Debt crisis in Africa - multilateral solutions are needed

Increased costs of importing energy and food, falling prices of raw materials on the world market, wars, climate change, but also bad management - these and other factors have in recent years led to a significant worsening of the problem in a large part of the African continent - over-indebtedness.

The example of Zambia: the resource-rich southern African country declared insolvency during the coronavirus crisis. National debt jumped to 2020 percent of gross domestic product (GDP) in 129. The temporary drop in world copper prices, the main export product, further reduced the Zambian budget. In early 2021, the country requested debt restructuring and has since been subjected to various austerity programs by major creditor countries.

And Ghana suspended debt servicing at the end of 2022 due to the impending state bankruptcy and has been negotiating with various creditors ever since. According to the World Bank, Ghana's debt level in 2022 was about 82% of gross domestic product (GDP), while nominal debt was approximately US$45 billion. A $13 billion restructuring was recently agreed.

Countries such as Chad, Ethiopia, Malawi, Kenya, Angola and Mozambique are also in contact with the World Bank, the International Monetary Fund (IMF) and other international financial institutions.

The IMF, which is dominated by the West, especially Western Europe, provides financial assistance to countries in economic crisis, but this is usually linked to structural reforms. These programs often cause large social cuts, which provoke resistance from the population. Case in point: A planned tax hike has sparked months of protests in Kenya since June.

Searching for a solution with the participation of China

"The problem of over-indebtedness in Africa urgently requires multilateral solutions that will support the Chinese as the continent's largest creditor. Also, African debtors themselves must be involved in international financial institutions and participate more actively in finding solutions," says Eckart Bode, author of a study published in May by the Institute for the World Economy in Kiel (IfW Kiel), which systematically compares Chinese lending with lending the six major Western countries - France, Germany, Italy, Spain, Japan and the US. "There is no doubt that major debt write-offs are needed now, but this is made more difficult by the power struggles between the West and China."

The positions of China and the West regarding the international financial architecture are increasingly irreconcilable. IMF Director Kristalina Georgieva has repeatedly demanded that Beijing adhere to existing rules.

Those rules were set by the IMF and the World Bank, the two key institutions of the financial system after the Second World War, under great influence from the West. The World Bank has been run by the US since its inception, while the IMF is run by Europe.

China wants to thoroughly reform the multilateral development banks and demands that the decision-making rights in these institutions be adapted to the real economic strength of the countries.

IfW expert Ekart Bode points out that the motives of the West and China for granting loans to African countries differ significantly. Western countries are more likely to grant loans to resource-poor and heavily indebted African countries. On the other hand, Chinese lending to Africa is more driven by economic, but also political interests. Those competing interests threaten much-needed debt relief for African countries, according to the IfW study.

Stereotypes make it difficult for Africans to get credit

Another recently published study suggests that African countries, due to often stereotypical and negative media reports, have to pay disproportionately high interest rates when taking out loans. Reports on Africa are full of clichés, according to a study by the non-governmental organization Africa No Filter and the consulting firm Africa Practice.

The African continent pays billions of dollars in "prejudice premiums" on the international financial markets. Because of this, African countries that take loans lose up to 4,2 billion dollars annually. According to the study, international investors unfairly perceive African countries as riskier.

It is necessary to implement a course change in international debt relief policy, concludes Bode from the IfW. However, there is currently no clear concept: "I'm afraid it will take a few more years until Chinese and Western creditors get close enough to reach a solution."

World Bank and IMF: The debt crisis is intensifying

On October 13, the World Bank published the study "The poorest economies face the most difficult conditions in the last two decades". It says the 26 poorest countries, which account for about 40 percent of all people living on less than $2,15 a day, are more indebted than at any time since 2006 and are increasingly vulnerable to natural disasters and other shocks. Yet international aid as a share of their GDP has fallen to its lowest level in twenty years, forcing many to obtain loans on very unfavorable terms. Most of these countries are located in sub-Saharan Africa.

The head of the IMF, Kristalina Georgieva, primarily blames the coronavirus pandemic for this. At the same time, a few days ago in an exclusive interview for DW, she appealed to recognize the positive in Africa. The continent has "tremendous potential and a young population with exceptional talents, which the aging world in Europe and Asia is counting on". In order to increase Africa's influence, on November 1 this year, another member of the IMF's Board of Directors from sub-Saharan Africa should be appointed. of Africa.