BusinessDay
NigeriaDecides2023

Yet another round of African debt restructurings (3)

If African economies take loans to build infrastructure and provide public services in a sustainable way, their recurrent debt troubles might be justifiable. But that is all too often not the case. These loans are taken without much care for sustainability, are often used for vanity projects at bloated costs, and a great deal of the proceeds end up in private pockets through corrupt means.

Even so, the case for another round of African debt relief and restructurings is strong. But there is clearly a moral hazard problem as well. If African leaders expect that their countries’ international debt will always be forgiven or restructured, there is no incentive for them to borrow wisely, spend cautiously, and pay back their debt.

The Chinese approach of liens on assets being funded has proved to be risky, as the citizens’ backlash to this approach in African capitals and abroad has shown.

Conditional loans by the IMF and western countries have been problematic in the past as well. True, the IMF and World Bank are now more nuanced with the conditionalities attached to their support programmes. And there are good results to show for this effort, as it is indeed true that many African economies are today better managed.

But there has to be a robust and enforceable agreement on a minimum quality of economic management going forward, with global mechanisms put in place to ensure that African leaders know the price will be high when they lose their way yet again

But the Covid-19 pandemic provided an opportunity for a regression to economic populism, with many African countries resorting to borrowings from their central banks and the international debt markets at suboptimal costs.

Debts in emerging markets
Debts in emerging markets

As the botched Chinese experiment with unconditional African lending is showing, international development support is more effective if it is conditional. But these conditions must be ones that take into cognizance the unique political and social characteristics of each African economy.

Read also: Yet another round of African debt restructurings (2)

Telling a country like Nigeria to float its currency abruptly and totally, for instance, will almost certainly cause a political crisis. Incrementalist economic reforms that are supported with hedges and mitigants by international development financial institutions are best. But this will require a long-term joint commitment with African governments on debt sustainability and economic reforms. As administrations change hands every four or five years via elections, sometimes to new parties, this may not be easily achieved for many African countries.

Still, an elite commitment across tribal, political, and religious persuasions to common economic causes can be secured towards what are clearly optimal developmental ends. There is an opportunity in the incipient African debt crisis once again to do this right. Yes, African economies should yet again be forgiven some of their debt. Yes, international creditors should yet again restructure some of the increasingly costly loans. And yes, the IMF and World Bank should open their vaults to help African economies during yet again another period of need.

But there has to be a robust and enforceable agreement on a minimum quality of economic management going forward, with global mechanisms put in place to ensure that African leaders know the price will be high when they lose their way yet again.

An edited version was originally published by the Italian Institute for International

Political Studies in Milan, Italy. See link viz. https://www.ispionline.it/en/pubblicazione/crisi-del-debito-ci-risiamo-36083

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