AFRICA’S DEBT TRAP: WHY NIGERIA, GHANA AND ZAMBIA ARE SEEKING HELP FROM THE IMF
o years ago, the International Monetary Fund (IMF) expressed concern that African countries rushing to issue Eurobonds risked raising their debt levels and undermining growth in the process. The argument detailed that they could end up facing hikes in the exchange rates, which would make repaying debts problematic. Today, several of those countries which the IMF expressed those fears for are fulfilling that “prophecy” in an even more terrifying way. Nigeria, Ghana and Zambia—three countries which in the last decade cumulatively issued nearly 3 billion dollars in Eurobond—have not only seen their currencies crash, revenues dwindle and growth deepen, they are now actively seeking IMF assistance in the face of mounting budget deficits.
Last week, the Zambian government announced that it was seeking an IMF program to help stem rising budget deficits. The deficits have been caused mostly by weak commodity prices, electricity shortages and the economic slowdown in resource-hungry China, which has decreased the Asian giant’s demand for copper—of which Zambia is the world’s largest producer. “We are both of the view the current levels of the budget deficit are unsustainable, as it leads to increased future requirements for debt repayment,” Treasury Secretary, Fredson Yamba, said at the end of an IMF mission to Zambia, a statement that is strikingly similar to what was said in Ghana two years ago.
Ghana was the first, between Zambia and Nigeria, to fall into a deficit crisis, when its growthbegan to decline in 2013 amidst a high inflationary rate, steep fall in the value of its local currency and a 75 percent debt-to-GDP ratio. Six years before that, Ghana was also the first African beneficiary of debt relief to issue a EuroBond of $750 million for a 10-year tenure. Now, the country is gradually, stoking up its debt burden again and, as is expected, it is getting a helping hand from the IMF. Unable to pull out from the financial rubble on its own, Ghananegotiated a three-year loan of US$918 million.
Like Ghana, Nigeria is also in the revolving door of debt. Since its debt-relief of 2004, the country has raised money from Eurobonds twice; first in 2011 with a $500 million 10-year Eurobond and then in 2013, when it issued a $500 million 5-year bond at a yield of 5.375 percent and a $500 million 10-year bond with a yield of 6.625 percent. Now, with low oil revenue and high cost of foreign exchange, the country is building up its debt burden once again. Of the 6.08 trillion Naira proposed 2016 budget, the Federal Government (FG) projects a revenue of N3.86tn, resulting in a 36.51 percent deficit of N2.22tn. According toBudgIT, the deficit projection “is the country’s biggest yet.” Citing data from the Central Bank of Nigeria, the civic technology organisation said “in the last 34 years, Nigeria has managed to post only two years of fiscal surpluses. A budget surplus of N1bn and N32.05bn was recorded on the back of a N248.77bn and N337.22bn spending plan in 1995 and 1996 respectively. Therefore, the longest uninterrupted stretch of deficit spending began in 1997, with 2016 deficits set to reach record highs.”
Worse still, Nigeria’s current deficit may increase even more during the fiscal year if, as is feared, oil revenue falls and remains below the budget benchmark. With deficits effectively raising the cost of servicing debts and the country’s Eurobonds yields entering a period when it is high, Nigeria looks to be potentially sliding into what BudgIT describes as a debt trap. “The cost of servicing the Federal Government’s debt, relative to its revenue, is entering uncharted territory,” the organisation wrote in its analysis of the 2016 budget. It is no surprise then that the country recently hosted the IMF chief, Christine Lagarde. While no mention of an IMF program was made, many believe it is only a matter of when, and not if. “We indeed stand ready to assist the authorities, should such a request [for IMF assistance] materialise,” said Ms Lagarde.
The problem with the IMF assistance is that it is never just that. This is because the conditions that surround IMF assistance programs often hurt, rather than help the people of the country that the institution claims to be aiding. A good example of this is Ghana, where the conditions for IMF assistance include the elimination of subsidies and other austerity measures, all of which add more burden to an already economically stretched population. Another worry with the IMF is its prioritisation of debt servicing, one of the major reasons why many view the institution as a neo-colonialist framework more concerned about serving the interests of the wealthy western countries.
Despite being aware of the downside of mounting debt and holding reservations at the conditions of the IMF, African countries continue to fall for both. Africa’s sovereign debt-to-GDP levels now stands at 44 percent, from 34 percent in 2010, according to data presented at the Strategic Growth Forum in Johannesburg, South Africa. “A myriad of problems add to the debt process,” Ifediora Amobi, the Executive Director of African Heritage Institution,told Ventures Africa in February. They include the global, economic crisis, migration issues and terrorism among others. Countries that depend on single commodities like oil or agricultural products whose prices have declined in the past 12-18 months will experience this debt crisis more significantly than others.
“Most countries are grappling today just to make enough revenue to meet their budgetary requirements, but the debt crisis has been an incredible hindrance to development. Migration has also been a massive problem. As much as we all encourage foreign investment, African countries need to set up a framework within which they can operate because the current policies are not favourable toward foreign investment. In most cases, foreign investors dictate how they will operate in our economy and the framework. Our government’s set up should be able to stop this.”
SOURCE: GHANA MEDIA WORLD
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