Africa’s debt woes had long seemed insoluble. But the days of the debt crisis now look numbered
The African debt crisis is coming to an end – or at least that’s the international verdict for a large swathe of the continent. And the day when debt is no longer the big issue for even the more problematic creditors m ight not be too far away. Liberia is working to complete the reconciliation of its estimated $1–1.4 billion obligations to the London Club of commercial bank creditors. Meanwhile, the club’s negotiations with Cote d’Ivoire are expected to conclude soon. In November, the Republic of Congo (Brazzaville) reached agreement with banks on a major write-down, nearly wiping out a foreign debt burden that had once amounted to about $2,000 for every person in the country.
Some problem creditors remain. BNP Paribas’ Thierry Desjardins, chair of the London Club, tells Emerging Markets there is still no sign that the Democratic Republic of Congo is close to engaging in talks. And, although Angola has agreed to clear repayment arrears to the Paris Club of governmental creditors by January 31, 2010, it continues to resist negotiating a reform deal with the IMF, preferring to set up bilateral financings with China. But the path towards resolving the debt problems that characterized much of the 1980s and 1990s has been taken by a majority of countries. “For countries like Congo [Brazzaville] and – as I soon hope, Cote d’Ivoire – these reductions of debt give them a chance to once again find their financial equilibrium,” says Desjardins.
While agreements with private creditors may not reduce the strain on national cash flows – because in many cases governments are not making repayments anyway – it changes the way they are perceived once a new, and manageable, accord with creditors is in place. “The fact of having a debt which is paid up to date, and which is sustainable, alters their credibility,” Desjardins says. This allows them to finance new projects such as – in Congo-Brazzaville’s case – modern timber ventures, the revamp of Pointe Noire docks or a paper-pulping operation.
Nigerian breakthrough
The major breakthrough of recent years was Nigeria’s decision to use a hefty slice of its windfall oil earnings to pay off most government debt to both private and public foreign creditors at a substantial discount. Some $12.1 billion went to the Paris Club of official creditors and around $2.25 billion went to clear up accounts with the London Club banks. Although domestic critics felt the money could have been better used on public services or in paying off local business creditors, it took Nigeria a further step down the path of restoring international financial credibility.
Since the mid-1990s, peaceful and low-income countries such as Mali, Uganda, Tanzania, Ghana, Mozambique and Benin have been rewarded for their steady economic reforms. They have secured debt relief under the Heavily Indebted Poor Countries (HIPC) and Multilateral Debt Relief initiatives. Their oil-producing neighbours mostly lagged behind. Nigeria, Congo-Brazzaville and Angola were reluctant to bow to the economic reform conditions demanded by their international partners.
Meanwhile, Liberia, Cote d’Ivoire and the Democratic Republic of Congo (DRC) were caught up in conflicts that undermined any attempts to implement serious long-term economic policy. Radical changes in internal conditions or government thinking have produced the latest spurt of progress towards an African exit from the debt crisis.
Liberia, for example, has performed well under an IMF programme and in mid-March was formally granted access to relief. It has been given a 67% write-off under the so-called Naples terms, which are applied to debts from the poorest nations. A further cancellation of 91% of the remaining debt above that has been added, and further relief, from the African Development Bank and the World Bank, could follow.
There are still troubling moments. Congo-Brazzaville has been persistently targeted by so-called vulture funds, which buy debt cheaply on the secondary market and then bring legal action in western jurisdictions, to extract repayment from the debtor country at a much reduced level of discount.
With the debt pressures eased, the focus is shifting towards how countries can sustain growth and development, and make effective use of the resources they have freed. “Whatever the resource flows, do they know how to manage?” says Harry Broadman, a senior economist in the World Bank’s Africa department: “You still have to see the extra resources trickling down through the system.”
He says governments have to develop the systems to manage public expenditure effectively and sufficient detailed data to monitor the results. At the same time, some governments are also starting to tap the international markets for new funds – and finding a ready welcome from investors. There was hefty demand for Ghana’s debut $750 million, 10-year Eurobond last September. Gabon followed in December. Zambia, Kenya and Nigeria have also shown interest in taking this route.
Such market-based financing can probably not carry the full burden of funding public budgets. But, as Broadman says, they do establish a useful benchmark of status. “If you are able to float these issues it’s going to encourage foreign direct investment.”