Is debt restructuring the magic wand for Africa’s problems?

The recent annual meetings of the International Monetary Fund (IMF) and World Bank, hosted in Africa for the first time in five decades, were initially seen as a promising opportunity for the continent. The gatherings were expected to bring not only renewed attention to Africa’s economic potential but also vital support in addressing its pressing issues. While the IMF has projected a recovery for African economies, forecasting a return to pre-pandemic growth rates as early as next year, the meetings have been met with significant criticism for failing to adequately address Africa’s most urgent problem: its escalating debt crisis.

Despite the optimism surrounding the IMF’s predictions of economic rebound, the outcomes of the meetings revealed a more sobering reality. From Marrakesh, the only significant positive development emerged from Zambia. The Southern African nation, which became the first country on the continent to default on its debt in the wake of the COVID-19 pandemic in 2020, successfully negotiated a debt restructuring deal with its major creditors, including China and France. This deal, which came as a result of extensive negotiations, has provided Zambia with some financial leeway to address its internal economic challenges. As of December 2022, Zambia’s debt stood at an alarming $32.8 billion, making it one of the ten African countries experiencing severe debt distress.

However, the picture is far bleaker for other nations. Countries like Ghana, Somalia, Sudan, Equatorial Guinea, Malawi, Mozambique, Zimbabwe, and the Republic of Congo continue to face debilitating debt service issues without having secured comparable relief agreements. These nations are still grappling with their debt obligations, and no substantial agreements have been reached with their creditors. In addition to these distressed countries, another ten African nations, including Kenya and Rwanda, are identified by the IMF as being at high risk of default due to surging loan servicing costs.

The situation is further compounded by the stark increase in the cost of debt servicing. Since the pandemic began, the cost of servicing loans has nearly doubled for many African countries. IMF figures reveal that yields on African Eurobonds have soared to over 12 percent, compared to approximately 7 percent before the pandemic. This surge in borrowing costs has exacerbated the funding squeeze faced by the continent, making it increasingly difficult for nations to manage their debt obligations.

The IMF’s recent report paints a troubling picture, with Africa’s average debt-to-GDP ratio climbing to 60.8 percent this year. The report warns that this ratio could rise by an additional 10 percent over the next five years if countries do not undertake critical fiscal reforms to address their budget deficits. Many experts and activists, however, argue that the IMF’s approach may not be the right solution.

Critics of the IMF’s strategies point to the austerity measures prescribed by the institution, which they argue have been detrimental to essential public services such as healthcare and education. Fadhel Kaboub, an economist with a deep understanding of the African economic landscape, has voiced strong criticism of the IMF’s approach. In an interview with The EastAfrican, Kaboub suggested that the IMF and World Bank, with their longstanding influence in Africa, either failed in their development mission or have skillfully used their influence to entrench the continent in a cycle of external debt.

ActionAid, a Johannesburg-based international charity, has echoed these concerns. In a recent report, the organization criticized the IMF’s austerity prescriptions, asserting that they have harmed state spending on vital sectors like healthcare and education. ActionAid advocates for a shift away from austerity and fiscal fundamentalism, calling for development-focused strategies that prioritize economic growth and social investment over rigid debt repayments.

The IMF, for its part, attributes the continent’s growing debt crisis to Africa’s shift towards commercial and non-concessional debts. According to the IMF, the share of domestic and commercial debt in sub-Saharan Africa has increased significantly since the early 2000s, while the proportion of bilateral and multilateral debt has decreased from 50 percent in 2000 to 21.6 percent in 2021. This shift has introduced more complexity into debt restructuring negotiations, as the involvement of a diverse range of creditors makes successful debt reworking more challenging.

Despite these complexities, restructuring agreements are seen as crucial for alleviating the debt crisis. Eric Musau, the executive director of research at Nairobi-based Standard Investment Bank, highlights the importance of restructuring as a key achievement for any administration, provided it does not result in significant economic or political penalties. Nonetheless, Zambia’s Finance Minister Situmbeko Musokotwane has acknowledged that while debt restructuring is beneficial, it alone is insufficient to significantly improve the living standards of the Zambian population.

