Details of the new fiscal regulations for the EU have not been decided, but it appears that the Member States agree that debts exceeding 60% of GDP trigger a mandatory clause of debt reduction. If the same rules were applied to loans to Africa the international monetary system could not function.

In 2022, the public debt in Africa will reach 65% of GDP, doubling from 2010. According to the latest Debt Sustainability Analysis of the International Monetary Fund and the World Bank, dated 28 Feb 2023, seven African countries are in debt distress. Thirteen others are at high-risk. The Republic of Congo is in acute distress, as are Malawi, Mozambique and Somalia.

60 % of all countries with low incomes are at high risk of debt distress, or have already reached it. The numbers are growing.

Gleichzeitig, the COVID-19 epidemic and the economic downturn that followed the war in Ukraine has only increased the demand for finance. The UN Secretary-General, ahead of the World Bank’s and IMF’s annual spring meetings in April, called for an additional stimulus of at least 500 billion dollars per year to avoid missing the Sustainable Development Goals of 2030.

In developing countries, the dichotomy between debt and development can be seen in government spending. In 2019, 60% of African nations spent more on debt repayments than on national health care.

IMF vs. World Bank

The IMF and World Bank are at odds over the debt versus development debate. In November, the IMF came to an agreement with Chad, which was experiencing a debt crisis. While IMF Managing director Kristalina Georgieva lauded this deal, she said:[w]The World Bank was not as optimistic.

The IMF agreement consists of a lenient repayment schedule, but it did not reduce the total amount of debt. World Bank President David Malpass stated that he was “deeply concerned” about Chad’s ability to pay its external debts of $3 billion on a longer-term basis, due to the lack of any actual debt reduction.

This brings up a very important point regarding how to deal with a debt problem in a country such as the Chad, where 42% of its population lived below the poverty level in 2018 and hosts over 450,000 refugees.

Unfortunately, there are no data on the effectiveness or debt reduction methods. The IMF’s 2023 World Economic Outlook notes that “a vast literature studies the effect of fiscal consolidation on the GDP, but much less work has been done to understand the impact of fiscal policy on debt ratios.

The authors examined debt crises in 55 countries with low incomes from 1985 to 2021. They found that reducing public spending and increasing domestic resources did not contribute much to reducing debt levels in low income countries. The so-called fiscal consolidating approach is much more effective in advanced economies.

Fiscal consolidation can have negative effects on poverty reduction and development in low-income countries. Cutting back on public services such as education and healthcare or raising the value added tax, for example, both have a disproportionate impact on the poor.

IMF’s 2023 World Economic Outlook notes that in low-income countries, GDP growth and inflation are the two actions most likely to succeed in reducing the debt ratio.

In a written reply, Adrian Peralta, Assistant Division Chief at the Research Department of the IMF, told EUobserver that “high inflation can reduce debt ratios but it is not recommended as an instrument for policy.” This leaves GDP growth to be the preferred method of reducing debt in low-income nations.

Debt talks ignore structural issues

Celine Tan, Professor of International Economic Law from the University of Warwick, also shared with EUobserver that the IMF should prescribe more policy based on evidence and coordinate with local governments. “Countries don’t always have the expertise or space to direct their own policies, as they are reliant on the IMF, other creditors and the market.”

She also says that the underlying reasons for the current debt crisis are not being addressed. “There are a variety of structural issues, including trade barriers, asymmetries of international investment law and tax evasion. These questions are so important and I don’t think they are being addressed in the financial discussions about debt.

Every year, $88.6 billion leave Africa due to illicit financial flow, including tax evasion, trade smuggling and organised crime, or corruption of government officials. The UN Conference on Trade and Development in 2020 reported that this amount is almost equal to the combined Overseas Development Aid and Foreign Direct Investment.

If the leakage is not fixed, any additional funding could be diverted or misused and may not contribute to economic growth over the long term.

Problematic Chinese loans

Zambia, which raised the alarm about its debt nearly two years ago, is one example of immediate obstacles to resolving the debt crisis.

The new Global Sovereign Debt Roundtable, which met for the first time on February 12th and again in April, was created to “accelerate and make more efficient debt restructuring processes”. Participants included the IMF, World Bank, bilateral creditor countries including China, which is the largest bilateral creditor in the world, private sector lenders, and debtor nations (Ecuador. Ethiopia, Ghana, Sri Lanka. Suriname. Zambia).

