Africa debt woes: When will it stop raining?

This week we resume our debt series with the third instalment of the articles. A conversation I had with Wandia Musyimi, a Research Associate at Anjarwalla & Khanna, with whom I usually co-write this column, turned first to what Dambisa Moyo termed ‘Dead Aid’.

Although convincing and fiery, some of the argumentative flaws that supported aid conversations could not be carried forward when discussing debt in Africa. So Wandia’s analysis tries to dismantle the belief that debt relief in itself causes poor economic growth and unremarkable human development. Instead she proposes that other factors may be to blame for dismal development.

In Dambisa Moyo’s controversial book ‘Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa’ (2009), she asserts that the US $1 trillion in development–related aid that had been pumped into Africa for over five decades only led to decreased economic growth and increased poverty.

Moyo’s arguments were founded on shaky grounds. Although she illustrated how increased aid coincided with decreasing growth, she fell short in her attempt to prove that aid had actually caused poor economic growth. It is also equally likely that without aid, growth would have been slow.

It is prudent to avoid the same trap when discussing contemporary development questions, particularly those that relate to debt. This is the third instalment of a four-part debt series that has so far uncovered the ugly side of debt through several African examples.

The first example is the Mozambican hidden loans case worth US $2.2 billion, of which US $1.2 billion was borrowed in secret by state-owned companies. In Kenya, the recent Court of Appeal decision surrounding the Standard Gauge Railway (SGR) resulted in a judgement of unconstitutional behaviour on the part of the Kenya Railway Corporation for the manner in which it procured China Road and Bridge Company as a contractor.

Another developing instance is happening in West Africa. Nigeria’s National Assembly is to set up an investigation committee to review Chinese loan contracts since the year 2000, with a view to ascertaining their viability and even possibly renegotiating them.

The unanimously adopted motion that was presented by Member of Parliament Benson Igbakpa essentially cited fears of the aptly titled ‘debt-trap diplomacy’. This phenomenon describes predatory loan practices that drive countries into debt servitude and jeopardise sovereignty. Chinese loan contracts in Africa and around the world have given a fresh impetus to this notion. It is worth remembering that African nations have been here before, whether as debtors to multilateral institutions post-independence, or as pawns in the Cold War diplomatic battles. 

Nonetheless, we must neither be quick to conclude that debt is detrimental to development, nor that debt relief programmes such as the Multilateral Debt Relief Initiative (MDRI) and Heavily Indebted Poor Countries (HIPC) initiatives – which have been the focus of this series – do more harm than good.

HIPC was better than nothing, but less than ideal

The short–lived successes of the HIPC and MDRI debt relief initiatives have contributed to our bleak outlook towards debt in Africa.

Data sourced from World Bank Fiscal Space Data Set

As illustrated above, while the HIPC initiative managed to ensure that debt-to-GDP ratios of African HIPC countries were restored to manageable levels (between 2000 and 2007), shortly after the completion of the programme, HIPC countries' debt-to-GDP ratios began rising steadily and eventually surpassed non-HIPC countries. Without the initiative though, debt levels would have soared exponentially to about 400% of GDP.

As a result of debt reduction, it was presumed that the savings made would be directed towards increased social expenditure. The overall goal, like with aid, was to improve development indices of HIPC countries. On average HIPC countries annual debt service payments were cut down to about 1% of GDP between 2009 and 2016.

Having averted debt crises, the general expectation was that improved fiscal space would boost development, which is measured below using the Human Development Index (HDI). This index takes into account quality of life indicators such as health, education and standard of living.

The diagrams below trace human development in African HIPC countries against non-HIPC countries in order to assess whether HIPC countries experienced greater human development compared to the rest.

Data sourced from UNDP human development report

Indeed with increased savings from debt relief, spending directed towards health, education, and other public goods in HIPC countries increased from less than 6% of GDP prior to 2000, to more than 8% on average since 2009.

Unfortunately, as illustrated above, this did not translate into noteworthy improvements in Human Development Indices (HDI) of HIPC countries. Furthermore, despite HIPC countries having more room to invest in public goods and develop infrastructure, HDI in these countries did not increase at a much faster rate than in non-HIPC countries. 

Essentially, higher government spending was largely ineffectual in the HIPC universe. Governments’ ability to spend more to advance public goods did not mean that they actually spent more on these facilities. And because of this, sustained meaningful development was impossible during and after the HIPC period.

As one human rights scholar argues, while “basic maths— comparing money spent on debt servicing with funds budgeted for public health programmes, for example— suggests that debt relief has great potential to help governments progressively realise economic and social rights, the reality is far more complicated.”

This is what this series has stressed from its onset; that the reason it is always raining in Africa might not be purely financial. There are other endemic reasons why nations are bleeding out.

The reason it is always raining inAfrica

This is the point of divergence from Moyo’s arguments; HIPC debt relief in itself neither caused poor economic growth nor was it the cause of unremarkable human development.

The binding constraint, and the thing that lies at the heart of aid, debt and debt relief, is their management. With that, it is an unsurprising fact that in places characterised by corruption, political instability, weak institutions, incompetent administrations and weak property and creditor rights, neither debt nor debt relief can flourish.

It is near impossible to isolate aid, debt or debt relief from the prevalent conditions of countries where they are rolled out. A revealing exchange that took place in the Financial Times in 1998 between the Deputy Director of the IMF’s African Department and a former colleague of his, highlights some key sentiments surrounding debt cancellation towards the inception of the HIPC programme. 

