Eric LeCompte: "Africa will need $500 billion to $1 trillion to get through this crisis"
We speak to the executive director of debt, trade and tax reform non-profit Jubilee USA about Africa's debt and how it could be sustainably restructured.
You’ve said that just for Africa to get through this crisis, it needs $45 billion in debt relief. How feasible is this? If it doesn’t come, what will happen?
That’s the call for this year alone for all Africa’s finance ministers combined – from poor and middle-income countries. That relief is not enough to mitigate the seriousness of the crisis, to deal with all the health and economic impacts of a crisis that the IMF [International Monetary Fund] is saying could be worse than the Great Depression. The UN says 265 million more people will be experiencing famine this year, all over Africa.
Africa will need $500 billion to $1 trillion to get through the crisis. Europe and the US have passed fiscal stimuli, but even in the US, after robust stimuli, 14 million children are experiencing extreme hunger. Africa, however, can’t print money, get additional credit or secure bridge financing. It has been able to get emergency loans from the IMF, but for Africa to deal with the growing health crisis, given the continent’s lack of critical care units and need for bridge financing, enormous amounts of money are needed.
Debt relief is only part of the solution. The other is access to global reserve funds, or special drawing rights (SDRs), where the IMF can create trillions of dollars in currency if the G20 approves it. There may be consensus for this by the autumn – this would provide the liquidity that low- and middle-income countries in Africa desperately need to mitigate the health and economic impacts of the crisis.
If those countries don’t get those funds, there’ll be real human results. People are already dying on the streets, and the famine is growing.
Would access to global reserve funds not lead to adverse consequences, such as inflation?
By IMF rules, this access is meant to meet liquidity needs, not go beyond them. $648 billion could be printed today, right now, to meet those needs, with no additional approval from national parliaments – if the G20 finance ministers agreed to it.
Going beyond that number would require more rigorous approval. Issuing these funds in the world’s five strongest currencies would also help guard against inflation.
How can such enormous financing needs be met without increasing debt vulnerability? What other forms of financing are viable? Would embedding standstills or relief in debt instruments, tied to human rights and health outcomes, work?
The most important thing, other than debt relief, is the access to the global reserve funds or SDRs. This money comes without repayment conditions, at least under the current structuring. The last time we used this access to global reserve funds was after 2008: immediately, developing countries could access hundreds of billions of dollars. So making such money immediately available – putting it on central bank spreadsheets – would make bridge financing and healthcare possible. This wouldn’t increase debt vulnerabilities.
40% of African countries were already in debt distress before the crisis; many countries were, as in the 1990s, spending more on debt than on healthcare, education and social infrastructure combined. Access to global reserve funds can help relieve some of the debt.
Outside of this, [World Bank President] David Malpass has said that by the end of the year, Africa needs to see permanent debt reductions or huge portions of its debt wiped out. En route to debt sustainability, governance, human rights and the strain caused by the coronavirus crisis are key considerations.
Many African countries spend more on debt repayments than on healthcare, education and social infrastructure combined
The Catastrophe Containment Relief Fund doesn’t encompass middle-income countries. What aid are those middle-income countries getting? Do you see a realignment between the countries that are now low-income and the countries that are now middle-income?
So far, middle-income countries have largely been left out of relief initiatives, even though most of the African countries’ ministers calling for relief are middle-income nations. They’ve been able to access emergency loans from the IMF, but that’s where it stops. The debt standstill, relief and reduction processes need to start including middle-income countries – it was alluded to at the G20 Finance Ministers’ meeting, but nothing concrete was decided.
You’ve called for a new HIPC [Heavily Indebted Poor Countries initiative, 1996] or MDRI [Multilateral Debt Relief Initiative, 2005], which helped reduce debt on the continent. How would you modify those relief initiatives for 2020?
The original initiatives, while not perfect, were incredibly important, and accountable – some see them as the primary reason for Africa’s economic growth from the mid-2000s, and its mitigation of some of the worst effects of the GFC (great financial crisis, 2008-’09). 50 million kids in sub-Saharan Africa got to go to school because of those initiatives.
