During a speech today for the 2023 Spring Meetings of the International Monetary Fund (IMF) and the World Bank Group in Washington, IMF director Kristalina Georgieva acknowledged that Africa is facing a “tremendous financial crunch” and is “being held back by unsustainable debt built over the years.” However, her solution to the problem is not without contradictions.
Georgieva’s proposed solution to Africa’s debt problem “is to call on countries in strong financial positions to give back some of their Special Drawing Rights (SDRs) [to the IMF], so that the firm can lend to African countries at concessional rates.”
This idea raises questions about the sustainability of continuing to take on more debt to solve an already existing debt problem.
The director also praised African countries for raising taxes on wealthy individuals and businesses, and said she is seeing positive development in “resource mobilization,” a move which some economists argue hinders growth in the private sector.
Despite these contradictions, Georgieva remained positive about Africa’s future. She emphasized that Africa has the potential for significant economic growth if it can overcome its debt challenges. “I remain very optimistic about Africa,” she said.
Georgieva acknowledged the dire debt situation that many African nations find themselves owing to adverse economic conditions, and she stressed that the path forward lies in establishing a robust rule of law.
“Africa is faced with a tremendous financial crunch,” the director said. “You have to get to a point where the economy is functioning because policies are sound and institutions perform.”
Africa’s debt problem is complex and multifaceted. While it is true that unsustainable debt is holding back economic growth in many African countries, it is not clear that taking on more debt is the best solution.
Mark Weisbrot, co-director of the Center for Economic and Policy Research, for example, has long been a critic of the IMF. In an article in The Guardian back as 2019, for example, he posited that the IMF was harming the very nations it sought to help.
Weisbrot argued at the time that IMF economic policies failed to address global inequality and instead have contributed to exacerbating it, contending that policies often favor the politically connected and the super-wealthy rather than the general public at large. He suggested that the IMF needs to fundamentally rethink its economic policies to reduce global inequality.
Georgieva assured listeners that she had spoken with top Chinese diplomats who have agreed to work toward debt-restructuring agreements in Africa. The comments come after continuing accusations by the international community that China engages in “debt-trap diplomacy” with many developing nations, tempting them with unsustainable debt to gain political favor down the road.
A 2021 global research project by AidData shed light on China’s aggressive lending practices and their exploitative nature. The study analyzed 100 loan agreements that China made with 24 countries, most of which were part of the Belt and Road Initiative. The study revealed that these loan contracts provide China with significant leverage by incorporating provisions that go beyond standard international lending agreements.
In fact, the agreements are so one-sided that they restrict the borrowing nations’ choices, while giving China’s state-owned banks complete discretion over borrowers. China can even cancel loans or demand full repayment before the due date, according to the study’s findings.
“Such terms give lenders an opening to project policy influence over the sovereign borrower, and effectively limit the borrower’s policy space to cancel a Chinese loan or to issue new environmental regulations. Some of the debt contracts in our sample could pose a challenge for multilateral cooperation in debt or financial crises, since so many of their terms run directly counter to recent multilateral commitments, long-established practices, and institutional policies,” the study noted.
A reversal of these aggressive lending practices by China would be a welcome development to many in the international community.