Dr. Kaboub concurs, arguing that postponing debt payments does not address the underlying structural issues that have led to the debt trap. He emphasizes the need for African leadership to focus on these structural problems to create sustainable solutions.

In light of these challenges, African finance ministers have proposed a series of reforms aimed at improving the continent’s liquidity and access to more favorable, long-term loans. The World Bank, having recently approved a new vision statement, seems committed to these reforms. World Bank President Ajay Banga has suggested exploring loan maturities of 35 to 40 years, which could support long-term investments in social and human capital.

The ongoing discussions and proposed reforms reflect a broader recognition of the need for more effective debt management strategies and financial support mechanisms. While the IMF and World Bank meetings in Marrakesh offered a platform for addressing Africa’s economic issues, the continent’s debt crisis remains a pressing concern that demands more comprehensive and effective solutions.

Global Financial System Drives African States into Debt Distress

According to the latest International Debt Report 2023 from the World Bank, a staggering $21.5 billion will be expended by 24 of the world’s lowest-income economies on servicing their external public debt in 2024. This alarming figure highlights the escalating financial pressures faced by these vulnerable nations, which are struggling to manage their debt obligations amidst a challenging global economic environment.

In 2022, the year for which the most recent data is available, low- and middle-income countries collectively paid a record-breaking $443.5 billion to service their external public and publicly guaranteed debt. This unprecedented expenditure underscores the mounting burden these nations are shouldering as they attempt to navigate the complexities of debt management in an increasingly strained global financial landscape.

The report’s release coincided with a significant development in Africa’s debt crisis: Ethiopia became the third country on the continent, following Ghana and Zambia, to default on sovereign bonds within the past three years. Ethiopia’s default on a $33 million interest payment on its international government bonds serves as a stark reminder of the severe financial pressures facing many African nations.

Prof. James Gathii, a founding editor of Afronomicslaw, a network advocating for African sovereign debt justice, has raised alarm over the dire situation. “Ethiopia’s default this month is a clear indicator that African countries will continue to face extreme financial pressures regarding debt repayments,” Prof. Gathii stated. He further elaborated that the debt crisis is not merely a result of excessive borrowing by African nations but also a consequence of a global financial system and debt architecture that is fundamentally skewed against heavily indebted countries.

The debt crisis affecting 33 African nations has escalated to a point where many are struggling to meet their debt obligations, including both interest and principal repayments. This overwhelming debt burden has forced governments to divert crucial resources away from essential services such as healthcare, education, and infrastructure. The International Debt Report 2023 underscores that one in every four developing countries is effectively excluded from international capital markets, reflecting a broader trend of financial exclusion and instability.

For the poorest countries, debt has become an almost paralyzing burden. Among the 28 countries eligible to borrow from the World Bank’s International Development Association (IDA), many are at high risk of debt distress, with eleven already in a state of distress. The past three years alone have witnessed 18 sovereign defaults across ten developing countries, including Zambia, Sri Lanka, and Ghana. This number exceeds the total recorded in the previous two decades, highlighting a sharp increase in sovereign defaults.

Compounding the problem is the withdrawal of private creditors from developing countries, leaving these nations with fewer financing options. “Private creditors are prioritized for repayment out of any revenue collections, ahead of spending on essential public services such as health, education, and housing,” noted Prof. Gathii. He criticized private creditors for their reluctance to engage in debt restructuring, as delaying or avoiding restructuring is more financially advantageous for them. The lack of a fair and balanced restructuring mechanism that accommodates the interests of both creditors and debtors exacerbates the crisis.

African nations, including Kenya, Zambia, Ghana, Ethiopia, Zimbabwe, Mozambique, Nigeria, and Senegal, are expected to continue experiencing significant debt distress, especially as the global economic outlook for 2024 remains uncertain. For countries eligible to borrow from the IDA, interest payments on their total external debt stock have surged to an all-time high of $23.6 billion since 2012. This sharp increase underscores the persistent and worsening nature of the debt crisis.

