners for the invitation to join the inaugural event on debt and development and input the work of my firm Development Reimagined. I would like to share three key proposals from my firms work, particularly from our flagship project “Africa Unconstrained”. Our work under this flagship ties in well to the conference theme of African countries working together to be rule-makers.
Firstly, it is important to first make one data-driven observation to keep in mind before we talk of any “debt crisis”. While Africa’s debt in absolute terms has been on the rise since 2000 and 2010, if we look at debt as a percentage of GDP there was a huge peak in debt levels in the 1980s and 1990s, however now – in terms of economic size – the majority of debt levels are back to the late 1970s level of debt exposure. It means we are actually returning to “normal” debt levels, and – at least before COVID19 – there should have been significant room for growth. This growth was much needed to meet infrastructure needs.
Nevertheless, there is one similarity and one big difference between the late 1970s and now. Both now and in the 1970s economies experienced a worldwide external shock. In the 1970s, this was the oil crisis, and now economies are impacted by COVID-19 and the various measures that go alongside that health crisis. However, an important difference between now and the 1970s is the composition of debt, as there is a much broader range of creditors now, including the private sector and China. Furthermore, across the continent finance amounts from China differ widely. For example, Cabo Verde only has 2% of its total bilateral debt owed to China, Angola has over 80% of bilateral debt to China, and Djibouti’s debt from China accounts for close to 40% of GDP.
The variations depend on the country’s ability to borrow, China’s openness to new models and different risk analyses. This is because bilateral donors have reduced their finance and concentrated their finance on specific countries, while low credit ratings restrict access to private sector finance – a key source of finance. Furthermore, it is commonly thought that Multilateral Development Banks (MDBs) are infrastructure financiers, however, that role in our continent is taken by African Development Bank only – as, for example, the World Bank has not funded an independent new rail project since 2002. The reason this is important is that we cannot distinguish China’s role from the gap it is filling in a multilateral system that does not meet our needs. While China’s loans can be improved, the best way to do this is to improve the international system.
As such, here are three proposals from my firms’ analysis:
- We need to focus on the quality of debt, not the quantity. This includes asking questions such as, where are the funds going? How productive are these funds for recipient economies? How can civil society drive higher quality through transparency and analysis from the information already available? A starting point includes agreeing on what civil society views as high quality. For instance, is it recurrent expenditure, is it expenditure on infrastructure, which of these are best for women?
- We need to question aspects of the international system that are not meeting African needs. For instance, where does the 60% debt to GDP threshold that is used when determining “debt sustainability” come from, which also contributes to the risk analysis that credit rating agencies do? What is the evidence on this and how does that evidence relate to future financing needs? The entirety of African debt is minuscule in comparison to the rest of the world – equivalent to that of a singular country. Therefore, how can this create any “crisis” for a creditor? My firm was the first to point out that Special Drawing Rights (SDRs) allocation to Africa will be very small, although the narrative around SDRs is supposedly to help poor countries. We need to focus on reforming the system to avoid these outcomes, and to be truly in line with what the narrative is.
- We need to avoid what happened in the 1980s and 1990s. This includes avoiding structural adjustment-like policies through new loans. But this is not the only issue – the debt restructuring framework is also problematic, as this results in countries individually having all their creditors putting pressure on them. China has given debt relief, even a country like Zambia has had more debt relief from China as a creditor directly than the US or UK. We need more coordination across borrowers, alongside more accountability to citizens. How can borrowers learn from each other to get better outcomes from their creditors? How can they pool their risk to get more finance, as the Grameen Bank did for countries that could not get access to finance? Further, what role can African-owned organisations – like the African Monetary Fund – play, and how can the momentum of the AfCFTA be garnered to make these happen?
My firm has and is continuing to conduct analysis on these issues, and they are central to building forward together. We certainly can’t build back together, as that won’t meet our interests.
By Hannah Ryder