Last year Africa spent more money servicing debts than on the health issues of its public. According to World Bank, Africa is home to the world’s highest number of heavily indebted poor countries owing a total of US$493.6 billion in long term debts.
As the World Bank and IMF issue funding aid to help support Africa respond to the effects of COVID-19, countries including Tanzania and Rwanda have asked that the international community focus more on debt relief.
The IMF issued a statement listing certain countries as being eligible for debt relief and asked others to state their case—to explain why they deserve debt relief.
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.
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The deal is under the Paris Club, which most bilateral creditors subscribe to and there are expected to be measures that will side-track the negative effects of outright debt relief. 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 interest rates.
This is what came to be known as the HIPC initiative of 1996—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 lawsuits that earned the creditors returns of up to 2,000%.
In the face of COVID-19, part of the ongoing debt relief initiative and its terms, is being led by the African Union, and the UN Economic Commission for Africa.
Danny Bradlow, SARCHI Professor of International Development Law and African Economic Relations, University of Pretoria writes, the AU and the UNECA “…have announced they are looking at the feasibility of creating a special purpose vehicle that can swap African bonds for debt instruments with more generous terms.”
Several African countries have received the debt relief they asked for. But these countries could actually end up paying more for those ‘forgiven’ debts than they ever would have had they maintained the debt financing course, rough as it may be. Call it a trap within a trap.
It is expensive for Africa to pay these debts but a debt is a debt. 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 Professor Danny Bradlow’s article about how in the 90s Africa was heavily in debt until a debt ‘relief’ initiative was set up. Instead of relief, the countries found themselves in the clutches of unforgiving vulture funds that made them cough up the debts in full, in courtrooms.
What is a Vulture Fund? It is … 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.
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).
The good professor has urged the AU in its drive to lead relief efforts to take precaution and protect countries seeking debt relief to be wary lest they turn victims of these vultures of goodwill.