One significant factor contributing to Africa’s debt predicament is the continent’s struggle to generate sufficient domestic resources for development. Chenai Mukumba, executive director of the Tax Justice Network Africa, highlights that African countries have a tax-to-GDP ratio of approximately 15 percent, the lowest in the world. This is half the tax-to-GDP rate of OECD (Organisation for Economic Co-operation and Development) countries. The limited tax revenue available for debt servicing means that crucial public services, which predominantly benefit low-income households and marginalized individuals, are inadequately funded.

Debt-to-GDP ratios serve as a key indicator of a country’s level of indebtedness, with a high ratio suggesting a greater risk of failing to meet debt obligations. For example, Ethiopia’s debt-to-GDP ratio stands at 46.37 percent, lower than that of many advanced countries. However, nearly half of Ethiopia’s debt is external, posing additional challenges.

In Kenya, the government’s draft supplementary budget estimates for the fiscal year ending June 2024 reveal a new deficit forecast that is roughly one percentage point greater than the initial budget projection of 4.4 percent of GDP. The continued depreciation of the Kenyan shilling has further intensified inflationary pressures, exacerbated by Kenya’s heavy reliance on imports. Since the beginning of 2023, the Kenyan shilling has lost approximately 31 percent of its value against the dollar, falling from 123.5 to 154 per dollar by December 21, 2023. The usable foreign exchange reserves amounted to $6.71 billion (equivalent to 3.6 months of import cover) as of the same date, falling short of the statutory reserve threshold of 4.0 months of import cover. This imbalance between dollar supply and demand is disrupting business operations and accelerating the depreciation of the shilling, further complicating debt management.

Solutions proposed by advocates for debt justice include calls for debt cancellation, arguing that much of the debt accumulated by African countries was incurred within a global financial system that unfairly positioned them within the global economy. Chenai Mukumba also emphasizes the need for increased domestic resource mobilization by addressing tax avoidance and evasion, particularly practices perpetuated by multinational corporations.

In summary, while the World Bank’s projections of economic recovery for Africa offer some hope, the continent faces an ongoing and deepening debt crisis that demands urgent and effective solutions. The challenges highlighted by the International Debt Report 2023 underscore the need for a comprehensive approach to debt management and economic reform to alleviate the severe financial pressures on the world’s most vulnerable nations.

How Africa Can Navigate the Global Rush for Its Minerals

As the global demand for critical minerals, particularly lithium, accelerates to support clean energy and de-carbonization goals, Africa finds itself at the epicenter of a burgeoning mineral rush. Foreign mining companies are flocking to the continent to invest in exploration and secure mining licenses, drawn by Africa’s rich deposits of these essential resources.

The 2023 Critical Minerals Market Review by the International Energy Agency underscores the dramatic increase in demand for critical minerals. Lithium demand, for example, has surged threefold from 2017 to 2022. The overall market for critical minerals has doubled in the past five years, reaching a valuation of $320 billion in 2022. Projections indicate that demand will more than double by 2030 and quadruple by 2050, with annual revenues expected to hit $400 billion.

recent research into African lithium projects, specifically in Namibia, Zimbabwe, the Democratic Republic of Congo (DRC), and Ghana, reveals a significant gap: these countries lack robust strategies for managing their critical minerals sector. Despite their vast mineral resources, these nations are largely reactive to the global rush for these minerals, rather than proactively shaping their mineral economies.

The African Union is urged to expedite the development of a cohesive African critical minerals strategy. Such a strategy should draw from global best practices to guide member countries in negotiating mining contracts and agreements effectively. Additionally, national mining policies and regulations need to be updated to address the opportunities and challenges posed by the rising global demand for critical minerals.

The term “critical minerals” lacks a universal definition, with different regions and institutions maintaining varying lists that evolve over time. For instance, Australia designates 47 minerals as critical, while the European Union identifies 34 critical raw materials essential to its economy and vulnerable to supply disruptions. The United States lists 50 critical minerals, 45 of which are also considered strategic.

