There’s need for a permanent solution to our debt crisis Featured
The fifty-four sovereign African states are vastly different from each other, with distinct languages, histories, social and economic challenges, and possibilities. However, they are united by a political project that has been institutionalised through the African Union and its legal and organisational frameworks and by a neocolonial sovereign debt crisis.
Many countries across the Global South, particularly those in Africa, are currently in the throes of fiscal crises – largely the result of a perfect storm of global events. The COVID-19 pandemic triggered a global economic recession, which in turn impacted national economies. The ongoing conflict in Ukraine has disrupted vital global supply chains for food, fertilisers, and energy, thereby increasing many countries’ import bills and straining their budgets. The fiscal crisis is fundamentally a result of an unsustainable build-up of sovereign debt in the last decade, fuelled by cheap credit from Western economies and encouraged by international financial institutions, including the IMF. The COVID-19 pandemic and the conflict in Ukraine made what was already a tenuous situation worse.
Many poor countries are turning to the IMF as a credible source for finance in the present moment, largely egged on by claims that the IMF has reformed from its bad old ways and no longer demands crashing austerity as a conditionality. (‘Factsheet: IMF Conditionality’, International Monetary Fund, 22 February 2021, https://www.imf.org/en/About/Factsheets/Sheets/2016/08/02/21/28/IMF-Conditionality.)
Back in 2016, IMF economists published a mea culpa in which they (sort of) confessed the sins of the past and promised that they had turned over a new leaf. (Ostry, Loungani, and Furceri, ‘Neoliberalism: Oversold?’; Grieve Chelwa, ‘Is it Too Late Now to Say Sorry?’ Africa Is a Country, 29 May 2016, https://africasacountry.com/2016/05/is-it-too-late-to-say-sorry-imf-edition.). The evidence, however, suggests anything but a reformed IMF. A study from the International Labour Organisation that carefully tracked IMF conditionality in 2020, when many countries were grappling with health and financial burdens related to the COVID-19 pandemic, found that in most of the 148 countries examined, the IMF still required austerity as a condition for granting assistance. (Shahra Razavi et al., ‘Social Policy Advice to Countries from the International Monetary Fund during the COVID-19 Crisis: Continuity and Change’ (ILO Working Paper 42, International Labour Organisation, Geneva, 10 December 2021), https://www.ilo.org/global/publications/working-papers/WCMS_831490/lang–en/index.htm.).
The government of Zambia, the first country to default on its debt as a result of the pandemic, recently concluded a financing deal with the IMF with the signature condition of ‘a large, front-loaded, and sustained fiscal consolidation’, as the IMF put it –
in other words, austerity in black and white. (International Monetary Fund, ‘Zambia: Request for an Arrangement Under the Extended Credit Facility-Press Release; Staff Report; Staff Supplement; Staff Statement; and Statement by the Executive Director for Zambia’, IMF Country Report, no. 22/292 (September 2022), https://www.imf.org/en/Publications/CR/Issues/2022/09/06/Zambia-Request-for-an-Arrangement-Under-the-Extended-Credit-Facility-Press-Release-Staff-523196, 10.). The IMF wants the Zambian government to reduce its expenditure by billions of dollars over the next three years, which will be most acutely felt by the poor majority.(Grieve Chelwa, ‘IMF Deal: Cry, My Beloved Zambia’, Grieve Chelwa (blog), 7 September 2022). The government of
Sri Lanka, a country whose debt-fuelled boom came to a spectacular halt earlier this year, is also seeking IMF assistance, with early indications showing that the conditions attached to the deal will be as indefensible as the Zambian deal. (Peter Doyle, ‘The IMF’s Zambian and Sri Lankan Programs are Indefensible’, Peter Doyle (blog), 14 September 2022). The Ghanaian government too is desperately seeking another IMF deal, this after the last one was celebrated as the deal that would ‘restore the lustre to a rising star in Africa’. (‘Ghana to Conclude IMF Deal in March – Akufo-Addo Hopes’, Africanews, 7 February 2023, https://www.africanews.com/2023/02/07/ghana-to-conclude-imf-deal-in-march-akufo-addo-hopes/; ‘Ghana: IMF Program Helps Restore Luster to a Rising Star in Africa’, International Monetary Fund, May 2019, https://www.imf.org/en/Countries/GHA/ghana-lending-case-study.).
