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Consider the quality of debt
– by Leny van Oijen, Christian Penda Ekoka
© Julien Mattia/Le Pictorium/picture-alliance/dpa/MAXPPP
David Malpass and Emmanuel Macron have spoken out in favour of debt leniency. This picture was taken in May 2019 in Paris.
The rising indebtedness of low-income countries was until recently a matter of great concern. In early 2020, the presidents of respectively the World Bank and the African Development Bank were even engaged in a dispute about the roles their institutions played as regards the growing debt burden in Africa. But the Covid-19 pandemic has totally changed the discourse. Indeed, international finance institutions and others have increased their lending with the aim to help low-income countries to cope with the pandemic.
The G20 group of the largest economies has taken a lenient stance on debt in view of Covid-19. It agreed to suspend low-income countries debt servicing for one year. Moreover, various leaders have pleaded for even more radical steps. For example, French President Emmanuel Macron called for massive debt cancellation in April 2020. Later, David Malpass, the World Bank president, declared debt reduction to be the only way to escape the poverty trap.
We argue that the present loan frenzy is likely to exacerbate debt problems. It is true, of course, that this pandemic is an exceptional emergency, so international solidarity is needed. Low-income countries require both financial and in-kind support. But we must not lose sight of the ever-mounting debt burdens of a growing number of countries. It is wrong to believe that lending more money will solve fundamental problems.
The analysis of the debt situation in low-income countries mostly uses quantitative data, such as the ratio of debt to Gross Domestic Product or to exports. It would be equally relevant to consider two critical performance criteria:
- debt effectiveness (to what extent did a loan achieve what it was supposed to achieve?) and
- debt efficiency (the value added per dollar borrowed).
If performance is mediocre in both respects, that means that funds were wasted. Moreover, possible misuse by kleptocratic governments adds to the toxicity of country indebtedness.
Country-specific information of this kind exists. It is included in loan reporting and must be considered when decisions are made on further lending and/or debt relief. Across the broad cancellation of debts, by contrast, is a problem rather than a solution in cases of dramatically underperforming loans or of evident misuse.
Many low-income countries benefited from earlier debt relief efforts, in particular the Heavily Indebted Poor Countries (HIPC) Initiative that was launched in 1996. It covered full or partial debt relief totalling more than US $ 100 billion for 37 countries (of which 31 in Africa). In return, the countries concerned had to implement structural economic and social reforms. Prudent debt management was supposed to prevent debt from returning to unsustainable levels again. Two decades later, we know that this was not applied, neither by lenders nor by borrowers.
Ad hoc debt relief does not address the root causes of the recipient countries’ problems. It therefore will not allow them to escape poverty and debt traps. The challenge is to make economies create value and become competitive, resilient and inclusive. “Money alone” will not do the job. It did not bring about good governance, effective leadership and capable institutions in the past. There is no reason to expect it to do so in the future. When global leaders believe that a systemic reduction of debt is the only way to get on a growth path again and to get out of the poverty trap, there is reason to get worried.
Leny van Oijen is an independent development consultant.
Christian Penda Ekoka is the chief executive of Insight BDS (Business Development Service).