Prior to the roundtable there was tension with China, which does not cancel its debt but only extends repayment terms. Researchers note that Chinese loans tend to be more expensive and require repayment sooner. “A typical Chinese loan has a 4.2% rate of interest and a repayment term of less than 10 year.” AidData found that a typical loan issued by an OECD-DAC lender such as Germany, France, or Japan has a 1.1% rate of interest and a repayment term of 28 years.

Participants to the roundtable agreed to improve data-sharing at an early stage between all stakeholders, and to increase concessional financing from the International Development Association for countries in debt distress. The roundtable did not mention any commitments by China.

Malpass, a World Bank official, said that he hoped the debt restructuring agreement for Zambia would be signed as soon as possible, including by China. However, he noted that there are still disagreements in the country.

Opaque debt

China has significantly reduced the loans it gives to other countries due to declining GDP growth rates and lower commodities prices. The peak was $28,4 billion in 2016 for African countries. In 2019, China provided loans of $8.2 billion and in 2020, during the pandemic, only $1.9 billion.

We don’t know how bad the debt is in some countries because non-disclosure agreements in private lending prevent us from knowing the exact amount. Since 2000, private lending has “surge” and is now the largest group of creditors for low-income countries.

The World Bank has noted that both Chad and Zambia have been affected by issues of transparency. “Chad and Zambia’s debt restructuring negotiations have been delayed because their respective debt offices could not produce current and complete records as to what was owed and to whom.”

Up to 40% of countries with low incomes will not have published data on sovereign debt “for more two years” by 2022. There can be huge discrepancies if they publish debt data. In some cases the discrepancy in debt can be as high as 30% of GDP.

The EU and others may be left to fill the funding gap if China retreats.

Enter the Global Gateway

Ursula von der Leyen, the EU President, did not hesitate to share her intention to counter China at the launch of the Global Gateway in 2021. “We will create Global Gateway partnerships with countries all over the world. […] Von der Leyen stated that it was not logical for Europe to build the perfect road between an owned copper mine by China and a Chinese harbour.

In the next few years, the EU will invest EUR150 billion in Africa. A large part of this money is expected to come from private lenders, not EU institutions. Private lenders are expected to provide 135 billion Euros of the estimated 300 billion euros that will make up Global Gateway.

“Good governance and transparency” are two of the six core principles of Global Gateway. This should extend to private lenders who benefit from Global Gateway guarantees. The EU should also work to increase transparency in grants, loans, and blended finance provided from EU institutions.

According to the European Network on Debt and Development, “[c]China and borrowing countries are the main targets of the calls for greater transparency in debt, even though neither the Paris Club bilateral creditor nor the private sector nor multilateral institutions are fully transparent in their lending. Paris Club permanent members include EU states like France and Germany.

Debt sustainability is now more important than ever, with a greater focus on projects like infrastructure projects that only have a long-term return on investment. The EU should increase its efforts to ensure debt transparency and analysis in order to have a clear picture of the outstanding debts of recipients, and know when and how much they must be repaid.

Financial leakage

The European Parliament held a debate on debt distress in the developing world on 14 June 2022. MEP Charles Goerens (Rapporteur of the 2018 Resolution ‘Enhancing Developing Countries’ Debt Sustainability’) stressed the importance of ensuring the debt viability for public-private partnership projects throughout the duration of the project.

Eurodad’s report ‘The Emperor’s New Clothes: what’s new about EU’s Global Gateway’ noted that Eurodad’s report ‘The Empire’s New Clothes’ highlighted the high risk associated with infrastructure public-private partnerships. From September 2022, the high risk associated to infrastructure public-private partnership. “Privately-financed infrastructure projects that are suitable for the domestic private sector and with the support from international capital are highly capital-intensive, and therefore a lucrative potential profit source for the private sectors. They have long-term repayment cycles that are a source for country debt and a heavy burden on citizens in developing countries.

In light of the current levels of debt stress in low-income countries, and the significant financing needs for the climate and SDG crisis, the EU should work closely together with the G20 Common Framework. They should anticipate debt distress and work actively to prevent it from happening. This should include private lenders as well as China.

IMF reports that the conditionality of loans should be based on economic growth rather than fiscal consolidation, as this could have adverse effects. No matter what the source of the loan is — EU, China, or private — addressing illegal financial flows should be the main priority to fix this bucket of financing.