All this goes to show that the IMF cannot be the answer to the poorer nations’ economic challenges. Alongside its sister institutions, the IMF has provided ‘assistance’ to poor countries ever since its establishment in 1944, and yet many of these countries have remained poor in spite of this. The reason is that IMF assistance has never confronted the structural factors that have continued to consign many countries to the ranks of the poor. As diagnosed many years ago by scholars such as Walter Rodney and Andre Gunder Frank, development in the North is sustained by underdevelopment in the South. (Andre Gunder Frank, ‘The Development of Underdevelopment’, Monthly Review, 18 April 1966, https://monthlyreviewarchives.org/index.php/mr/article/view/MR-018-04-1966-08_3; Walter Rodney, How Europe Underdeveloped Africa (New York: Verso Books, 2018).). Seen this way, the IMF, as the archetypical Northern institution, is duty bound to maintain and entrench this status quo. How else does one explain the IMF’s solution to Zambia’s financial woes, for example? The IMF prescription ignores the fact that the country’s foreign-owned copper mines continue to generate billions for their overseas shareholders yet pay so little in taxes in a country where the estimated annual income taxes for one mining project alone could have amounted to nearly half the 2020 national water supply and sanitary budget.(Daniel Mulé and Mukupa Nsenduluka, ‘Potential Corporate Tax Avoidance in Zambia’s Mining Sector? Estimating Tax Revenue Gains from Addressing Profit Shifting or Revising Profit Allocation Rules. A Case Study of Glencore Mopani Copper Mines’, Oxfam Research Backgrounder Series, December 2021, https://www.oxfamamerica.org/explore/research-publications/potential-corporate-tax-avoidance-in-zambias-mining-sector/.).
A new kind of institutional apparatus that fosters cooperation, rather than competition, is required for Africa’s economic liberation and that of the Third World more generally. This would mean, for example, establishing currency arrangements that bypass the US dollar, which is a strong lever of IMF conditionality and a weapon of US foreign policy. These kinds of long overdue proposals are already underway in parts of the world, such as in Latin America, where Brazil’s President Luíz Inácio Lula da Silva (known as Lula) and Argentina’s President Alberto Fernández have proposed the establishment of a regional currency, the sur, that could be used to settle cross-border claims and store reserves.(Alberto Fernández and Luiz Inácio Lula da Silva, ‘Escriben Lula y Alberto Fernandez: Relanzamiento de la alianza estratégica entre Argentina y Brasil’ [Lula and Alberto Fernandez Write: Relaunching the Strategic Alliance Between Argentina and Brazil], Perfil, 21 January 2023, https://www.perfil.com/noticias/opinion/relanzamiento-de-la-alianza-estrategica-entre-argentina-y-brasil-por-alberto-fernandez-y-luiz-inacio-lula-da-silva.phtml.).
The hard work of figuring out the technical details related to the implementation of such regional currencies must begin in earnest.(Zinya Salfiti,
‘Nobel Economist Paul Krugman Slams Brazil and Argentina’s Joint Currency Plan, Saying “It’s a Terrible Idea”’,
Markets Insider, 30 January 2023,
Africa, for example, needs a continental bank that is wholly owned by the people and will serve as a genuine tool to bolster sovereign industrial policies. The highly influential African Development Bank, with its significant Western shareholding, is not fit for purpose. (‘United States of America’, African Development Bank, accessed 13 February 2023, https://www.afdb.org/en/countries/non-regional-member-countries/united-states-of-america.).
Furthermore, there is an urgent need to restore and reinvigorate the capacity and autonomy of the African state to deliver on its development agenda. State capacity and state autonomy depend on the ability to adequately mobilise tax revenues, an area in which the African state has continued to underperform. The tax-to-GDP ratio, a measure of resource mobilisation, has remained incredibly low in Africa largely as a result of illicit financial flows that continue to spirit away billions of dollars from the continent every year.(African Tax Administration Forum (ATAF), African Union Commission (AUC), and Organisation for Economic Co-operation and Development (OECD), Revenue Statistics in Africa 2022 (Paris: OECD Publishing, Npvember 2022), https://www.oecd.org/tax/tax-policy/brochure-revenue-statistics-africa.pdf, 3; United Nations Conference on Trade and Development, Economic Development in Africa Report 2020. Tackling Illicit Financial Flows for Sustainable Development in Africa (Geneva: United Nations, 2022)).
As a consequence, the adequate delivery of the kind of social services that underpin people’s dignity (social security, health, education, etc.) continue to be hamstrung. (Isabel Ortiz et al., Fiscal Space for Social Protection. A Handbook for Assessing Financing Options (Geneva: International Labour Organisation, November 2019), https://www.ilo.org/secsoc/information-resources/publications-and-tools/books-and-reports/WCMS_727261/lang–en/index.htm.).
