Africa's borrowing outside the law throwing away billions

This week, Zambian President Edgar Lungu’s government announced that it was seeking “the suspension of debt service payments for a period of six months, possibly making Zambia the first African country to default on its debt due to the coronavirus pandemic.

This raises concern for the future of debt in the continent. How did we get here? I had a conversation with Kasyoka Salim, a Research Associate at Anjarwalla & Khanna, with whom I usually co-write this column and she began her analysis of the situation from the Mozambique debt crisis. 

On June 9, 2020, the Constitutional Council of the Republic of Mozambique declared null and void loans worth US $1.4 billion and sovereign guarantees given by the Mozambican government. Mozambican state-owned security companies had borrowed the money between 2013 and 2014 from London branches of Swiss banking giant Credit Suisse and Russia’s VTB.

These loans formed part of US $ 2.2 billion loans – equivalent to about 13 per cent of GDP - taken out by Mozambican state companies of which US $1.2billion was borrowed in secret, behind the backs of parliament and the public, and only revealed in 2016, triggering a currency collapse and a sovereign debt default crisis.

The Constitutional Council found that the main issue in relation to the ‘hidden’ loans was that the government acted unconstitutionally. The Mozambican government had conceded sovereign guarantees of amounts that exceeded the legally established maximum amounts without legislative authorisation from the National Assembly as the Mozambican Constitution required.

The government had also contracted non-concessional loans in contravention of Mozambican law which required that loans that the State contracted guaranteed a degree of concessionality equal to or greater than 35 per cent. In addition, the government failed to declare these loans and the sovereign guarantees’ amount in the annual State Budget Law as required by law.

The decisions have spurred vociferous opinions from the international community. While clarity on the position of Mozambican law is welcome, international investment lawyers are particularly interested in the weight accorded the decisions in English law under which the debt was issued.

Most international agreements specify which court must rule on a dispute, usually in New York or London, where there are special courts and arbitrators. The US$2 billion secret debt arrangement specifies the London High Court. Will the national decision have any effect on the international investment questions in London?

Traditionally, the London High Court’s decision is not greatly influenced by laws and judicial decisions of involved countries but this practice is changing in cases where the debtor country can prove unconstitutionality in the manner the debt was procured.

While this will make for interesting discussion on the future of sovereign debt in Africa and indeed across the world, the Mozambican situation forms a backdrop to a truly exciting historical analysis of Africa’s debt management. First, we need to understand the World Bank’s Multilateral Debt Relief Initiative (MDRI); and one of its most prominent programmes: The Heavily Indebted Poor Countries (HIPC) initiative.

The HIPC & MDRI Initiatives

The MDRI and HIPC initiatives originated from the debt crisis of the late 1980s; the genesis of which was traceable to certain developments in the 1970s. In the wake of the first oil price shock (1972-1974) most of Africa’s major primary exports experienced an international commodity boom, followed by a short bust.

African governments responded to the rise in commodity prices by sharply increasing public expenditure and complimenting the revenue increases accompanying the commodity boom with external borrowing. This is understandable. African countries had huge infrastructural needs. In response, international banks, suppliers, and official export promotion agencies increasingly put together coordinated packages for major public investment projects.

The prudent assumption is that a favourable situation such as a rise in commodity prices would translate into improving current account balances. However, as a result of the need for infrastructure development, improving terms of trade in the 1970s did not improve current account balances as African countries piled on more external and sometimes, non-concessional debt.

According to a recent publication by Brookings, 'Avoiding a Debt Crisis in Africa', African countries find countercyclical fiscal policies politically difficult to implement due to infrastructure needs. Western countries have learnt to save for rainy days; but in Africa “it is raining today”.

Ezenwe Uka finds that new developments in the 1980-1983 period aggravated an already unhealthy situation: first, the over-lending by banks until 1981 and sudden withdrawal of bank credit thereafter; second, an extremely hostile international environment characterised by sluggishness of world trade; third, an unprecedented fall in commodity prices and abnormally high rates of interest in the international capital markets; and fourth, defective economic policies in some debtor countries, blew the debt crisis into the open.

Many African countries, incapable of adapting to the changed environment, failed to meet their debt obligations by the 1980s. The International Monetary Fund (IMF) responded by implementing, in these debt-laden states, structural adjustment programmes (SAPs) aimed at curbing domestic expenditure, reducing inflation, and boosting exports.

But the SAPs made for disastrous policy. They were solely designed to ensure debt repayment. African governments were therefore forced to reduce social spending in areas such as health and education. The overall result was a rise in extreme poverty and drastic reduction in the standard of living across the continent.

This caught the attention of several important personalities. In September 2000, the Irish rock star Bono met with North Carolina’s Senator Jesse Helms, then conservative head of the US Senate Foreign Relations Committee, and urged him to support developing country debt relief on behalf of Jubilee 2000.