These minerals are deemed critical for several reasons: their essential role in a low-carbon economy or national security, the absence of substitutes, and their vulnerability to supply chain disruptions.

At the time of research, 18 lithium projects were at various stages—from early exploration to production—across Africa, with a focus on Namibia, Zimbabwe, the DRC, and Ghana. Our analysis shows that discussions about Africa’s critical minerals are heavily influenced by geostrategic and economic opportunities driven by demand from Western countries and China. However, less attention has been given to securing supply chains for current and future industrial needs.

Our findings highlight that African countries, while significant contributors to global critical mineral reserves, have yet to establish comprehensive infrastructure and policies to manage the impacts of mining. Lithium mining, for instance, affects communities, biodiversity, water sources, and energy usage, and underscores the need for a clear, strategic agenda.

Emerging lithium mining activities in Zimbabwe, the DRC, and Namibia are not only fueling economic opportunities but also giving rise to new forms of corruption and illegality in the resources sector. Ghana, meanwhile, is still in the early stages of developing its lithium sector.

To fully leverage the economic opportunities presented by the critical minerals boom, Africa must strengthen its governance framework. This includes enhancing regulations, accountability, and transparency within the mining sector. Mining companies operating in Africa should adhere to leading global practices and national regulations to mitigate environmental and social impacts.

The urgency of securing critical minerals should not justify bypassing regulations. Instead, it should empower African governments to negotiate better mining deals that benefit both people and the environment. There should be incentives for local companies to mine and process lithium domestically. Processing lithium within the country of origin would boost local returns, create jobs, and stimulate growth in other sectors of the economy.

Coordinated efforts across Africa are needed to build local capacity throughout the mining chain—from exploration to market. There is also an opportunity to establish industries that support the global de-carbonization agenda, such as manufacturing electric vehicle batteries.

By doing so, Africa can transition from merely being a source of raw materials to becoming a competitive player in the low-carbon product market. This approach will not only enhance Africa’s economic prospects but also support global efforts toward sustainability and climate resilience.

As the world’s attention intensifies towards Africa’s vast mineral resources, the continent stands at a crucial crossroads. Africa is endowed with a wealth of minerals essential for various industries, from technology to energy, driving a global rush for its resources. This surge in interest presents both opportunities and challenges. For Africa to effectively manage this global rush and harness its mineral wealth for sustainable development, it must adopt a multifaceted approach that addresses economic, environmental, and social considerations.

1. Developing Robust Resource Governance Frameworks

One of the primary steps Africa must take is to strengthen its governance frameworks for mineral resource management. Effective governance ensures that mineral extraction is conducted transparently and equitably, benefiting the continent’s economies and people.

A. Transparent Regulatory Frameworks:
Countries need to establish clear and transparent regulations governing mineral extraction. This includes setting up stringent licensing requirements, monitoring mechanisms, and anti-corruption measures. Transparent processes help attract responsible investors while minimizing opportunities for illicit practices.

B. Strengthening Institutions:
Building strong institutions that oversee the mining sector is crucial. These institutions should be empowered to enforce regulations, negotiate fair contracts, and address grievances. Capacity building for regulatory bodies can help ensure that they are well-equipped to manage the complexities of the mineral sector.

C. Enhancing Legal Frameworks:
Revising and updating legal frameworks to reflect modern practices and international standards can improve governance. Laws should cover environmental protection, workers’ rights, and community engagement, ensuring that mining activities do not undermine social and environmental sustainability.

2. Promoting Value Addition and Industrialization

Africa’s mineral wealth can be a catalyst for economic growth if the continent shifts from mere extraction to value addition. Developing local industries that process minerals can create jobs, stimulate economic activity, and increase the continent’s share of the mineral value chain.

A. Encouraging Local Processing:
Investing in infrastructure and technology for local mineral processing can help countries add value to their raw materials. By processing minerals domestically, Africa can retain a larger portion of the economic benefits from its resources.

