Why can't African countries stay out of debt?
by Onize Ohikere
Posted 2/05/16, 08:00 am
Some Sub-Saharan African countries are once again wallowing in debt more than a decade after receiving major debt forgiveness.
In 2005, U2 frontman Bono joined a debt coalition campaign to relieve 32 African countries of their debt burdens, raising more than $100 billion. The result was astounding: Mozambique’s debt declined from 86 percent of its gross domestic product to 9 percent in 2005. The international community also forgave nearly half of Ghana’s debt, 82 percent of its gross domestic product.
The debt forgiveness had its benefits. The region’s business environment boomed, commodity prices rose, and global financial conditions created a positive environment for growth.
“It’s helped incredibly,” said Eric LeCompte, executive director of Jubilee USA Network, an economy reform organization. “In Sub-Saharan Africa, we’ve seen 54 million kids go to school who’ve never seen the inside of a classroom.”
But as the region’s debt starts to accumulate and governments head down a familiar path, it’s obvious the real problem is a bigger issue of internal regulation that debt forgiveness can’t remedy. Mozambique’s debt is already back at 61 percent of GDP, and Ghana’s is at 73 percent.
Part of the problem can be attributed to a shift in the global economy. In a region substantially reliant on commodity exports, the decline in demand for raw materials hit hard.
“China, the largest single trade partner of Sub-Saharan Africa, is rebalancing its growth away from manufacturing, construction, and exports—where production inputs are highly skewed toward raw materials—toward the services sector and consumption,” the International Monetary Fund (IMF) wrote in an analysis of the region’s economic outlook.
The plight gets worse for oil-exporting countries. Within the last year and a half, Nigeria has seen its oil prices fall by nearly 70 percent as it struggles with a $15 billion budget deficit. The country recently asked the World Bank and African Development Bank for a $3.5 billion loan to buffer the impact of the oil crisis.
African currencies also are feeling the burden of the crisis. The Zambian kwacha weakened by 42 percent over the past 12 months. But that might not be all bad. According to IMF analysts, it’s better for the countries to devalue their currencies as a way to absorb the financial shock: “Resisting downward pressures on the currency not only risks depleting reserves, but also means that the adjustment to the shock would instead have to be borne via import compression and lower growth.”
But the bigger struggle for many Sub-Saharan economies is tied to the lack of a structured economic system, which makes it easy to slide back into debt.
“There are a lot of issues that haven’t changed yet, like regulations around responsible lending and borrowing is very important,” LeCompte said. “Having a bankruptcy process in place, being able to raise tax revenues that corporations and multinationals are avoiding in Sub-Saharan Africa.”
The developing world annually loses $1 trillion to tax aversion and corruption. It will take a while for African countries to reform their economic systems, but Paulo Mauro of the Peterson Institute for International Economics suggests they start by cutting spending.
“It’s the same for a person who loses his or her job,” he said. “You have to reduce your consumption and if you have some savings, you can do it gradually. But at the end of the day, that has to happen, unfortunately.”
Onize is a reporter for WORLD Digital based in Abuja, Nigeria.