A world recession induced by pandemic and war, a consequent boom in energy prices and a cost-of- living crisis with rising inflation especially of food prices, is threatening to reverse the progress that many African economies made during the ‘commodity super-cycle’ of the 2000s and the first part of the 2010s. Indeed, there are strong echoes of the recession of the late 1970s and early 1980s, itself induced by a twelvefold increase in the price of oil and in Africa, by famine and war. In both cases, these appearances of crisis disguise the fundamental contradiction of capitalism – the relentless pressure to increase profits facing the limits of realisation as consumption is squeezed and the state is restricted in its powers of intervention, even in limiting the impact of the cost-of-living crisis on its already impoverished population.
While much attention has been focused on the oligarchs of Russia and Ukraine, these plutocrats as they should be called, exist all over the world. Their increasing influence is evident everywhere. They acquire their wealth by hoarding the economic rent they receive from highly valued products and paying as low wages as they can get away with to largely non-unionised labour. They then secure that wealth and economic power from any government intervention by first, capturing political parties, and not only of the right, but also the self-styled left, and then play a crucial role in funding their election campaigns. Then after those parties win elections the government is captured and liberal democracies or countries moving towards such democracy morph into shades of oligarchy or even autocracy, as we observe most obviously in countries such as India, Hungary, Turkey and in Africa, Uganda.
Once again, the chief beneficiary of this war-induced recession is US imperialism and its dominant financial-security complex (if not oligarchy) based on oil, gas and arms. Not only has the US been able to benefit as an oil producer from the increase in the oil price, but also from the increased demand for its liquid petroleum gas (LPG) as Europe reduces its demand for Russian gas following that country’s further invasion of Ukraine. The potential axis of Brussels-Moscow-Beijing, which would have been a serious threat to US global interests has been averted. The US has been able to reassert its hegemony over Europe through its mobilisation of economic and military support for Ukraine and has also underlined its hegemony in the Far East with its clear assertion of its support for Taiwan’s independence, reaffirming its strategy of, and belief in, a unipolar world.
For the countries of Africa, the last decade has seen a large increase in sovereign debt in the wake of the extremely low interest rates that followed the financial crisis of the late 2000s. The encouragement of African economies’ entry into global capital markets mainly through issuing Eurobonds, was regarded as something to be celebrated as part of the ‘Africa Rising’ narrative. Not that capital markets treated African economies in the same way as those of the Global North. Instead, they placed a premium on interest rates reflecting what they saw as the greater risk in lending to African countries. Borrowing on global capital markets when interest rates were low seemed a good way to finance development or even restructure existing debt. However, the downturn in the world economy both before and especially during the Covid-19 pandemic together with the effects of the Russia-Ukraine war has now placed some 22 countries in the position of actual or potential ‘debt distress’ and needing, or likely to need, IMF and World Bank support. Such initiatives as the G20’s Debt Service Suspension and the Common Framework for Debt Treatment have relieved very little of the pressure on the debtor countries.
African countries’ debt now averages over 60% of GDP and in the case of Mozambique 100%, ratios not high in comparison with some countries of the Global North but servicing this debt diverts resources away from investment in productive activity as increasingly borrowing is directed to repayment of previous bond issues. In the case of Mozambique, Zambia and Ghana, ‘debt distress’ has led to default on some of their debts and attempts to restructure them including negotiating deals where effectively a large part of the debt is written off as the lenders take the proverbial ‘haircuts’. In Ghana, these problems of integration into global financial markets have led to bank failures putting even more pressure on weak financial systems. Ethiopia’s war with Tigray has had devastating effects on its economy and increased its level of debt distress resulting in a rescheduling of its debt to China (a third of its total external debt) and so reducing the risk of default. In North Africa, Egypt and Tunisia have been racking up huge external debts and have now agreed new credit arrangements with the IMF.
China has become a major lender to Africa, mainly for infrastructural investments and now holds 12% of Africa’s debt, and for several countries in Africa is its biggest creditor. Debate around the motivations for Chinese lending abound, with some observers seeing China luring key African states in debt-traps while others see China being drawn into a trap of its own as the risk of default heightens. Perhaps because of this risk, the last two years has seen China sharply scaling down its lending to Africa. Unlike its willingness to reschedule Ethiopia’s debt, and that of some other African countries, China is now delaying a rescheduling of Zambian debt arguing that the multilateral organisations such as the World Bank and IMF should also take haircuts as well. This is of no help to Zambia which needs support from all its creditors. The IMF’s agreement to grant an Extended Credit Facility of $1.3 billion in August 2022 is contingent on Zambia effecting its ‘home grown’ adjustment strategy which involves restructuring and rescheduling China’s external debt as well as the other usual ‘adjustments’ in the IMF’s playbook, to which we return later.
How far repayment of current external debt by African economies is feasible will depend on its foreign exchange earnings. These are still for much of Africa, some 60 years after the end of colonial rule, highly dependent on the export of primary products. The latest data tells us that these products, predominantly fuels and minerals, comprise 77% of Africa’s export income. Some countries are more dependent on primary product exports than others and in some cases their export income is dominated by just one product, as in the case of copper in Zambia which produces 70% of its export income, Botswana, heavily dependent on its exports of diamonds and Angola and Nigeria, almost completely dependent on oil. Recent discoveries of new sources of gold, oil and gas has led to export concentration in an increasing number of countries.
