“At 10, 12 or 15 percent, it becomes impossible. “It is impossible to address our development needs with the financial resources available from this architecture,” said he.

The annual event, named after its founder, the Sudanese billionaire Mo Ibrahim, who was also the interviewer of the event, has become a forum for African leaders, allowing them to speak openly about the challenges that face African development and global finance failures.

Ruto said, “It’s our responsibility to engineer this conversation and put forward a view on a financial system which works for everyone.” To increase Africa’s presence on the world stage, African leaders agreed that the African Union Chair and a small group of AU Commissioners would represent Africa in meetings with foreign leaders. “It’s not intelligent” for all 54 African heads of state to travel to the US and Japan to meet with a “single” foreign leader to discuss bilateral relations. “Sometimes, we are crammed into buses like schoolchildren. It is not right.

Despite admitting that many African leaders are reluctant to “relinquish”, sovereignty to the AU – “we can’t support Somalia with $85,m,” he said – the push to unite on the global stage is gaining momentum. African finance ministers demanded recently that the African Union be confirmed a full G20 member before the end the year.

The IMF and World Bank Annual Spring Meeting in Washington in April also laid out a 5-point plan for global financial Reform, including a call for more low-interest loan, to unlock IMF’s unused reserves for poor countries, and a solution to the EUR3,9 trillion in debt that hangs over the developing world.

The treatise is a part of an international push to reform the global financial system. It is too complex to cover it all at once so we will focus on two aspects, debt and borrowing.

Worst debt crises in a generation

The cost of borrowing, and therefore the interest payments to service debt, is one of the biggest issues facing poor countries. This is not a problem limited to the African continent.

According to World Bank statistics, 60 percent of developing countries — which represents 40 percent of global GNP — are at risk of defaulting loans. In practice, this means bankruptcy. Marcello Estevao is the global director of macroeconomics for the World Bank. He recently described it as “the worst debt crises in a generation.”

In February, the IMF, World Bank, Blackrock and other large private creditors, as well as bilateral lenders, debtor countries, launched the Global Sovereign Debt Roundtable. The goal is to find a transparent and predictable way to deal the debt relief for countries that have defaulted.

There is no standard way to deal with debt in the world today. After the pandemic the Group of 20 (G20), wealthy countries launched a “common framework” for debt resolution, but it has failed to bring together all creditors.

It is important to resolve debt problems quickly because countries in default are unable pay civil servants’ salaries, pay for healthcare services and generally perform their state roles.

Since defaulting, at least seven of the 21 countries in trouble have waited more than a full year for a deal. The Annual Spring Meeting was a high point in these negotiations, as for the first time debtor countries — Ecuador and Ethiopia, Ghana, Sri Lanka Suriname and Zambia — were given a prominent place at the table.

But trying to find progress in these talks was not the point. Yes, the World Bank has pledged to release additional lending worth EUR5bn per year and yes, there have been some improvements in the disagreements between China, the West and others (more about that later). But poor countries must raise EUR2.5 Then, you can get a better understanding of the trillions of dollars Just to pay back creditors, it will take five years.

David McNair, Executive Director of the ONE Campaign, a global campaign against poverty, said that the Roundtable’s solutions are “a drop in the ocean”.

Let’s put this statement into concrete numbers: According to the World Bank Nigeria, Africa’s largest economy, spent 96 percent of its total revenues on foreign investors. Pakistan, which suffered the worst floods in recorded history and whose reconstruction costs are estimated at EUR30bn – exceeding its annual budget – spends 50% of its budget to pay off debt. As does Egypt.

“Whatever we decide, our economy is shrinking and debt is increasing.” Imran Khan, former Prime Minister of Pakistan, told the Financial Times that his party has begun to believe that it is stuck.

Bickering at the Table

When debt servicing costs were so high in the ‘lost decades’ of the 1990s 60 to 80 percent had to be canceled. Many NGOs are calling for this. “Without debt cancellation Southern debts will continue rising,” said Mae Buenaventura, of Debt Justice, an advocacy group based in the UK.