Further, the low tax-take in the poorer nations forces many governments to seek the easy way out by borrowing on the international capital markets, setting into motion dangerous debt dynamics that ultimately lead governments back into the unloving arms of the IMF. Notably, IMF conditionality rarely confronts the fact that state capacity and autonomy have been eroded in Africa largely as a result of the tax dodging practices of transnational corporations.
Just as problematic is the leading role that the IMF and its allied institutions have taken in the fight to save the planet from climate change. The IMF’s answer to climate change, which is influential given its inordinate role in the world, points to the private capitalist sector as the solution to the planet’s problems.( ‘COP27: IMF Calls for Climate-Smart Investment in Africa’, Africanews, 8 November 2022, https://www.africanews.com/2022/11/08/cop27-imf-calls-for-climate-smart-investment-in-africa/.).
All this is ironic given that the private capitalist sector’s insatiable appetite for profits at all costs has been responsible for the climate crisis.
The Third World must re-imagine a path out of our current crisis that doesn’t depend on the IMF, its allied institutions, and Western capital. The last seventy years or so have demonstrated that a reliance on these institutions only serves to trap the Third World in a perpetual state of underdevelopment. We need an emancipatory set of institutions and frameworks that will lead to the total independence of the Third World.
This is a task that our political leaders have to take on in a serious way with a very strong commitment to the economic, and thus total, emancipation of the African continent and the Third World more broadly.
We need to rebuild a present, and future, that centres the needs and aspirations of the majority.
Over the course of the past two decades, the stranglehold of Western-based bondholders and Western-controlled IFIs has weakened as other countries – mainly China – have emerged as the largest trading partners with African states and as the largest lenders to these states. Importantly, China’s public and private debt forgiveness during the pandemic has put pressure on IFIs to rethink the harshness of their debt repayment-austerity governance model.
The opening provided by Chinese funding is not an opportunity merely to borrow more: it is an opportunity for African states to construct genuine, and sovereign, development projects in this climate. These projects must seize multiple opportunities to raise funds, and the fragility of IMF power must also be utilised to advance fiscal and monetary policies that are built on an agenda committed to solving the problems of the African people, not facilitating the demands of wealthy bondholders and the Western states that back them. A number of mechanisms must be put on the table to avoid the IMF-driven debt-austerity trap.
There’s need to invalidate historical debts and rescue stolen assets:
Renegotiate all odious external debts of the poorer nations. An ‘odious debt’ is a debt incurred by a country without the assent of its people, such as during the phase of a military dictatorship.
Seize assets held in illicit tax havens, which as of 2010 total at least $32 trillion.(United Nations Conference on Trade and Development, Economic Development in Africa Report 2020. Tackling Illicit Financial Flows for Sustainable Development in Africa, 88.).
Build progressive tax codes:
Build the capacity of tax departments in each country, including digital tax infrastructure.
Implement taxes on wealth and inheritance.
Implement higher rates of taxation on income, such as capital gains, that is made through financial speculation by all non-bank corporate entities.
Discourage the base erosion and profit-shifting activities of multinational corporations and adopt a unitary approach to tax the share of global profits generated by subsidiaries of multinational corporations.
Reform domestic banking infrastructure:
Democratise the banking system by expanding the role and size of public banking and by implementing more regulations of and transparency for private banking.
Enforce ceilings as a percentage of liabilities on speculative banking activity by commercial banks.
Regulate the interest rates that banks charge for specific goods, such as housing loans.
Implement tight regulations for pension funds so that the savings of the people are not used recklessly for financial speculation and encourage the creation of public sector pension funds.
Build alternative funding sources to the IMF’s debt-austerity traps:
Set capital controls to prevent both foreign and domestic capital flight, policies that even the IMF argues are important.(International Monetary Fund, ‘Review of The Institutional View on The Liberalization and Management of Capital Flows’, IMF Policy Paper, 30 March 2022).
As highlighted earlier, capital flight is not only deleterious for local financial markets: it also robs the continent of the resources needed to drive an autonomous developmental agenda. With capital controls, governments will be able to devise effective monetary policies in an environment that would not be buffeted by shocks and unexpected fragilities. Capital controls must be implemented alongside a robust wealth tax collection system, pro-labour distribution policies, and the prevention of dollarisation.
Attract investment from institutions that do not enforce structural adjustment conditions, such as the Belt and Road Initiative and the BRICS’s New Development Bank. The absence of SAPs-like conditions on these emerging and alternative sources of capital explains their growing popularity in the South and Africa in particular.
Take advantage of local currency central bank swap arrangements (such as those offered by the People’s Bank of China).
Adopt ceilings on the interest rates that commercial and multilateral lenders charge developing countries.
Encourage the creation of regional trade and reconciliation mechanisms.
President of the Socialist Party