Debt relief, a trap within a trap

Did you know, last year (2019) Africa spent more money servicing debts than the amount it spent on health issues of its public? This obviously a general statement, it does not mean that each and every country in Africa spent more on debt servicing that the money it allocated to its health center, but the fact holds true for most of Africa’s 53 countries.

It is not that Africa does not care about the health of its people, on the contrary, its just that, according to World Bank stats, Africa is home to the World’s highest number of heavily indebted poor countries owing a total of USD 493.6 billion in long term debts.

As the World Bank and International Monetary Fund issue funding aid to help support Africa respond to the effects of the COVID-19 global pandemic, many African countries including Tanzania and Rwanda have asked that the international community focus more on debt relief.

To their credit they have,  well lets say they have to some extent. The IMF issued a statement listing a dozen African countries as countries eligible for debt relief and asked others to state their case; that is, to explain why they deserve debt relief.

Now the Institute for International Finance, a club of some 450 banks and financial investment firms from across the globe, say they are working on temporarily suspending debt financing by the poorest countries, most of which are in Africa.

In the deal, which is under the Paris Club, where most bilateral creditors are members and there are expected to be measures that will side track the negative effects of outright debt relief. Why, well if you are not a finance guru you may not be aware that a similar case occurred in the 90s when most debts owed by African countries were bought off by non-participating creditors, who in turn made these countries enter into strict contracts that bound them to pay back at extremely high interests.

This is what came to be known as the HIPC initiative of 1996. HIPC stood for Highly Indebted Poor Countries and as stated in the ‘Conversation Africa under a Creative Commons license’ these countries were later obligated to pay in full or face law suites that earned the creditors insane returns of upto 2,000%.

So now in the face of COVID-19, part of the ongoing debt relief initiative and the terms therein, is been led by Africa its self. The African Union, working with the United Nations Economic Commission for Africa is ironing the creases so to speak.

Danny Bradlow, SARCHI Professor of International Development Law and African Economic Relations, University of Pretoria writes, the AU and the UNECA “…have announced that they are looking at the feasibility of creating a special purpose vehicle that can swap African bonds for debt instruments with more generous terms.”

Goodwill gone bad: Its not the relief but how the relief is given

To fight Covid-19, most African countries have asked for debt relief and several of them have got it. But did you know, these countries could actually end up paying more for those ‘forgiven’ debts than they ever would had they maintained the debt financing course, rough as it maybe? Its why I call it a trap within a trap.

It is expensive for Africa to pay these debts but hey, a debt is a debt, period. However, in adverse cases, say, a global viral pandemic, it only makes sense to stay these debts or forgive them entirely. A good gesture indeed, until you read between the lines and realize the debt relief actually entangles you into an even heftier debt with stricter terms by unforgiving Good Samaritans turned cold blooded vultures.

Ever heard of a vulture fund? I didn’t until I read the article by Professor Danny Bradlow, of the University of Pretoria, South Africa. The SARCHI Professor of International Development Law and African Economic Relations, writes about how in the 90’s Africa was so much in debt and then a debt relief initiative was set up.

Instead of relief, the involved African countries found themselves in the clutches of unforgiving vulture funds that made them cough up the debts in full, in courtrooms.

Lets step back, what is a Vulture Fund? It is, in the simple Wikipedia terms… a distressed debt fund, that invests in debts considered to be very weak or in default. Investors in the fund profit by buying debt at a discounted price on a secondary market and then using numerous methods to gain a larger amount than the purchasing price. Debtors include companies, countries, and individuals.

Consider this: Vulture funds have had success in bringing attachment and recovery actions against sovereign debtor governments, usually settling with them before realizing the attachments in forced sales –  “A victory by default?” The Economist (3.03 2005)

So the good professor has urged the African Union in its drive to lead the relief efforts to take precaution and protect the African countries that are seeking for debt relief to wary lest they turn victims of these vultures of goodwill.