Kenyan police using a water cannon to disperse anti-finance bill protesters in Nairobi. After a new tax increase incited weeks of deadly riots in Kenya early this summer, President Ruto (left) announced that he was reversing course and abandoning the finance law he had proposed. — ©2024 The New York Times Company
AFTER weeks of deadly riots in Kenya sparked by a new tax increase earlier this summer, President William Ruto announced a U-turn. He abandoned his proposed finance law and reshuffled his Cabinet.
Then, the government reversed course once again, with the newly appointed finance minister announcing the reintroduction of some of the discarded tax increases.
The Ruto administration is desperate to raise revenue to pay off billions of pounds in public debt and avoid defaulting on its loans, even as essential public services and assistance are being slashed. This dilemma is echoed across Africa.
At the end of 2022, the continent’s foreign debt surpassed US$1.1 trillion. Over two dozen countries are considered to have excessive debt or are at high risk, according to the African Development Bank Group.
A staggering 900 million people live in countries where interest payments on debt exceed spending on healthcare or education.
While substantial debt has been a persistent issue in the developing world, the current crisis is considered the most severe to date, owing to the sheer amount owed and the exponential rise in the number and types of foreign creditors.
In a continent brimming with both potential and peril, debt overshadows nearly every aspect of life in Africa.
It restricts investment in job creation for the youngest, fastest-growing population on the planet; it limits resources for managing potential pandemics like Covid-19 or monkeypox; it hinders the ability to provide basic necessities such as food, housing, and education; and it impedes efforts to combat the devastating effects of climate change, which threaten to render vast swathes of land uninhabitable and force mass migrations.
If no action is taken to help the countries manage this financial crunch, “a wave of destabilising debt defaults will end up severely undermining progress on the green transition, with catastrophic implications for the entire world”, warns a new report from the Finance for Development Lab at the Paris School for Economics and Columbia University’s Initiative for Policy Dialogue.
Simultaneously, economic stagnation, coupled with government corruption and mismanagement, has rendered many African nations more vulnerable to violent conflicts, military coups, and anti-government riots.
In Nigeria, where foreign debt amounts to US$40bil, soaring inflation and widespread hunger fuelled a wave of violent anti-government protests this month.
Forty per cent of the country’s 220 million people live in extreme poverty. Yet, over a third of the government’s revenue is used to service its public debt.
In Uganda, where foreign creditors are owed US$12bil, demonstrations erupted in July, targeting corruption. And in Kenya, burdened by US$35bil in external debt, some protesters have declared their readiness to march again following the recent news of impending tax increases.
Across many African countries, per capita income growth has stagnated for the past decade. The debt crisis has led to a depreciation of many currencies, further eroding purchasing power.
The series of economic shocks stemming from the Covid-19 pandemic and Russia’s invasion of Ukraine exacerbated the debt crisis.
Food and energy prices skyrocketed as government coffers dwindled. Central banks in wealthy nations raised interest rates to combat inflation, leading to a rapid increase in borrowing costs.
However, the crux of the issue lies not solely in the amount of money borrowed by countries like Kenya and Nigeria but also in the identity of their lenders.
In recent decades, the pool of potential lenders has expanded dramatically, encompassing thousands of private bondholders and a prominent new geopolitical player: China.
Seeking to bolster its global influence and counter American and European dominance, China has emerged as the world’s largest national lender, financing infrastructure projects such as roads, ports, bridges, airports, power plants, telecommunications networks, and railways in developing countries.
Many nations, frustrated by the terms imposed by Western lenders or the International Monetary Fund, eagerly sought alternative sources of financing. Agreements with China were often less transparent but often lacked environmental, financial, or human rights restrictions.
China now accounts for 73% of bilateral borrowing in Kenya, 83% in Nigeria, and 72% in Uganda, according to the United Nations Conference on Trade and Development.
A report by the National Bureau of Asian Research found that over the past two decades, one in five infrastructure projects in Africa was financed by China, with Chinese firms constructing one in three projects.
While some projects, like Kenya’s railway between Nairobi and Mombasa, have become notorious for corruption and blunders, many of these large-scale infrastructure projects are unlikely to generate enough revenue to justify their costs.
Despite deteriorating economic conditions and loan repayment prospects, China has been hesitant to offer debt relief.
Instead, it has insisted on repayment, extending credit swaps and rollovers that merely postpone the inevitable reckoning.
For instance, it took Zambia nearly four years to reach a loan restructuring agreement after it defaulted in 2020, largely due to opposition from China, the country’s largest creditor.
The monumental surge in the number of private bondholders and creditors has further complicated efforts to resolve debt crises.
The IMF and the World Bank encouraged poor and middle-income countries to embrace Wall Street and seek private loans overseas during the 2010s, explained Jayati Ghosh, an economist at the University of Massachusetts Amherst.
With extremely low interest rates and investors eager for higher returns, development officials hoped nations could tap into this vast new source of capital.
However, this resulted in governments borrowing excessively to garner political support or finance development, while creditors, driven by profit, lent excessively.
The sudden rise in interest rates forced countries to take out new loans at exorbitant costs to repay their previous debts.
Investors also imposed costly loan terms, such as higher interest rates, on struggling nations teetering on the brink of default, a phenomenon known as a risk premium.
Kenya’s government paid over 10% on international bonds to settle a US$2bil debt that matured in June.
Countries that borrow beyond their means inevitably experience severe economic and social consequences: output collapses, unemployment surges, and inflation and poverty escalate.
The systemic problem, according to Indermit Gill, chief economist at the World Bank, is that lenders who made unwise decisions by extending excessive credit often face no financial penalties.
“You got paid a risk premium for a reason,” Gill said of the lenders, adding that if they don’t absorb losses, they will continue to make reckless loans.
“That’s a major weakness in the way the system works.”
This debt overhang impedes countries from making investments that could stabilise their economies and enable them to repay their loans.
Moreover, funds intended for economic development are often diverted: emergency loans from international institutions like the IMF and the World Bank have been used to repay private foreign creditors or China.
In Kenya, the central bank announced in June that private creditors would receive US$500mil from a World Bank loan.
As the Finance for Development Lab report concluded, “The global community is currently funding loans to developing countries, which end up ‘leaking out’ to pay off other creditors.” — ©2024 The New York Times Company