But it was treated as a one-off, and didn’t look at prevention measures or post-corruption measures to ensure that companies that had good approval procedures for loans and budgets. There was no permanent settlement for stability or future borrowing.
A new HIPC initiative would need to look at the debt vulnerability of all developing countries to get them back to sustainable levels. Just as important would be a new process to continue to restructure debt during challenges, and ensure budget transparency, responsible lending and borrowing laws, and anti-corruption measures.
Laws should also be passed to involve private sector and commercial banks in debt relief initiatives. These things have been on the table since 2015; if they’d been implemented, the current situation would not be as bad as it is now.
You’ve argued in the past for a global bankruptcy system. What’s standing in the way of this, and what might that system look like?
We’re still dealing with political challenges among leaders. All world leaders agreed to a global bankruptcy process in 2015; the IMF proposed it and the G20 seriously discussed it. But as the GFC receded in memory, this idea fell by the wayside. It hasn’t really been raised on a major scale since 2015.
Predatory hedge funds can make a lot of profit in the absence of clear bankruptcy procedures and rules. Some of them have very powerful lobbyists lobbying G20 leaders. So although every world leader has agreed to a global bankruptcy process in theory, we’re still dealing with the politics of implementing it. Can we move forward differently, now we’re in a different crisis?
I find it interesting that the initial idea for this bankruptcy system came from Adam Smith, the father of modern economics, who laid out a conservative ideology for world economics and thought a global bankruptcy process would be the only way to ensure stability.
A debt standstill or moratorium is the first step towards unifying the currently piecemeal global bankruptcy process. The IMF is coming up with a debt sustainability process will help us cancel or reduce some debt. But we have to get out of this informal, piecemeal process and unify it fast.
Middle-income countries in Africa have largely been left out of relief initiatives
You’ve said that the private sector needs to be not just invited but compelled to help with restructuring Africa’s debt. Is this realistic? Was anything decided at the G20 Finance Ministers meeting in July?
Well, the finance ministers used stronger language than previously, which carries some weight in arbitration and the courts. They’re using words like “strongly encouraged”, which is not compelling enough but is more forceful than previously. Now they have to say the private sector “must” be a part of the solution.
The private sector is a very large pool of mostly legitimate actors. Many of these have lent money that deserves to be repaid. Currently, the lack of a bankruptcy system doesn’t even protect creditors, let alone debtors. All actors need to be brought to the table in a new global bankruptcy process.
Most debt in the world is contracted under New York and UK law; the remaining 4-6% is under German, Japanese and Australian law. Changing New York and UK law to ensure processes whereby the private sector is a part of renegotiating and restructuring debt is the most important thing in the medium term.
So: in the short term, stronger language needs to be used. In the medium term, those laws need to be changed. In the longer term, the global bankruptcy system needs to be implemented.
There are also technical issues on the debt standstill that need to be resolved. The way the term sheet is structured, countries wanting to renegotiate their debt will be dealing with low- or zero-interest loans if a G20 country is offering debt relief. But if commercial players get involved in debt relief, higher interest rates will be at play. This needs to be addressed if African countries are to take advantage of the debt standstill.
Something all countries can call for is for the UN Security Council (UNSC) to call all private creditors to be a part of debt negotiations. The last time they did this was in 2003, around the debt and creditors of Iraq, where they called all creditors to the table for a unilateral debt restructuring for Iraq. If the UNSC were to do this again, it would provide an immediate solution to the problem. But I don’t have much hope that it will act.
Will leaders using stronger language really do much good?
If a country defaults to a private creditor – say, when a hedge fund bought Zambia’s debt very cheaply, and is now not playing by the rules and is suing to get the full amount collected – it could say in court, “Look, world leaders and the IMF have said private creditors ‘must’ comply and participate, and this creditor has done neither.” It creates a stronger court case and precedent. It’s not a silver bullet, but it will likely be considered and heard as evidence. It’s not the same as Congress or Parliament passing a law in the country where the creditor is based, but it does carry considerable weight.
