WASHINGTON – There was a time, about ten years ago, in which world-famous rock stars like Bono of U2 used their name and influence to convince governments and international institutions that it was wise to forgive large amounts of debt that African countries could not possibly repay.
Debt is back
And the effort worked. As the WSJ reports, more than $100 billion of African government borrowings was forgiven a decade ago. But guess what: “Now the big debts are back, and it’s getting tougher for countries to pay them off”, says the paper.
Indeed, Mozambique is right back where it started. When its debt was erased, it was 86% of GDP. Now it is 61% of GDP. Not quite as bad, but close. The same applies to Ghana and to a lesser extent Zambia, according to data reported by the WSJ.
What happened?
Well, what happened? A few bad things happened. After the massive debt write-off, many African countries were doing better financially thanks to a new commodities boom that boosted their revenue. China was buying “everything”, in massive quantities. The Africans were selling. Prices went up.
Comforted by this trend, African governments started borrowing again in international markets. They were confident that the revenue stream derived from commodity exports, plus solid currencies would enable them to repay these new obligations with relative ease.
Well, it did not happen this way.
First of all, much of the money borrowed did not go to new investments; but to finance current government spending, always a bad development.
Secondly, the commodities boom suddenly crashed, bringing down the currencies of the borrowers. No, China is not buying anymore.
So, here is the picture. In many African countries debt levels are high again, while it is not clear how borrowers can pay back, given higher interest on their new debt, (10% or more), and devalued currencies.
Borrow more just to pay old debt
In fact, countries such as Ghana and Angola had to borrow more money, at 10% or above, just in order to repay earlier debt obligations. As indicated, the fiscal picture is very tight. There is far less revenue available. Commodity prices are depressed, while new wealth-generating sectors, part of feeble efforts to diversify commodity dependent economies, still struggle to emerge.
Unless a miracle comes about, it looks as if the presidents of Ghana, Mozambique, Nigeria and Zambia will need U2 and Bono’s help all over again.
Quite depressing.
The way out
Well, is there a way out of this? Yes, of course there is. But not in the short term.
In the medium and in the long term Africa needs to build a more viable, internationally competitive economic base. It needs all the usual things. Decent infrastructure, better access to credit, more foreign direct investments, improved education, a more business-friendly regulatory environment, a serious anti-corruption effort.
Yes, it is a tall list. It will take time. And yet, as many stories of successful emerging markets show us, all this has been done; and so it can be done again.