B. Supporting Industrial Development:
Governments should create policies that support the development of mineral-based industries. This includes offering incentives for businesses that invest in mineral processing, such as tax breaks, subsidies, and access to financing.

C. Investing in Human Capital:
Training and education programs should focus on developing a skilled workforce capable of managing and operating mineral processing facilities. This investment in human capital is essential for building a competitive and sustainable mineral industry.

3. Ensuring Environmental and Social Sustainability

The environmental and social impacts of mineral extraction must be carefully managed to prevent long-term harm to communities and ecosystems.

A. Implementing Environmental Safeguards:
Robust environmental regulations and impact assessments are vital. Mining companies should be required to adopt best practices for minimizing environmental degradation, such as proper waste management and rehabilitation of mining sites.

B. Engaging with Local Communities:
Community engagement and consultation are critical in ensuring that mining projects do not adversely affect local populations. Governments and companies should work together to develop community development plans that address the needs and concerns of affected populations.

C. Promoting Corporate Social Responsibility:
Companies should be encouraged to adopt corporate social responsibility (CSR) practices that contribute to the well-being of local communities. This includes investing in infrastructure, healthcare, and education projects that benefit the areas where mining operations are conducted.

4. Leveraging International Cooperation and Partnerships

Africa can benefit from international cooperation to manage its mineral resources more effectively. Partnerships with global organizations, development agencies, and other countries can provide technical expertise, financial support, and market access.

A. Engaging with International Organizations:
Collaboration with organizations such as the United Nations, the World Bank, and the African Development Bank can provide valuable resources and guidance. These organizations can assist in developing and implementing best practices for resource management.

B. Building Bilateral and Multilateral Partnerships:
Countries can forge partnerships with other nations to share knowledge and resources. Bilateral agreements can focus on technology transfer, capacity building, and joint ventures in mineral processing and value addition.

C. Participating in Global Initiatives:
Africa should actively participate in global initiatives aimed at promoting responsible mining practices. Initiatives such as the Extractive Industries Transparency Initiative (EITI) and the Global Reporting Initiative (GRI) can help improve transparency and accountability in the mining sector.

5. Enhancing Economic Diversification

To mitigate the risks associated with dependence on mineral exports, Africa should focus on diversifying its economies. Economic diversification can reduce vulnerability to fluctuations in global mineral prices and create more stable and resilient economies.

A. Investing in Non-Mineral Sectors:
Governments should promote investments in sectors such as agriculture, technology, and manufacturing. Diversification can create new economic opportunities and reduce reliance on mineral exports.

B. Developing Infrastructure:
Investing in infrastructure, including transportation, energy, and technology, can support economic diversification and improve the overall business environment. Infrastructure development enhances connectivity and facilitates trade, benefiting various sectors of the economy.

C. Fostering Innovation and Entrepreneurship:
Encouraging innovation and supporting entrepreneurial ventures can drive economic growth beyond the mineral sector. Policies that promote research and development, technology adoption, and business incubation can stimulate new industries and create jobs.

Conclusion

Africa’s global mineral rush presents both significant opportunities and challenges. By adopting comprehensive strategies that focus on robust governance, value addition, environmental sustainability, international cooperation, and economic diversification, the continent can harness its mineral wealth to drive sustainable development and improve the lives of its people. Effective management of mineral resources will be pivotal in shaping Africa’s economic future and ensuring that its mineral wealth translates into long-term prosperity for its nations.

Development vs conservation: DRC’s dilemma over resources

Nature conservation, a pressing global issue, remains a distant concern for many in the Democratic Republic of Congo (DRC). As the International Day for Nature Conservation approaches on July 28, the debate over oil exploration in the DRC’s protected areas has resurfaced, highlighting a profound conflict between environmental preservation and economic advancement.

