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African Debt Isn't The Problem - The Global Financial System Is - African Business Magazine
African Debt Isn't The Problem - The Global Financial System Is - African Business Magazine
African Debt Isn't The Problem - The Global Financial System Is - African Business Magazine
https://africanbusinessmagazine.com/opinion/african-debt-isnt-the-problem-the-global-financial-system-is/ Page 1 of 5
African debt isn’t the problem – the global financial system is - African Business Magazine 12/11/2020, 15:10
First, with Covid-19, few countries are growing, let alone collecting new
taxes. The IMF’s World Economic Outlook, Autumn 2020 report predicts a
3% fall in GDP for sub-Saharan Africa in 2020.
Second, African countries have to repay loans from multiple lenders – from
other governments such as the US, UK, Japan, France and China; from
multilateral banks such as the IMF, World Bank, and AfDB; and commercial,
private banks such as Goldman Sachs, as well as various state-owned banks
such as China-Exim or India-Exim.
They have used these loans for infrastructure and recurrent expenditure
such as key worker and civil servants’ salaries, as well as medical
equipment and vaccines for life-threatening diseases. These loans have
different repayment schedules – some have “grace periods”, some don’t;
some have high and variable interest rates, some don’t earn any interest;
some need to be repaid within five years, others within 30 years.
https://africanbusinessmagazine.com/opinion/african-debt-isnt-the-problem-the-global-financial-system-is/ Page 2 of 5
African debt isn’t the problem – the global financial system is - African Business Magazine 12/11/2020, 15:10
This lack of fiscal space is why Ethiopia’s prime minister called for debt
relief so early on. In response, the G20 agreed to provide a “repayment
holiday” from May to December 2020 worth $5.2bn for Africa. China went
further and cancelled repayments for all zero-interest loans expiring in
2020, and recently announced its willingness to extend the repayment
holiday into 2021.
The World Bank, IMF and AfDB responded by committing $50bn, $26bn
and $10bn respectively in support – the vast majority of which is new loans.
Some IMF loans – for instance to Ethiopia, Nigeria and South Africa – will
need to be repaid within four years.
But even these positive steps are lacking. The fact is, Covid-19 does not
expose a looming debt crisis, it exposes a fundamental mismatch between
the finance that African countries need to grow and the loans they can
afford.
Before Covid-19, the AfDB estimated that African governments need extra
finance to pay for a massive $68-$108bn worth of infrastructure every year
up to 2030. In a post-Covid-19 age this infrastructure is arguably more, not
less, essential. Roads and trains are needed to transport medical equipment
and food across borders. Covid-19 requires fibre-optic cables for children to
e-learn from home and for rural communities to access digitised
government services. New power plants need to run factories. And even
more finance is needed to make Africa’s infrastructure low-carbon and
climate resilient.
https://africanbusinessmagazine.com/opinion/african-debt-isnt-the-problem-the-global-financial-system-is/ Page 3 of 5
African debt isn’t the problem – the global financial system is - African Business Magazine 12/11/2020, 15:10
Accordingly, not only are the solutions being applied so far insufficient in
the short-term, they are also grossly inadequate to meet long-term needs.
International debt markets, as currently shaped, exclude and penalise the
poorest countries that need them most. If a long-lasting solution to Covid-
19 debt problems is to be sought, the global debt system itself needs to be
reimagined.
Yunus’s bank enabled people to club together to take loans, as well as make
slower and smaller affordable repayments together. The system, though it
had faults, has been replicated globally and enabled millions of people to
access debt to durably lift themselves out of poverty.
https://africanbusinessmagazine.com/opinion/african-debt-isnt-the-problem-the-global-financial-system-is/ Page 4 of 5
African debt isn’t the problem – the global financial system is - African Business Magazine 12/11/2020, 15:10
This borrower’s club could be combined with other ideas for addressing the
Covid-19 debt challenge. For instance, there are proposals for IMF member
states to issue or reallocate special drawing rights (SDRS) to deal with
Covid-19 – as they did after the 2009 financial crisis. Some of the SDRs
could kickstart the borrowers’ club. Similarly, a special purpose vehicle that
Vera Songwe, head of the UN’s Economic Commission for Africa, has
proposed could be merged with the borrower’s club.
The fact is, Covid-19 is exposing the world’s true financial conundrum – a
debt deficit, not a debt overload. We must think innovatively to construct
long-term solutions that shift the balance in favour of empowering
worthwhile borrowers. If not now, when?
https://africanbusinessmagazine.com/opinion/african-debt-isnt-the-problem-the-global-financial-system-is/ Page 5 of 5