We need a unified global bankruptcy process, and fast
How should the role of credit-rating agencies change when it comes to restructuring debt in the less developed world?
It’s a very serious issue, and one where we’ll need guidance and clarity from the G20 and the IMF. Countries don’t want to see their credit downgraded when they’re accepting debt relief or restructuring. We need to look at implementing laws around the world that provide limitations for credit rating agencies when countries are receiving debt relief or undergoing debt restructurings – freezing those ratings temporarily, for example. It’s a complex problem that needs to be dealt with legally and by supranational bodies.
Shirley Yu, a writer and professor specializing in Chinese economics, has argued that in many ways, China has behaved exemplarily; it cancelled zero-interest loans to Africa this year. What has China done well and not so well when it comes to relief for Africa?
China is on a learning curve when it comes to dealing with its responsibilities around debt. It’s also posing a lot of problems during these initiatives, as well as being helpful. In the mid-1990s, when it was mostly Europe and the US lending to the developing world, you could go to any of these G20 countries and say, “It’s a good idea economically and humanely for you to cancel debt,” and they would have laughed at you. Debt reduction was transactional – “We’ll cut Zimbabwe’s debt if they give us access to wood at concessional rates until a certain date.”
Then HIPC and MDRI came along and there were new processes by which wealthy countries began understanding their responsibilities to relieve debt. China, as a newer creditor, is only just now at that level. Until now, its debt has been purely transactional – for example, Somalia gave China a northern port with exclusive access in return for debt cancellation.
China has more to lose: it holds 25% of Africa’s debt. Also, China isn’t fully participating through all of its agencies – the government is involved, but the Chinese Development Bank has not started on the debt reduction or cancellation process. This is why we need global laws on responsible lending and borrowing and a global bankruptcy process. China is acting in challenging ways, in its own self-interest – that’s normal for players.
This is another reason access to global reserve funds is key – it can also help China be more stable as it relieves and cancels debt. Can we rely on China to fully participate in a permanent debt reduction process? So far, evidence says yes – their debt cancellation so far doesn’t seem to have strings. They can only act how they should with global laws in place. Currently the situation is both piecemeal and political, rather than comprehensive and neutrally arbitrated.
Many have described the US and China as entering a new Cold War; in the last one, Africa was used as a proxy battlefield. Might the same happen again? Beyond COVID-19, what are your views on the increasingly close China-Africa relationship?
Hopefully the coronavirus crisis will help us think differently about how we work together and face challenges. Unfortunately, before this crisis, Africa was very much a proxy for wider geopolitics. Consensus is emerging only very slowly in these days of political fractiousness, which leads to great suffering in Africa. Is this similar to the Cold War? I don’t see it happening at that level, but we’re still at a point where wealthy countries are trying to go beyond their own self-interest in looking at global solutions. The politics is still messy. There’s more consensus and collaboration than not, though. Political difficulties have slowed decisions, they haven’t prevented them.
How has Jubilee USA changed its approach since its inception? What has been learned along the way?
In the mid-1990s, when we formed, we were trying to address symptoms of the financial systems – high debt levels, for instance. Now we try to address the root causes of financial issues. So our work has expanded to include not just debt, but all the issues that are part of debt crises. As well as bankruptcy processes and responsible lending and borrowing, we’re looking at the revenue side of how countries can be better capitalized. The developing world loses $1 trillion a year because of tax evasion and corruption. If this can be curbed, hundreds of billions of dollars could be retained by African countries, giving them revenue to reduce the need for borrowing.
We also need to address broader trade issues, in terms of trade imbalances between countries, and how countries are treated in trade agreements. Trade is a key part of revenue. If we’re serious about tackling these, we need to look at all these issues: debt, tax, trade, transparency and corruption.
Interview by Arjun Sajip
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