Oil Exploration vs. Environmental Protection

Over a year ago, the DRC issued invitations for bids to exploit oil and gas blocks, aiming to harness its substantial fossil fuel reserves. Despite this, the project has failed to attract significant bidders. However, the Congolese government, under pressure from nature conservationists, remains determined to move forward. Environment Minister Eve Bazaïba staunchly defends the government’s position, arguing that opponents of the project must present viable alternatives to support Kinshasa’s economic and social development.

Economic Pressures and Conservation Challenges

The DRC, home to one of the world’s largest carbon sinks, stands at a crossroads. The government’s push for fossil fuel exploitation is justified by its need for economic growth, framed as “climate justice.” The International Trade Administration reports that the DRC holds the second-largest crude oil reserves in Central and Southern Africa, after Angola. These reserves are situated around major lakes bordering Tanzania, Burundi, Rwanda, and Uganda. The DRC’s proven oil reserves amount to 180 million barrels, with potential for even more significant discoveries in methane and natural gas.

Lake Kivu, straddling the borders of Rwanda and Burundi, contains nearly 60 billion cubic meters of dissolved methane. This methane represents a dual challenge: it poses a risk to local populations but also offers a potential energy source. Rwanda has already harnessed this methane through a power plant, generating 30-40 megawatts of electricity. Beyond the existing reserves, Lake Kivu is estimated to produce between 120 and 250 million cubic meters of new methane annually.

Economic Dilemmas and Conservation Efforts

The DRC relies entirely on imported refined petroleum, fueling a debate among Congolese citizens about whether to exploit domestic oil reserves or continue struggling with poverty. The dilemma pits economic needs against environmental concerns. Joe Kassongo, a senior legal officer at the African Wildlife Foundation, emphasizes that nature conservation can coexist with poverty alleviation. The key is educating communities on the importance of sustainable resource management and the need to preserve natural resources for future generations.

Minister Bazaïba contends that oil is a critical economic barometer. Limited access to oil leads to increased costs of goods and services, exacerbating living conditions. Conversely, accessible oil can lower living costs and improve access to necessities. This economic perspective complicates the conservation debate, as the government seeks to balance immediate economic benefits with long-term environmental sustainability.

Legal and Ethical Considerations

While the DRC’s conservation laws protect designated areas, there are loopholes that allow for exceptions under specific conditions. The law permits activities in protected areas if they serve the general interest or scientific research, provided they do not undermine conservation goals or harm wildlife. However, these exceptions often lead to tensions between industrial development and environmental protection.

Kassongo argues that although conservationists are not opposed to oil exploitation per se, any development must be conducted in a manner that does not endanger wildlife or violate conservation objectives. He advocates for focusing on green energy and minerals that support the energy transition, aligning economic development with environmental stewardship.

The Path Forward: Green Energy and Climate Leadership

In response to the climate crisis, the DRC has established the Ministry of the Climate Economy to spearhead green diplomacy and attract financial support for climate initiatives. The country boasts a vast array of natural resources, including extensive forests, a complex hydrographic network, and rich biodiversity. With an estimated 155 million hectares of forested area (62% of its national territory) and significant mineral wealth, the DRC has the potential to generate substantial revenue from carbon credits and eco-tourism.

Forestry expert Richard Kitenge suggests that the DRC’s forests and peatlands could generate up to $200 billion annually through carbon credit sales. This revenue could be pivotal in funding conservation efforts and promoting sustainable development. Prime Minister Judith Suminwa underscores the DRC’s potential to play a leading role in global climate discussions. Effective measures in climate and environmental sectors are crucial for the DRC to leverage its position as a climate solution country while addressing poverty.

Despite its potential, the DRC faces significant challenges, including deforestation, soil degradation, and urban pollution. The International Monetary Fund’s 2023 report highlights the urgent need for comprehensive efforts to combat these issues sustainably. The country must address flooding, erosion, and other adverse effects to ensure a balanced approach to development and conservation.

In summary, the DRC stands at a critical juncture, balancing the immediate benefits of oil exploitation against the long-term need for environmental conservation. The decisions made today will shape the country’s future, influencing its role as a global leader in climate solutions and its ability to overcome poverty while preserving its rich natural heritage.