Such dependence and concentration leaves countries vulnerable to swings in commodity prices which can affect both the capacity to import and the management of windfall gains in export income. However, research carried out to examine the effects of commodity prices on economic growth in African economies has suggested that there is no clear positive relationship which may have to do with the volatility in commodity spot prices not being reflected as sharply in actual export earnings. Commodity prices are normally set by long-term trading contracts incorporating expectations about the future, so the prices at which commodities are actually traded do not fluctuate as wildly as spot prices such that the effect on economic growth will be more muted. Where a country exports more than one commodity, all prices may not always move in the same direction.
Diversifying out of dependence on primary commodity exports was always a policy objective of post-colonial governments in Africa and elsewhere. While there has been considerable growth in industrial and service activity, primary commodity production has also grown as global corporates with active support from African governments have sought to diversify their sources of high-value commodities. The ’commodity super-cycle’ of the 2000s petered out in the course of the 2010s and especially during the pandemic-induced decline in global growth, but now there is talk of a new super-cycle as economies recover and demand especially for precious metals increases. The Ukraine war’s effect on oil prices has strengthened primary commodity prices but this will not offset the large increases in debt interest payments following the tightening of money supply generally in the wake of the rapid rise in inflation resulting from the steep increase in energy and cereal prices triggered by the Russia-Ukraine war.
A return to structural adjustment
The combination of rising indebtedness and a slowdown in global growth, if not another world recession has seen the return of structural adjustment programmes (SAPs). These sets of policies spawned from the 1980s neoliberal revolution succeeded in halting the transformation of African economies from producers and exporters of primary products to industrialized manufacturing economies despite the less than perfect implementation of their industrialisation strategies. Now once again, indebted countries seeking assistance from the international financial institutions (IFIs) are to be subject to a set of economic policies intended to restore domestic and external balances to some degree of equilibrium (see suggested further reading below for more background to the first phase of SAPs).
Current SAPs, whether ‘homegrown’ or not, involve government budget restraint, increasing efficiency in tax collection, abolishing many price subsidies, improving the management of public enterprises, and facilitating greater private sector investment. The major plank of previous SAPs – devaluation – is no longer a requirement where, as in most cases, foreign exchange markets are liberalized and currency values find their own level dependent on market assessment based on the trade and payments balance and its anticipated movement. However, in the case of Egypt, there is a specific requirement to liberalise the exchange rate. Paradoxically, exchange rates tend to appreciate when an IMF support package is agreed and financial inflows increase, which is the opposite of what is theoretically required to increase exports, but that seems to matter less than the fact that a country’s economic policy is being supervised by the IMF and gives greater confidence to potential foreign investors even if the trade balance goes even more in the red.
The most noticeable difference with the SAPs of the 1980 is the requirement that governments protect the vulnerable. Here is the IMF Mission Chief for Ghana announcing the agreement with the Ghana government for an extended credit facility of $3 billion over three years:
Key reforms aim to ensure the sustainability of public finances while protecting the vulnerable. The fiscal strategy relies on frontloaded measures to increase domestic resource mobilization and streamline expenditure. In addition, the authorities have committed to strengthening social safety nets, including reinforcing the existing targeted cash-transfer program for vulnerable households and improving the coverage and efficiency of social spending. (IMF, 2022)
Help for ‘vulnerable households’ is also a key requirement for the Egyptian loan package. With the benefit of hindsight, the IMF and the World Bank recognise the political difficulties for governments in pursuing an austerity agenda which leaves more and more people living below what passes for the poverty line. The solution to avoiding bread riots and other manifestations of public discontent is to target ‘vulnerable households’ with cash transfers so that they can eat. But it is not to support government investment in economic activities that will generate employment and structurally transform African economies, support which is badly needed to build the economic and social infrastructure that will generate growth in other sectors and the linkages develop.
However, as has been pointed out many times before in ROAPE the activities of the IFIs are not about growth and development, let alone protecting the vulnerable, but about control of global south economies by the global north and the hegemon-in-chief, the US which lest we forget appoints the head of the World Bank, while Europe chooses the head of the IMF.
An alternative strategy and politics
While the IFIs return to making policy in some African countries, there is also pressure on them to finance a green agenda for the Global South in the face of the climate emergency. Where such financial transfers from the IFIs to support green policies or compensate countries for the losses from following these policies take place this will offer the IFIs yet another opportunity to exert their leverage on policymaking in general. Dressed up as getting countries to ‘take ownership’ of policies which have been imposed on them, yet again we will see that African countries, and indeed all countries of the global south, will come under the tighter control of global capitalism.
There have always been alternatives open to African governments. The ‘introverted’ strategy advocated by Samir Amin has been much maligned and misrepresented as autarky but, like Clive Thomas’s strategy of seeking the convergence of domestic resources with domestic needs, offers countries a way out of what appears to be their enduring entrapment in a global financial system that works for the global financial corporates that dominate it. This system ensures uneven development with some countries or regions of countries developing faster than others. But it does offer opportunities for rapid development through a relatively coherent industrial and agricultural policy. The alternatives calling for a domestic oriented industrial strategy argue for taking more distance from this system, but still exporting wherever possible to earn the foreign exchange needed to import capital goods while prioritising domestic production for the needs of the majority. This is surely a better way forward than being trapped into permanent debt and cajoled to ‘own’ policies made in Washington DC.
This article was first published by ROAPE.