"African countries can\u2019t resolve their debt crisis under a system rigged against them"

" \r\n \r\n African countries can\u2019t resolve their debt crisis under a system rigged against\u00a0them \r\nThe debt situation in many African countries has escalated again\u00a0 to a critical juncture . Twenty are in, or at risk of, debt distress.\r\n\r\nThree pivotal elements significantly contribute to this.\r\n\r\nFirstly, the rules governing the international banking system favour developed countries and work against the interests of African countries.\r\n\r\nSecondly, multilateral financial institutions such as the International Monetary Fund (IMF) and the World Bank focus on poverty alleviation. This is commendable. But it doesn\u2019t address the liquidity crisis countries face. Many don\u2019t have the necessary readily available funds in their coffers to cover urgent development priorities due to their dependency on volatile commodity exports. As a result governments turn to raising sovereign debt under conditions that are among the most unfavourable on the planet.\r\n\r\nThis perpetuates a debt dependency cycle rather than fostering sustainable economic growth.\r\n\r\nThirdly, there\u2019s the significant influence of biased credit rating agencies. These unfairly penalise African countries. In turn, this impedes their ability to attract investment on favourable terms.\r\n\r\nThe convergence of these three factors underscores the imperative to implement effective strategies aimed at mitigating the overwhelming debt burden afflicting African nations. These strategies must address the immediate financial challenges facing countries. They must also lay the groundwork for long-term economic sustainability and equitable development across the continent.\r\n\r\nBy tackling these issues head-on, a financial environment can be created that fosters growth, empowers local economies, and ensures that African countries have access to the resources they need to thrive.\r\n\r\n Rules of the banking game \r\n\r\nThe\u00a0 Bank for International Settlements \u00a0is often called the \u201ccentral bank for central banks\u201d. It sets the regulations and standards for the global banking system.\r\n\r\nBut its rules disproportionately favour developed economies, leading to unfavourable conditions for African countries. For instance, capital adequacy requirements \u2013 the amount of money banks must hold in relation to their assets \u2013 and other prudential rules may be disproportionately stringent for African markets. This limits lending to stimulate economic growth in less attractive economies.\r\n\r\nThe bank\u2019s policies also often overlook developing nations\u2019 unique challenges.\r\n\r\nFollowing the 2008\/2009 financial crisis, the bank introduced\u00a0 a new, tougher set of regulations . Their complexity and stringent requirements have inadvertently accelerated\u00a0 the withdrawal of international banks \u00a0from Africa.\r\n\r\nThey have also made it increasingly difficult for global banks to operate profitably in African markets. As a result, many have chosen to scale back their operations, or exit. The withdrawals have reduced competition within the banking sector, limited access to credit for businesses and individuals, and hampered efforts to promote economic growth and development.\r\n\r\nThe limitations of the new regulations highlight the need for a more nuanced approach to banking regulation. The adverse effects could be mitigated by simplifying the regulations. For example, requirements could be tailored to the specific needs of African economies, and supporting local banks.\r\n\r\n Focus on poverty alleviation \r\n\r\nMultilateral financial institutions like the IMF and the World Bank play a crucial role in providing financial assistance to many countries on the continent. But their emphasis on poverty alleviation and, more recently, climate finance often overlooks the urgent spending needs.\r\n\r\nAdditionally, the\u00a0 liquidity squeeze \u00a0facing countries further limits their capacity to prioritise essential expenditure.\r\n\r\nWealthy nations enjoy the luxury of lenient regulatory frameworks and ample fiscal space. For their part African countries are left to fend for themselves in an environment rife with predatory lending practices and exploitative economic policies.\r\n\r\nAmong these are sweetheart tax deals which often involving tax exemptions. In addition, illicit financial practices by multinational corporations drain countries of their limited resources.