Sub-Saharan Africa: From poverty-trap to debt-trap

Africa in general, and sub-Saharan Africa in particular, are caught in an economic vortex of poverty and debt. There is a strange and ironic connection between debt and poverty. A new investigative report by Western news agency Reuters shows that at the turn of the century, Africa was seen as the next big opportunity for capital markets, which were supposed to pull the poor countries with rich resources into the realm of prosperity.

The World Bank had written off debt of $100 billion through a combination of loans and grants and buybacks for about 40 countries. This was 30 years ago. By 2010, it was decided to bring the African countries under the economic risk assessment by the three top rating agencies, S&P Global Ratings, Moody’s Ratings and Fitch Ratings. It is a coincidence that they are all American. Around 2002, the Americans were keen to bring African countries into the market economy universe. The investors were also looking for new hunting grounds. The ratings by the top agencies opened the gates of investment in the African continent. Instead of loans from World Bank at lower interest rates, which was hobbled by bureaucratic processes, global investments were pulled in through the issue of bonds by the African governments. Africa soon raised $200 billion through bonds. These investments were predicated on development and growth. But they ended with unpayable borrowings and heavy debt-servicing.

The ratings agencies had to downgrade the economic ratings of the defaulting countries, and it worsened the economic situation. Faced with the economic crisis, many African leaders felt that it is the bias of the rating agencies that is making things worse for them. Reuters says that its independent investigation showed that there was no bias.

Even as the debate goes on about the bias of the rating agencies, the economic reality is that the huge inflow of funds into countries like Ghana, Nigeria and Ghana which had stable economies with promise of healthy economic growth faltered because of the economic misfortune and because of the Covid-19 pandemic. Corruption and wastage also accounted for the inefficient use of the investment funds.

Things did not go according to plan. Projects were not completed and the expected economic growth did not happen. The experts now opine that opening the gates of investment inflows in as-yet-unprepared economies was a mistake, that the African countries were not in a position to absorb the investments in a constructive manner. But this is a lesson learnt after a bitter experience, and the experience is bitter for the debtor countries than for the creditors.

The African experience with market-driven investments shows that the argument that the poor countries lack financial resources to develop does not appear to be the correct diagnosis. There is need for an economic and administrative structure that can channel the funds into productive projects, and the need for fiscal prudence while building the much-needed infrastructure.

The burden however falls on the countries that have unthinkingly indulged in market borrowings. The flood of investment had resulted in crushing burden of debt. While earlier, the African countries were caught in the poverty trap because of lack of adequate financial resources, the bond markets with the help of credit ratings had led these countries into a debt trap.

It is argued that Africa can get out of the poverty trap only with the help of market investments. But the market investments bring with them their risk factor. African countries are too inexperienced to hedge the risk factors. It looks like what Africa needs is a good internal leadership and not so much foreign aid or foreign investments. The external help is only helpful when the countries have good leadership to lead the economic development strategy.