Saturday, September 11, 2010

Africa’s Debt Constraint

For the second time in four months, U.S. Secretary of State Hillary Clinton last week said that America’s external debt is a national security issue that weakens the nation.

“It undermines our capacity to act in our own interest, and it does constrain us where constraint may be undesirable,” Clinton said.

Quite true. China is a major holder of U.S. Treasury debt, and even though the level officially declined to US$755.4 billion last year (just below Japan), it is believed that a significant amount of the US$170 billion U.S. debt increase to the United Kingdom was financed by China, which means the Chinese directly or indirectly remain our largest debt holder. As Secretary Clinton declined to say directly, this impacts our ability to press China on major international issues of concern.

Of course, African and other developing nations have had to live with such constraints in operating in their own national interests since independence. In many cases, developing countries were required to assume the colonial debt or pay to become free. France, for instance, required Haiti to start its independent existence with a 150 million franc debt back in 1804.

As we celebrate the 50th year of independence of 17 African nations this year, we must keep in mind that the overwhelming majority of Africa became independent during the Cold War era. During this period, their strategic importance to the United States and the rest of the West was based on two things: their vital resources and their willingness to join our side against the Soviet bloc. Consequently, odious regimes were sometimes tolerated and even supported in running up a debt they either likely never intended to repay or ended up not repaying due to their lack of longevity.

When Nelson Mandela took the helm of a majority rule government in South Africa in 1994, he started out having to pay debt accumulated by the apartheid regime to prolong itself for Cold War benefits. That very same government had imprisoned him for nearly 30 years and had threatened to cause an unstoppable social explosion in a major world diamond and gold producer, hence the international support. The South African debt also included paying for the funding of the apartheid regime’s unwise and/or illegal military operations in Namibia and Angola.

Now really, when former Nigerian dictator Sani Abacha borrowed international funds, was there ever any serious belief that he intended to do the right things with that money and pay it back in full and on time? Surely not by any reasonably aware lender. Because of the intransigence of Nigerian leaders and unforgiving lenders, a US$5 billion debt ended up being more than US$32 billion in debt when former Nigerian President Olusegun Obasanjo turned on the light in his office on the first day even though the country had paid back US$16 billion.

Some of the loans reportedly had technical deficiencies, meaning they were bum deals from the start. Some were dollar-based, meaning that they had to be repaid at the U.S. dollar rate rather than based on the value of local currency. Other loans were necessitated by world events over which African governments had no control, such as rapid increases in oil and food prices.

Certainly, there is enough blame to go around for this debt burden, which has been as high as US$15.2 billion annually and remains in the neighborhood of US$14 billion even now. Too many African leaders have shown little commitment to developing sustainable programs to expand their economies and increase the collective wealth of their citizens, which would produce higher tax revenues that could replace donor assistance. There also is insufficient skill among some African governments in handling loans efficiently to avoid penalties and in understanding the many issues involved in debt.

Still, a 2004 World Bank study showed that African countries who qualified for debt relief generally used the break wisely. According to the study, Tanzania used debt savings to eliminate school fees, hire more teachers and build more schools. Burkina Faso reduced the cost of life-saving drugs by a significant amount and increased access to clean water for its citizens. Uganda used its debt relief to facilitate the doubling of school enrollment. So why are so many international financial institutions, major international banks and donors still so reluctant to agree to a sweeping round of debt forgiveness?

The theory of “moral hazard” espoused by many economists speculates that if debt were broadly forgiven, it would motivate countries to default on their remaining debt or deliberately borrow more than they could repay in hopes of another round of debt forgiveness.

But if an amateur like myself can offer a solution based on the current practices of the Millennium Challenge Account and other international aid programs, why not negotiate debt forgiveness based on a debtor’s public-private plan to use the monies saved to benefit its citizens. If the money is tied to agreed-upon benchmarks and timetables and paid out in tranches, what would be the genuine risk to lenders, who collectively give aid with one hand and take back more in debt repayment with the other?

The harm of not doing so for the African debtor nations is this: for every US$1 African countries receive in grants, they pay US$13 in interest on debt. What if China forced us to repay our debt to them under the kind of terms under which Africa is forced to repay its debt?

That puts this matter in a very different light, doesn’t it?


  1. Africa has been growing at a good pace, 5-6 percent per year in the last 15 years. It takes time to move up the production curve. In the next 5 years, the volume of output will be substantial, to overcome the debt constraint.
    On the blog:
    Africa's Growth Model: From the 90s to the present.

    It states the reasons for the new Africa's growth. It shows how the debt question was addressed and what is predicted for the future.

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