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Debt relief

G20 plans do not go far enough

by Linda Engel

In brief

Risky investments: a ship belonging to the Korea Gas Corporation before the Mozambican coast.

Risky investments: a ship belonging to the Korea Gas Corporation before the Mozambican coast.

The debt burden of poor countries continues to grow. A lot of money is used to pay interest and repay loans rather than for education and health care. The G20 is not showing much interest in establishing an international sovereign insolvency procedure.

Last year, the number of critically indebted countries increased from 108 to 116. In its recently launched 2017 debt report, erlassjahr.de, a civil-society organisation, identifies a particularly negative dynamic in North Africa and the former Soviet republics. In relation to their gross domestic product, these countries’ foreign debt is much too large. Following the collapse of the Soviet Union, many eastern European countries financed the transition to a market economy through loans from abroad.

Erlassjahr.de points out that heavily indebted countries depend on the goodwill of their creditors, which tend to be governments from the prosperous global north. The report bemoans the lack of international standards for lending. The authors want fair and transparent procedures to be established for debt relief, so funds could be freed up for fighting poverty.

Many sub-Saharan countries have benefited from past international debt-relief programmes, especially the Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI). According to erlassjahr.de, however, their situation is worsening once again. They used renewed creditworthiness to take out new loans.

Problems have been compounded by low interest rates in Europe. For years, international investors have been turning to Africa in the pursuit of higher returns. They found resource-rich countries especially attractive, the debt report points out. In Mozambique, for instance, domestic and international private-sector companies invested in the infrastructure that is needed to extract the natural gas off the coast. The report argues that these investments were risky, since the companies were betting on rising energy prices. Low gas prices, however, mean that Mozambique’s economic growth is slowing down while the private sector’s foreign debt is increasing (see article in D+C/E+Z e-Paper 2016/09). Erlassjahr.de warns that, in the worst-case scenario, the Mozambican government will have to intervene to shore up the weak natural gas sector.

Sovereign debt is also an issue within the G20, the members of which include countries like Italy and Japan, which are themselves heavily indebted. According to the report, the plans drafted under Germany’s G20 presidency to tackle the matter so far do not go far enough. Germany belongs to the so-called “Paris Club”, an informal group of rich nations that makes decisions about debt relief. The G77 and China, a group of developing and emerging market countries, has been calling for formal legal framework for debt relief and debt restructuring. However, introducing an international sovereign insolvency procedure is not on Germany’s current list of priorities, despite the fact that it has being discussed in the UN context since 2014.

At present, the practice of using investment funds to finance development projects enjoys international support. But they are also guilty of driving up the debt balance of developing countries.

Criticism of German fund

Moreover, the debt report expresses criticism of the Africa Agriculture and Trade Investment Fund, which was set up by Germany’s Federal Ministry for Economic Cooperation and Development (BMZ), the KfW Development Bank and Deutsche Bank. The idea is to boost African agriculture using a mix of public and private financing. However, the majority of investments so far have flowed to companies with headquarters in so-called tax havens. These companies avoid paying taxes that might have replenished national budgets. 

The report also argues that the impact of the investment fund has been question­able. In Zambia, for example, a large farm has not managed to create the desired number of jobs despite having received a ­$ 10 million loan. Instead, it resulted in land conflicts with local people.

The debt report’s section on India offers insights into the lending practices of “new donors”. Despite the fact that large parts of its own country are still poor, India is working on expanding its influence in Africa. In doing so, it is competing with China, which has been investing there for many years. The debt report finds fault with India’s lack of transparency and the lack of oversight from Indian civil society.

Erlassjahr.de: Debt Report 2017.

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