Researchers from a collaboration including the Boston University Global Development Policy Center published a report on Tuesday that, for the 61 countries facing debt distress, it is necessary to restructure more than EUR740bn — jargon meaning cancellation or delayed repayment — across all creditor classes.

The financial system is much more complex today than it was in the 1990s. Politics has become more volatile, and debt restructuring negotiations have stalled with the defaulted countries.

What has changed is that debts are no longer owed exclusively to western countries or multilateral development bank, but to private creditors such as Blackrock and to new big players like China and India.

Every debt restructuring is therefore also deeply geopolitical. China’s insistence on the IMF and World Bank taking a cut in the event of a debt restructuring nearly derailed roundtable discussions. China eventually relented but the lack of cooperation between great powers is slowing the process, to the detriment for debtor countries.

Highest returns in the World

Private creditors now account for 60 percent of the total debt of African countries, compared to almost nothing in 1990. Negotiations with private creditors are more difficult because they are less willing to accept a haircut, and because there are many of them.

“Who are you speaking with, do you know?” “There are thousands of investors, and you can’t bring them all into a room and have a conversation with them,” Gyude, Moore, former Liberian minister of work and now senior policy analyst at Center for Global Development in Washington, told EUobserver.

Officials from debtor nations are reluctant to contact private creditors directly for fear of being branded as bad investments. “Private capital is an important part of the building of African infrastructure, and it holds 60 percent our debt. They don’t want private creditors to be burned,” he said.

Investors are guided by the opinions on the creditworthiness of sovereign debt by rating agencies Fitch and Moody’s, and the threat of being downgraded is always present in the minds of African policymakers–because higher perceived risk means even higher borrowing costs. Kenyan President Ruto has been working to change the current system.

Moore says that African leaders shouldn’t be afraid to start debt restructuring discussions with private investors, as this offers them transparency, which could ultimately lead to a better deal. “We need to bring private investors in much earlier. African countries have let the Americans, Germans and World bank speak for them. I think that’s a mistake.”

Moore also says that African countries should directly engage with China to resolve its debt problems. Moore said that China has a good working relationship with nearly all African countries.

If you’re wondering if debt restructuring is a bad idea for investors, African countries pay an extra EUR68bn in borrowing costs per year above what is economically sensible. This amount is more than twice as much as the total amount of aid that has been given to the continent.

Researchers Josefin Meyer and Carmen M Reinhart found that the real returns on bonds issued by developing countries were high enough to compensate for risk. Over the past two centuries, real returns have averaged more than 6 percent per year.

An investment in Egyptian debt earned investors an average annual return of 6.9 percent over the entire period. This was despite defaults and major wars as well as global crises. The average return on Nigerian debt was 13,6 percent.

As Ruto said Saturday: “We are confident that Africa has the highest returns on investment in the entire world.”

I cry for Zambia

It’s clear why debtors should have a voice in resolving debt problems.

Anna Gelpern, Georgetown University professor and expert in law, said that “drowning” in debt is not a real problem but a challenge of financial engineering.

Africa, on the other hand, cannot create EUR1800bn to swap for dollars. It is not easy to change the plumbing in the financial system. At the very least, it would require a shift in power when discussing financial reform.

The Roundtable’s power dynamics is still heavily skewed in favor of creditors. “It was a no-match really.” “Debtors were present, but their influence on the negotiations was minimal,” Aldo Calidari, senior director of Jubilee Network USA (a global NGO) who attended the Washington proceedings told EUobserver.

The IMF’s move to austerity overshadowed the little that was achieved at the Roundtable. In a widely-shared chapter of its World Economic Outlook, the fund urged indebted nations to cut public spending in order to reduce debt.

Although the fund admitted austerity “on the average” does not reduce debt, it encouraged nations to do so because it helps restore financial stabilty (prices) within the global financial system. But this doesn’t help countries in debt trouble.

