In a state of near frenzy, Western and East Asian nations have demanded people stay home, and businesses close, hoping to halt the spread of the highly contagious COVID-19 virus.
Necessary as these measures are, putting a stop to world economic activity hits Africa — which can least afford it — especially hard.
African exports to Europe, Asia and North America have tanked, investments halted, incomes dropped and capital is fleeing the continent.
Along with outflows of money, falling commodity and oil prices have weakened currencies, increasing import prices and making debt repayment on foreign currency loans more expensive.
In 1996, the IMF and the World Bank put together a debt relief program for nations designated officially as Heavily Indebted Poor Countries (HIPC). African nations drew considerable benefit from investing at home, instead of sending interest payments to wealthy countries.
Between 2000 and 2016, average life expectancy on the African continent increased by 10 years. Recently three of the five fastest growing economies were African.
Debt relief is never a complete answer to promoting development, but it helped Africa improve its standing in the world.
In 2009, former U.K. prime minister Gordon Brown, then chair of the G20, led the world response to the great financial crisis. In the run-up to the April, 2020 G20 Summit teleconference, Brown initiated proposals on behalf of “The Elders” to deal with the virus, and especially the economic fall-out (Nelson Mandela founded the Elders in 2007 to bring experienced voices of past world leaders to bear on pressing world problems.)
The current downturn is already worse than the Great Recession that followed the 2008 financial crisis.
Eleven years ago the Great Recession was contained by actions of the U.S. Federal Reserve, which made swap lines of credit available to Canada, the U.K., the EU and Japan, enabling the main economies to buy corporate and mortgage bonds without worrying about foreign exchange reserves.
Brown has recognized what was easily forgotten: other countries, low income or so-called emerging market economies were equally hard-hit in 2008, and needed help from the multilateral resources of the Bretton Woods institutions.
In 2009, the G20 backed a major injection of liquid funds that was arranged through a one-time increase in IMF Special Drawings Rights (SDRs), the world reserve asset based on IMF allocations to member states.
In April 2020, U.S. Treasury Secretary Steven Mnuchin let it be known the U.S. would exercise its veto power to kill a new issue of SDRs (the U.S. holds 17 per cent of IMF votes; measures require 85 per cent support).
So recourse to a measure favoured by Brown and The Elders that would have boosted the foreign reserves of poor nations was unceremoniously dropped.
Mnuchin pointed out that since SDRs were allocated in proportion to IMF voting shares, the rich countries would benefit more than the poor. True enough, but also beside the point, because following a new SDR issue, proportionately, the poor countries would have seen the largest increase in their reserves.
In addition, an arrangement to have richer countries assign their additional SDRs to poorer nations was being discussed as part of the proposed new SDR issue.
African nations have seen their debt load rise to close to $400 billion. This needs to be seen in the light of the $8 trillion in new spending by IMF members in the initial response to the pandemic.
Poor countries need debt forgiveness. The G20 response, welcomed by the IMF, was to propose a moratorium on debt payments for the rest of the year.
A moratorium means interest payments would be suspended for a period, but interest on the debt would continue to accumulate, the total debt would grow, and the increased debt would have to be paid off in full.
Debt forgiveness means the capital owing is written off, the interest ceases to be charged, and the low income countries can direct funds where they are most needed.
The difference is major.
Favouring a debt moratorium over debt relief means the G20 are unwilling to recognize that the broken global order threatens the African very poor with starvation. People in power are prepared to look the other way — witness Yemen where millions face starvation and yet no international body has been able to put a stop to the tragedy.
The IMF has agreed to forgive debt payments on its own loans to those low-income members that face a public health disaster. This happens through the aptly named Catastrophe Containment and Relief Trust. Debt forgiveness is subject to so many conditions that is difficult to see how any country could have the IMF write off its outstanding loans.
This kind of technocratic response to catastrophe misses the first law of finance. If debts cannot be paid … they will not be paid.
That is why the current explosion of debt to sustain life will be followed in coming months with debt forgiveness. It makes sense to start today by having world leaders act in solidarity with strangers in other lands, and forgive African debts.
Duncan Cameron is president emeritus of rabble.ca and writes a weekly column on politics and current affairs.
Image: International Monetary Fund/Flickr
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