Evoking the biblical notion in the Book of Leviticus of a time of ‘Jubilee’– the year at the end of seven cycles of shmita (Sabbatical years) – where the poor would be forgiven of all their debt, Jubilee 2000 was a London-based transnational campaign that sought to eliminate the debts of the world’s poorest countries. To them, the only possible solution to the debt crisis, was debt relief.

As a result of the highly successful campaign, major creditor countries (most commonly known as the Paris Club) and multilaterals adopted the ambitious Multilateral Debt Relief Initiative (MDRI) for outright forgiveness of debt owed by a group of 36 low-income poor countries. Some 29 of these selected countries were African. The massive debt relief was conditioned on sound economic management and poverty reduction strategies.

The Heavily Indebted Poor Countries (HPIC) initiative, was part of this larger debt relief strategy instituted in 1996 to address debt overhang among these nations. The initiative would provide debt relief and low-interest loans to cancel or reduce external debt repayments to sustainable levels, enabling countries to repay debts in a timely fashion in the future.

For a country to be eligible under the programme, it had to demonstrate at the decision point that it faced an unsustainable debt situation after the full application of the traditional debt relief mechanisms and that it was eligible for highly concessional assistance from the International Development Association (IDA) and from the Poverty Reduction and Growth Trust (PGRT) of the IMF.

Debt relief and damnation without relief

To access full and irrevocable debt reduction under the HIPC initiative, countries also had to demonstrate that it had established a track record of reform and sound policies through IMF and World Bank supported programmes, maintain macroeconomic stability, a good reforms track record, and prove that it had developed a Poverty Reduction Strategy Paper (PRSP) that involved civil society participation.

Should a country satisfy these requirements, it was said to have reached its completion point and could receive the full debt relief committed at the “decision point”. Accessing debt relief was therefore critically dependent on a country’s ability to implement its poverty reduction strategy and maintain sound economic management. The lessons instilled during this time were supposed to inform debt management after completion of the HIPC programme.

Mozambique was part of the first cohort of countries admitted into the programme. The “decision point document” indicates that the decision point was in April 1998 and the completion point was set for June 1999.

Figure 3 below shows Mozambique’s public debt from 1994. The decrease recorded in the early 2000s is directly attributable to the HIPC programme.

  Figure 3: Mozambique’s rising debt

Strange correlations

Today, Mozambique’s total external debt stands at a little over 100 per cent of GDP as seen in Figure 4 below. The Republic of Congo, The Gambia, Sao Tome & Principe and Togo, whose share of debt is well past the IMF and the African Monetary Co-operation Programme (AMCP) threshold – at above 100 per cent of GDP were also part of the HPIC programme.

Other countries that teeter on the edge such as Burundi, Benin, Central African Republic, Chad, Ethiopia, Malawi, Senegal, Sierra Leone, and Zambia were also part of the HPIC initiative. A few of the countries in the programme (Uganda, Cameroon, Comoros, Guinea, and Rwanda) are managing their debt below the recommended threshold.

Figure 4

Debt relief is necessary when a country’s debt exceeds its future capacity to repay. But debt relief cannot be the solution to debt mismanagement. Today, public debt is creeping back up in sub-Saharan Africa as seen in Figure 5 below.

Figure 5

The problem is not the rising levels of debt per se. The real challenge is that for most countries in Africa, the cost of borrowing exceeds the rate of growth, as illustrated in the graph below.

For a country like Ethiopia, its rate of growth exceeds the cost of borrowing. Kenya and Ghana’s rate of growth and their costs of borrowing are almost equal. For countries like The Gambia, Mozambique, and the Republic of Congo, their rates of growth are greatly exceeded by their costs of borrowing in addition to their very high public debt to GDP ratios.

Figure 6

The 1990s debt-mania is finding its way back into sub-Saharan economies. The Constitutional Council’s decision with regard to Mozambique’s hidden debt is to be understood in this context. It is also not presumptuous of us to expect similar decisions in other countries in the near future.

Judicial decisions on the constitutionality of debt across Africa could be the new defining feature of this millennium’s debt. Indeed, Kenya’s Court of Appeal recently pronounced itself on the constitutionality of the procurement of China Road and Bridges Corporation for the construction of the Standard Gauge Railway in Kenya.

The 'But It is Raining Today' series takes an incisive look into the recurring debt crises in Africa. As with the Ethiopian famine, which was a direct result of war and the Ethiopian government’s counter-insurgency policies rather than natural causes, there seems to be a more insidious factor curtailing proper debt management in Africa. Debt relief, just like food relief, might turn out to be a superficial response, and perhaps the wrong cure.

We purpose to examine the egregious accumulation of debt in the continent. The next article: The Punctured Life Raft will look at the HPIC programme and analyse whether it can be judged to have been successful. This will illuminate the discussion on debt forgiveness for the purpose of development, which is finding its way into our conversations once again.

We propose that the reason it is always raining – our incessant need for debt – might not be financial as we believe. The reason might be the insidious dearth of capable rule of law institutions on which debt management regulation and policies are built.

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