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ANALYSIS: Are IMF, World Bank to blame for Africa’s foreign debt burden?

As the continent weighs the economic havoc wreaked by the Covid-19 pandemic, there have been growing regional calls for debt relief, most recently by African Union chair Cyril Ramaphosa on Africa Day on 25 May 2020.

Why are many African countries buckling under debt? They can blame international lenders according to Dr Arikana Chihombori-Quao, a former AU ambassador to the United States.

“[The] IMF, World Bank, all other institutions. They make African countries jump through hoops. Loans we’ll never be able to pay,” she told US broadcaster Voice of America in a wide-ranging interview in April 2020.

“The US, when they borrow money, they are getting it at 1.5, 1.9[%] interest rate. Africans, when they get the same amount of money, they are paying 9, 10%. The people who don't need a break, they get a break, the ones who need a break, they don't get a break”.

Chihombori-Quao left office in October 2019. The AU took the unusual step of denying it had pushed her out for being too outspoken. 

But does Africa borrow internationally at rates five times more than other countries? We looked into this claim.

Loan terms based on country’s income status

Africa Check reached out to Chihombori-Quao for evidence of her claim, and to ask which other institutions she meant. We will update this report with her response.

We asked Dr Charles Adjasi, professor in development finance at the University of Stellenbosch Business School in South Africa, about how African countries borrow from the International Monetary Fund and the World Bank

A country that accesses a typical World Bank loan “will access it based on its income status and at the corresponding interest rate”, Adjasi said.

The income status informs if the country borrows from two of the bank’s five units. These are:

Most countries in Africa only qualify for loans from the IDA, the World Bank told Africa Check. They are low-income countries and “get highly concessional financing in grant and interest rate free loans which only charge a 0.75% service charge”. 

As of April 2020, 68 countries were eligible only for IBRD loans and 14 of those were in Africa. Another 59 countries qualified only for IDA loans, 33 of them African. Of 17 “blend” countries, who could borrow from both units, six were from the region. 

Interest rates not as high as 9 to 10%

Loans currently made by the World Bank and the IMF do not have interest rates of 9 to 10%, Adjasi told Africa Check. They are pegged against the “Libor”, the London Interbank Offered Rate, a reference lending rate widely used in international banking.

Adjasi told Africa Check that loans from international lenders usually attract an interest rate of the Libor plus “+/-0.5%”. 

“Libor is around 0.4 to 0.9%,” which would add up to a rate of 0.9 to 1.4%. “So 9 to 10% is certainly too high for interest rates. That is even higher than lending rates in some developing countries and defeats the purpose for IBRD, IDA or IMF facilities,” he said.

An IMF spokesperson told Africa Check that it was impossible to know what loans the former ambassador was describing because her remarks were in “very general terms”. 

However, “the bulk of our lending to low-income countries is set at 0% or concessional terms.”

US cannot borrow from World Bank

Chihombori-Quao made reference to the United States borrowing money at lower rates. But the World Bank and IMF websites show that the country currently has no loans from either lender. The World Bank spokesperson said developed economies like the US were not eligible to borrow from it.

Adjasi told Africa Check that a high-income country like the US does not qualify and technically cannot borrow from the World Bank. However, it can borrow from international capital markets.

Higher interest rates in 1980s

Until the end of the 2018 financial year, IBRD loans to eligible members did not vary according to the individual circumstances of a country, the World Bank said. Members were “subject to the same pricing, regardless of their region of origin and based on the market conditions prevailing when the loans were issued”. 

The bank said it currently offers one flexible loan, the IBRD Flexible Loan, that takes into account a country’s financing or debt repayment needs.

Have African countries in the past taken loans at interest rates of up to 10%? 

According to historical data on IBRD loans, a number of countries, including Nigeria, Republic of the Congo, Ivory Coast and Zimbabwe historically took loans with interest rates up to 12%, particularly in the 1980s. 

A rate query on the IMF website shows that adjusted rates of charge, which are levied on outstanding credit, were at 9% or more around 1990.

These rates were in line with prevailing interest rates, given that Libor was a factor in interest rates, Adjasi told Africa Check. 

“So with that perspective it is clear that facilities during periods of high Libor will attract higher rates for all, including African countries.”

Countries ‘graduate’, ‘reverse graduate’ between IDA and IBRD

A number of African countries that had progressed or “graduated” from the IDA to the IBRD are now back in the IDA, a process called “reverse graduation”. These are Nigeria, Ivory Coast, Republic of the Congo, Cameroon and Zimbabwe. Egypt returned to the IDA in 1991, but graduated up again to the IBRD in 1999.

The bank has in the past given a number of reasons for why IBRD countries have fallen back to IDA status. These include “sharp fluctuations in commodity prices coupled with exuberant over-borrowing in boom years” and “an abundance of commercial bank lending in the eighties”.

The bank notes that “with benefit of hindsight”, there was also “an over-optimistic view of the macro-economic prospects of many developing countries” leading to them becoming “over-indebted”.

It is possible that African countries that have reverted to IDA status could still owe IBRD loans, although some that have failed to pay have benefited from debt relief, Adjasi said.

“The main challenge here is that an unsustainable debt profile, or high debt burden, can push a middle-income country back into low-income status.”

The conclusion that African countries were singled out was not supported because IBRD and IDA pricing affects all eligible countries, Adjasi said. 

“So in the event that rates are 9 to 10%, it will apply to all. We also have no evidence yet to suggest that [higher income] Organisation for Economic Co-operation Development countries receive facilities at lower interest rates.”

Countries have ‘portfolios of loans’, says development studies expert

Dr Morten Jerven is professor in development studies at the Norwegian University of Life Sciences and has authored books on economic development statistics in Africa. 

It is not easy to directly judge if the envoy’s claim is accurate or not, he told Africa Check.

“The quote is imprecise as it does not claim that the loans from IMF and World Bank specifically are at 9 to 10%,” Jerven said, echoing the World Bank and the IMF.

“Countries have a portfolio of loans. It is very possible that one country has one loan from the IMF at a concessionary rate, and another at above market rate,” Jerven said. That same country might also “borrow in private markets, such as through treasury bonds, where rates might be higher again”.

Former envoy barking up the wrong tree?

Dr Misheck Mutize, who teaches finance at the University of Cape Town’s Graduate School of Business, told Africa Check that it was “unlikely that African countries are discriminately charged more”. The former ambassador’s “claims and assertions have a political context and dimension to them”.

As loans from multilateral institutions were low and on concessional terms, their interest rates were not the issue, Mutize said. His research interests include credit ratings, financial markets and African economic policy. 

Rather, the issue was “the conditions that accompany the multilateral loans”. He said these could be austerity measures and structural adjustment programs, which include cutting public expenditure, abolishing social support and reducing the public wage bill. He also noted increasing commercial lending rates to contain inflation and currency devaluation. 

As the loans have to be repaid in foreign currency, their cost increases when local currencies lose value, Mutize said. “This is another huge source of cost, and the net cost of devalued currency might be much higher than open market interest rates,” he said. To escape the loan requirements, African countries have started borrowing on the Eurobond market, where interest rates differ among countries due to credit ratings. 

“African countries are paying more because they have poor credit ratings or a high risk of defaulting,” said Mutize.

All these factors therefore mean Africa indebtedness is more complicated than the interest claims made by Chihombori-Quao.

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