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Week 6 Notes: Debt, Finance, and Banking in Africa
Reading Notes
Reading 1: Debt… and Déjà Vu?
T.J. Moss and D. Resnick, ch. 9 “Debt… and Déjà Vu?” in African Development: Making Sense of Issues
and Actors, Rienner (2017) pp. 169-184.
Debt and Deja Vu
● Since at least the early 1980s, calls to “drop the debt” have been a prominent feature of a global
campaign to help Africa.
Debt Stigma
● Association with poverty and stress however debt itself is not necessarily bad. If managed
properly, debt can actually be a very good thing for a country, allowing it to use other people's
money to invest in the future
● Most countries are creditors and debtors at the same time, with governments lending to and
borrowing funds from various other entities.
○ Almost all African countries have borrowed more money than they have loaned,
making nearly all of them significant debtors.
○ Became a problem in the 1980’s when the total debt started to mount at the same time
that countries encountered problems paying back older loans
○ This debt represented less than 15 percent of the continent's total gross domestic product
(GDP) in 1970 but jumped to over 100 percent by the 1990s.
○ The debt was becoming a barrier
Some Basic Debt indicators
● Debt stock: is the face value of all the outstanding debt owed by a particular country, typically
reported in US dollars or relative to the size of the economy as a percentage of GDP
● Debt service: is how much a country is supposed to pay in a particular year.
○ often expressed as a percentage of a country's export earnings that year, also called the
debt service ratio.
● Looking at just one of these indicators can be misleading because the burden (the ability to pay it
back) on countries can be very different.
○ A $1 billion loan for one year at commercial rates, say 10 percent, would mean the
country would have to repay $1.1 billion the following year.
○ However, a different $1 billion loan (implying the same nominal debt stock) that is for
thirty years at 1 percent would mean the country would have to pay only about $38
million the following year.
○ Most loans to low-income African governments have been closer to the latter example
(soft terms) rather than the former (hard terms), meaning that countries often have large
debt stocks but relatively small debt service
● External loans (as opposed to borrowing at home in local currency) have to be repaid in foreign
currency.
When Debt Becomes a Problem
● Whether debt becomes a problem depends on how the loan is used. If the money is invested
wisely in things that will produce a return, especially exports, then the loan should be repayable
○ Especially a soft loan
● However, if the loan is used for consumption (such as buying luxury goods), is wasted (spent on
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projects that fail), or disappears (say, into a private Swiss bank account), then there is little
chance that the loan will be repayable.
● Another way to think about it is that well-used loans should encourage faster economic growth
and hopefully more exports, too. In Africa's case, we can see that did not happen enough to allow
repayment of those debts
○ If African economies had grown instead over 1970-2003 at a still modest 3 percent
instead of 1.1, the overall debt burden would be half as much in 2003.
● In other words, looking at the usual debt indicators, perhaps the problem is not so much that the
numerators grew too fast but that the denominators grew too slowly
Africa’s Creditors
● African govs owe money to international financial institutions such as the World Bank and
other governments, primarily those in Europe, North America, and Japan
● More recently, China has become a major lender to African governments, funneling large loans
or offering huge credit lines, typically in exchange for mining or oil contracts.
● Typically considered aid when the terms are sufficiently soft
● Bilateral debt: When a loan is owed to an individual government (like France)
● Multilateral debt: when a loan is owed to international or regional organizations
● Commercial debt: to private companies, investors, or banks
○ examples: Bondholders, private banks, oil companies, equipment manufacturers
Debt Relief
● As early as the 1970s, bilateral creditors began writing off debts to some low-income countries
or agreeing to easier repayment plans.
○ A simple way to transfer more resources to countries, either as another form of aid or to
help a strategic ally.
○ Growing realization that much of the old lending was probably not going to generate
returns sufficient to pay back the original loans.
● The major bilateral official creditors organized into the Paris Club to provide a framework for
renegotiating old debts.
● Since 1996 there is also the Heavily Indebted Poor Countries (HIPC) program set up by the
International Monetary Fund (IMF) and World Bank to help the poorest countries cope with their
multilateral debt.
● By the 1990s there was a growing movement from advocates and pressure groups, such as the
Jubilee 2000 campaign, for more debt relief.
● The Paris Club allowed deeper and deeper cuts in debt with each new set of terms.
● The HIPC program allowed, for the first time, for the write-off of debts owed to international
financial institutions.
The Paris Club
● The main forum for renegotiating bilateral debt
● This informal group began in 1956 when Argentina asked all of its official creditors to meet (in
paris, hence the name) to discuss its debt problems.
● 19 members including most of the major international economic powers (China, India, Korea,
and Brazil are not members)
● Although not a formal legal organization, the Paris Club has established rules and arrangements
by which all members abide by.
○ Eg. “comparable treatment” whereby debtors must pay back all creditors equally
● Three terms are most commonly considered today for African countries.
○ “Houston terms” are for the lower-middle-income countries, such as Kenya, and merely
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restructure the payment schedule without any reduction in debt stock.
○ “Naples terms” are for low-income countries showing strain from their debts that also
meet certain conditions, such as having an IMF program in place
■ a write-down of 67 percent of the debt stock
○ “Cologne terms” were added in 1999 for countries in the HIPC program, qualifying
debtor countries for up to a 90 percent reduction.
○ Evian treatment which gives members flexibility to consider each country on a case-by
case basis
● Many African countries have turned to the Paris Club to help rearrange and reduce their debts.
(most have qualified for Naples). Some countries return multiple times: Senegal has returned no
fewer than 14 times
Heavily Indebted Poor Countries (HIPC) Initiative
● Despite some forms of debt relief available in the 1980’s campaigns began to urge the
rich-country creditors not just to reduce but also to completely erase the debts owed by poor
countries.
● WB and IMF - legal terms did not allow it, so they needed a more systematic approach this
they created the HIPC initiative
○ To acquire debt reduction beyond the Naples terms from the PC
● The HIPC process calls for countries to first seek a Paris Club deal; then, assuming their debt
numbers are still too high, they can apply for HIPC, which determines eligibility based on debt
sustainability and some record of good performance.
○ “Decision point” first, thereby interim debt service relief is provided then if the country
stays on track with its reforms and shows that savings from debt relief are being used
wisely, then the country can reach “completion point” → deeper and permanent debt
stock relief.
Going to 100% with the Multilateral Debt Relief Initiative
● 2005 major economic powers agreed to up to 100% debt reduction for the qualified countries
● The so-called Multilateral Debt Relief Initiative (MDRI) expanded the HIPC program to
completely erase the remaining debt owed to the World Bank, IMF, and African Development
Bank.
● So far, twenty-four African countries have reached HIPC completion point and have received
MDRI
○ 74 billion dollars worth relief.
● MDRI was not without controversy → creditors fought over how to pay for full relief, and were
concerned about future lending activities of the international institutions
● The compromise agreement allowed for 100 percent relief and promises by creditors to offset any
losses in the future.
Debt Sustainability
How much debt is too much?
● Debt sustainability ceiling: is the highest level of debt a country should take on before it
becomes a problem
○ Knowing such a level should be helpful in deciding whether to take new loans or if the
country is in need of more relief however finding that ceiling/the necessary measurement
required is not straightforward
○ Because the ability to repay debt is based on future taxes and exports (sometimes way
off in the future), this may be difficult to forecast, especially if the country's economy is
unstable, its prospects are uncertain, and the terms of the loan are decades long.