\r\n\r\nResearch by The ONE Campaign\u00a0 found \u00a0that financial transfers to developing nations plummeted from a peak of US$225 billion in 2014 to just US$51 billion in 2022, the latest year for which data is available. These flows are projected to diminish further.\r\n\r\nAlarmingly, the ONE Campaign report stated that more than one in five emerging markets and developing countries allocated more resources to debt servicing in 2022 than they received in external financing. Aid donors have been touting record global aid figures. But nearly one in five aid dollars was directed towards domestic spending hosting migrants or supporting Ukraine. Aid to Africa has stagnated.\r\n\r\nThis leaves African countries looking for any opportunities to access liquidity, which makes them a prey of debt scavengers. As\u00a0 noted \u00a0by Columbia University professor Jos\u00e9 Antonio Ocampo, the Paris Club, the oldest debt-restructuring mechanism still in operation, exclusively addresses sovereign debt owed to its 22 members, primarily OECD countries.\r\n\r\nWith these limited attempts to address a significant structural problem of pervasive indebtedness it is unfair to stigmatise Africa as if it contracted debt because of its performance or bad management.\r\n\r\n Rating agencies \r\n\r\nRating agencies wield significant influence in the global financial landscape. They shape investor sentiment and determine countries\u2019 borrowing costs.\r\n\r\nHowever, their assessments are often marked by bias. This is particularly evident in their treatment of African countries.\r\n\r\nAfrican nations argue that without bias, they should receive higher ratings and lower borrowing costs. In turn this would mean brighter economic prospects as there is a positive correlation between financial development and credit ratings.\r\n\r\nHowever, the subjective nature of the assessment system inflates the perception of investment risk in Africa beyond the actual risk of default. This increases the cost of credit.\r\n\r\nSome countries have contested ratings. For instance, Zambia\u00a0 rejected \u00a0Moody\u2019s downgrade in 2015, Namibia\u00a0 appealed \u00a0a junk status downgrade in 2017 and Tanzania\u00a0 appealed \u00a0against inaccurate ratings in 2018. Ghana\u00a0 contested \u00a0ratings by Fitch and Moody\u2019s in 2022, arguing they did not reflect the country\u2019s risk factors.\r\n\r\n Nigeria \u00a0and\u00a0 Kenya \u00a0rejected Moody\u2019s rating downgrades. Both cited a lack of understanding of the domestic environment by rating agencies. They asserted that their fiscal situations and debt were less dire than estimated by Moody\u2019s.\r\n\r\nRecent\u00a0 arguments \u00a0from the Economic Commission for Africa and the African Peer Review Mechanism highlight deteriorating sovereign credit ratings in Africa despite some posting growth patterns above 5% for sustained periods. Their joint report identifies challenges during the rating agencies\u2019 reviews. This includes errors in publishing ratings and commentaries and the location of analysts outside Africa to circumvent regulatory compliance, fees and tax obligations.\r\n\r\nA recent UNDP report\u00a0 illuminates \u00a0a staggering reality: African nations would gain a significant boost in sovereign credit financing if credit ratings were grounded more in economic fundamentals and less in subjective assessments.\r\n\r\nAccording to the report\u2019s\u00a0 findings , African countries could access an additional US$31 billion in new financing while saving nearly US$14.2 billion in total interest costs.\r\n\r\nThese figures might seem modest in the eyes of large investment firms. But they hold immense significance for African economies. If credit ratings accurately reflected economic realities, the 13 countries studied could unlock an extra US$45 billion in funds. This is equivalent to the entire net official development assistance received by sub-Saharan Africa in 2021.\r\n\r\nThese figures underscore the urgent need to address the systemic biases plaguing credit rating assessments in Africa.\r\n\r\n Next steps \r\n\r\nDebates about Africa\u2019s debt crisis often lean towards solutions centred on compensation. These advocate for increased official development aid, more generous climate finance measures, or the reduction of borrowing costs through hybrid arrangements backed by international financial systems.\r\n\r\nThese measures may offer temporary relief. But they need to be more genuine solutions in light of the three structural challenges facing African countries.\r\n\r\n \r\n "

"African countries can\u2019t resolve their debt crisis under a system rigged against them"

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