On one hand, the ex-IMFer argued that creditor nations had a moral obligation to cancel debt extended to Africa. On the other hand, the Deputy Director was adamant that simply cancelling debt would not be enough to deal with Africa’s problems; that simply cancelling debt presented a moral hazard. His response titled Hazards of Debt Cancellation Point to Benefit in Africa Finding its Own Sustainable Growth Path read in part:  

“Who would lend again to recipients of such cancellation? Why should countries that have misused resources more than others have more of their debt cancelled? What guarantee is there that the money saved would be put to effective use?

This latter concern is addressed under Fund-supported policies which aim to achieve high quality growth that leads to poverty reduction.

The record shows that when IMF-supported policies have been effectively implemented, the result has been higher social spending and sustained economic growth.”

We now know that it is not enough to guide a country through the debt relief process in order to ensure meaningful spending and development. And as it turns out, there is no correlation between debt-to-GDP ratios and corruption as well as inefficiencies. Countries that are corrupt remain equally corrupt even when their debt is forgiven, since the system allows for it.

Where debt forgiveness has not shown a correspondingly meaningful improvement in measurable quality of life indicators - despite the hike in social spending - it becomes clear that the (mis)use of resources should be given just as much attention. 

The cost of misuse

Managing resources efficiently is just as, if not more, important than spending on development. World Bank economists Rozenberg and Fay capture this in their work on sustainable development. The two believe that the cost of infrastructure development is largely determined by two things: access and quality, and spending efficiency.

The first of these - access and quality - calculates whether funds are used for what they are meant for. In relation to this, they ask: how much access could countries achieve by 2030 if each spent just 1% of their GDP on new rural roads every year? They predict that in Sub-Saharan Africa, the rural population within two kilometres of a primary or secondary road would go from 29% in 2017 to 46% by 2030. That is a difference of 17 percentage points.

Second, and more importantly, the above calculations are coupled with their analysis of spending efficiency. This looks into the effectiveness of complementary policies and measures to reduce the costs of procurement, planning or execution. Calculations of this sort are not abstract and contemporary case studies have shown how evading laws and policies increases inefficiencies, and ultimately the cost of development.

Take for example a study on healthcare in Africa that revealed that a 10% increase in public health spending per capita could yield an increase in life expectancy of just two months, whereas in countries where governments merely implement best practices, life expectancy could be boosted by five years.

Similarly, the Mozambican hidden loans case has resulted in a collapsed currency and sparked a debt default crisis because of a failure to follow the legal requirement to disclose loans over a certain amount to the National Assembly. 

In Kenya, the inconsistent application of procurement procedures has led to unconstitutionality surrounding the SGR contractors. As one of the largest infrastructure projects in the country's history, this may cost the country down the line.

In their calculations, Rozenberg and Fay demonstrate how infrastructure that would ordinarily cost 8.2% of a country’s GDP could be cut down to 4.5% of GDP because of policy and regulation induced efficiencies. Calculating this provides a value to certainty, transparency and predictability, which are among some of the tenets of the rule of law.

Financing development gaps

While countries mismanage savings obtained from debt relief, the global push to actualise development goals, such as the Sustainable Development Goals, continues. The truth is, the majority of HIPC countries did not meet, and were not on track to meet, any of the eight Millennium Development Goals. The outcome was the same with the Sustainable Development Goals when they were last assessed a few years ago.

And even with the glaring infrastructure deficit, the cost of development keeps rising. At the start of the past decade, the African Development Bank estimated that the continent needed to allocate US $93 billion annually between 2009 and 2020 in order to close the infrastructure gap. The financing gap at that time was about US $31 billion per year.

However, that figure was revised up towards the end of the decade to between US $130 billion and US $170 billion a year with the financing gap increasing to between US $68 billion and $108 billion per year. For the first time ever,over $100 billion was committed to infrastructure in Africa in 2018.

The question at the back of everyone’s mind is how much of this money will be lost to inefficiency and corruption. In essence, everyone wants to know how soon African countries will descend into crises and therefore compromise the ability of present and future generations to meet their needs.

The rain will continue

We cannot deny the power of debt to fuel development. And it is misplaced to conclude that debt and debt relief are in and of themselves detrimental, because that line of argument evades the issue of home-grown inefficiencies.

The reason the continent’s economic and financial reputation is dismal is not borne from receiving aid and debt but rather from managing it poorly. Pursuing debt would not be so daunting if African countries had a decent track record of managing it.

It is impossible to disentangle the prevalent regulatory conditions from debt and debt relief. So effectively reducing Africa’s infrastructure deficit will require policy and institutional reforms to be taken just as seriously as financing - as explored in the next article. Only when development financing is paced, and the rule of law is used to prevent individuals from bleeding their nations dry, will there be room for growth and less room for thievery.

That’s when it will stop raining.

This article is part of a long series of articles on the rule of law in the context of politics and ethics. The series is researched and co-authored by:

 Karim Anjarwalla, Managing Partner of ALN Anjarwalla & Khanna, Advocates; Kasyoka Salim, Research Associate at ALN Anjarwalla & Khanna, Advocates; Wandia Musyimi, Research Associate at ALN Anjarwalla & Khanna, Advocates; Zara Tayebjee, Barnard College of Columbia University; Rayaan Anjarwalla, St Andrews University; and Prof Luis Franceschi, Senior Director, Governance & Peace, The Commonwealth, London