Zambia has waited two and a quarter years to resolve its default on EUR17.3bn of debt after its finances collapsed in the Covid-19 Crisis. The IMF approved a EUR1.2bn bailout back in November. But the conditions were strict. The Zambian government was forced to agree to reduce fuel subsidies and small farmer subsidies, on which hundreds of thousands rely. IMF recommends higher electricity tariffs and VAT to increase revenue.

The cost of this would be borne primarily by the people. Grieve Chelwa wrote on his blog, Africa Watch, at the time, “I cry for the Zambia I love.” “This is austerity.”

In Chapter 3 of its World Economic Outlook the IMF acknowledged that some countries in acute debt distress will need “substantial debt reduction or rapid debt relief.” Debt resolution talks are moving slowly, and there is no solution in sight.

While countries like Zambia, Chad and Ethiopia will have to wait, many others will also have to wait. Zambia is still waiting on its bailout money today because creditors who cannot agree on the details of restructuring have blocked the process.

The system is rigged

Martin Guzman, former Argentine Minister of Economy, said in a recent interview that it is “essential” for understanding the debt dynamics in Global South to examine the monetary policy in North.

During the pandemic period, government debt grew by almost EUR1.8 trillion (excluding China) in more than 100 developing nations. Social spending increased while incomes were frozen due to lockdowns.

Guzman stated that central banks are focused on financial stabilization and “do not consider the international spillovers” of their actions. But the effects are significant for developing countries.

The steepest increase in interest rates in the history central banking by the US Fed and ECB was what pushed many to the edge last year. High interest rates increase food prices on the global markets, which is especially bad for sub-Saharan African countries where up to 85 percent of their food is imported.

According to the IMF’s own estimates, 340 million people are expected to go hungry this coming year. The fund has committed $13.2bn to countries affected by global food crises since February 2022. Of that amount, $3.7bn had been disbursed by March 2023.

The fact that 35 percent (of the debt) of poor countries is taken out at variable rates (as compared to debt in wealthy nations, which is fixed for years or decades) exacerbates the problem. This means that existing debts are subject to sudden cost increases when the Fed or ECB raises interest rates.

Mia Mottley said, “What is good for North, East, and West, is also good for South, East, and West.” She has been a strong voice for financial reform. “Cheap lending is the best strategy for developing countries.”

At the annual meeting, the IMF argued for higher interest rates. In a speech given at the Annual Meeting, Pierre-Olivier Gourinchas, chief economist of the IMF, said that interest rates were “bearing fruit” in reference to lower inflation. He added that financial instability had been “well contained.”

Does it make sense to conclude that risks are contained when 60 percent of developing countries — 40 percent of global economy — are facing bankruptcy?

A strong African voice

Rebeca Grynspan, secretary-general of the United Nations Conference on Trade and Development, wrote in February that there is a worrying tendency in the international community to view debts in developing countries as sustainable, because they can be paid back after some sacrifice. “This is a full blown development crisis, with debt distress as its core [and it] “A new lost decade is looming for a large part of the global economy.”

Jason Braganza said, “I think this conversation needs to be humanised very, very urgently,” at an event hosted by the World Bank. “We must move away from short term crisis management that favors creditors.”

How? Moore told Euobserver that “Africa must unite behind a common agenda on debt relief” to break the impasse. “We know what China, the US, and the World Bank want, but we do not know what Africa wants.”

Moore supports the proposal of Development Reimagined (a consultancy group working on China-Africa issues) to create a borrowers group as a counterpart to creditor group like the Paris Club. “The Paris Club represents a group of creditors who speak with one voice.” Moore said it was odd that a similar system didn’t exist for borrowing.

A stronger, more focused African Union would be able to move the needle towards debtor countries. Debates are now dominated by creditor nations and private investor interest. “If 54 African leaders continue to come to these meetings with 54 different agendas, they will not go back with much. “The size of your economy determines the power of your voice,” he said. “African leaders can achieve more if they work together.”

Moore added, “It is only logical that the AU has a permanent voice at the G20.” “Things do not always happen in the world because they make sense, but I am cautiously hopeful.”

The next big finance event will be held in Paris in June. Debt sustainability and cheap (climate-friendly) lending will again be at the top of the agenda.