Debt crises are back with a vengeance as the dollar goes from strength to strength and interest rates rise.
In November 2020 Zambia became the first African country to default since the pandemic, after missing a repayment on its $17 billion foreign debt.1 Fast forward to August 2022 and the country has signed up for a $1.3 billion loan from the International Monetary Fund (IMF), with stringent conditions, and has entered talks on debt restructuring.
As people struggle with price hikes, Zambia’s government is just one of many in the Global South facing crisis as the cost of servicing debts rockets. The US dollar, in which most foreign debts are denominated, is strengthening, while capital is draining out of the Global South, attracted by rising interest rates in wealthy nations. Countries are being pushed back into the arms of the IMF, despite its notorious history of imposing ‘structural adjustment’ (read austerity and privatization) policies.
Today the conditions the IMF lays down are no longer branded as structural adjustment, but are they so very different? And can the IMF offer any real answer to the build-up of unsustainable debts which then prevent governments from protecting and supporting their citizens?
The austerity diet
Debt payments are at their highest since 2001, according to the campaign group Debt Justice. The factors are complex – as well as recent monetary policy changes, dropping commodity prices from around 2014 have hit export earnings for many countries in the Global South. The pandemic caused economic chaos. Since the Ukraine war, the increased cost of key goods – food, fuel and fertilizer – has made imports dearer.
In Zambia’s case, the economy is heavily dependent on copper exports. In recent years prices were low (although they have risen again from late 2020), leading to a depletion of foreign currency reserves in order to fund imports. The Zambian economy contracted by five per cent in 2020, pushing its growing government deficits, and debt, to crisis point.2
In return for the $1.3bn loan and support for debt restructuring, the IMF has called for – no surprise – austerity measures. The goal that has been set is to turn the current deficit of 6 per cent of GDP to a 3.2 per cent surplus by 2025. IMF managing director Kristalina Georgieva, said this would ‘require a sustained fiscal adjustment’ with the plans focusing on ‘eliminating regressive fuel subsidies, enhancing the efficiency of the agricultural subsidy programme, and reducing inefficient public investment’. Sound familiar?
She said the plans would also require increasing ‘domestic revenue’ – the IMF wants electricity subsidies to be cut and tariffs to increase, and Value Added Tax (VAT) to be levied on more goods.3 Meanwhile Zambia has passed legislation at the IMF’s urging to strengthen borrowing controls and transparency, including requiring parliamentary approval for future loans.
Zambian economist and researcher Grieve Chelwa shudders when he thinks of what will become of the country after the IMF is done. He tells New Internationalist the bailout would rob vulnerable citizens of even the little that was available to them. ‘You cannot read that deal and say, “we’re entitled to our own affairs”,’ says Chelwa. ‘Because it will tell you that “you should do this by this date”. What is that, if not neo-colonialism?’
‘You cannot read the IMF deal and say, “we’re entitled to our own affairs”. Because it will tell you that “you should do this by this date”. What is that, if not neo-colonialism?’
Many, like Chelwa, have argued that the way the IMF and its sibling the World Bank relate to recipient countries – generally in the Majority World – continues and builds on an earlier, colonial tradition. In the late 19th century, what is now Zambia was invaded by the British South Africa Company. The company used the region as a source of cheap labour until 1924, when the British government formally annexed it and turned it into a valuable source of copper-mining income.4 In the 1960s, along with many other Global South states which were colonized by European powers, it gained independence.
However, unequal terms of global trade persisted. Majority World states became reliant on low value exports of raw commodities for foreign currency earnings, while former colonial powers, and institutions dominated by them like the IMF (where richer countries get more votes), have pressured them against using state spending and regulation to develop.5 Many states soon found themselves saddled with high debts to the Global North, and stringent loan conditions. Meanwhile no reparations were made for resources extracted and damage done during the era of formal colonialism.
‘The IMF will talk about austerity, about structural adjustment, retrenchment, reduction in expenditure,’ Chelwa adds. ‘These policies end up weakening the state. And we know from history that to develop, you need to have a strong state... [to build] infrastructure, hospitals, schools, regulate the economy, etc.
‘The IMF’s policies do the opposite. They’ll tell you things like “reduce expenditure on this aspect of the state, the state should roll back”. These policies undermine state and industrial capacity.’
If at first you don’t succeed
IMF austerity measures are not new to Zambia. In 2013, the Fund advised the Zambian government to keep its public wage bill under eight per cent of GDP. The government obliged by freezing and decreasing salaries.6 Wage ‘caps’ were introduced, a move that limited, among others, the capacity of teachers’ unions to negotiate for better and improved salaries and conditions of service. This contradicted the IMF’s stated commitment to improving education access.
It’s not as if this belt-tightening has helped. Since 2013, Zambia’s public debt has risen dramatically, causing ever-escalating debt repayments which crowded out critical social sector spending. From 2018 to 2021, debt repayments rose from 20 to 38 per cent of Zambia’s national budget. Meanwhile education and health spending dropped from 16 and 10 per cent to 12 and 8 per cent respectively.7
It is too soon to gauge the full effects of Zambia’s latest compact with the IMF. The latest budget plans are premised on successful negotiations with creditors – the 2023 national budget foresees restructuring of external debt leading to payments reducing from K51.3 billion ($3.1 billion) in 2022 to K18.2billion ($1.1 billion) in 2023, a reduction of K33.1 billion ($2 billion). That has created more room for social spending: the education budget has increased by 28.9 per cent, the health budget by 25 per cent and social protection by 28.5 per cent.7 So far the government has resisted VAT increases, opting for other revenue measures such as increasing property transfer tax from 5 to 7.5 per cent.
Still, the impact of fuel subsidy cuts and other revenue raising measures on poverty levels is unlikely to be positive. Meanwhile the results of debt restructuring efforts are yet to be seen, with the country seeking cuts of nearly half of the debt’s present value, with support from the IMF and World Bank.8
Spreading misery
That austerity measures do untold damage to citizens without solving debt is a truism equally applicable to the Global North. Consider Greece, which came close to default after the 2008 financial crisis. Steep spending cuts and tax rises were imposed as the conditions of emergency loans from the European Union and the IMF.9 Unemployment rose to 25 per cent as a result, including half of all young people.
Today Greece remains in an economic fix, and by the time it exited its third bailout programme in 2018, its economy had shrunk 25 per cent, its debt-to-GDP ratio had increased from 160 to 180 per cent of GDP and unemployment stood at 20 per cent.10
Despite continuing to require austerity, the IMF has also admitted it causes harm. An essay it published in 2016 acknowledged that cuts equating to one per cent of GDP on average increased unemployment by 0.6 percentage points long term and raised income inequality by 1.5 per cent within five years.11
Bring in the auditors
Some governments or civil society groups have carried out audits, investigating debts to assess their legitimacy. They are a useful tool to provide transparency with regard to borrowing – and leverage for governments. In 2007, following pressure from campaigners, the Ecuadorian government appointed an expert committee to investigate its foreign debt. The results were alarming, with discoveries of illegally contracted loans with questionable benefit. The government responded by suspending interest payments on $3.2 billion of Wall Street-traded securities in November 2008, causing the price of Ecuador’s bonds to plummet on international markets, with speculators selling them off in the belief that default was likely.
Ecuador manoeuvred itself out of the mess by secretly buying back part of the debt at cheaper prices, paving the way for a large amount of debt cancellation. In June 2009, 91 per cent of bond-holders accepted a deal for the country to buy the debt back at 35 per cent of face value, ultimately saving the country around $7 billion including avoided interest payments.12
If the system’s broke...
One problem that has emerged in recent years is the increased role of the private sector, now accounting for nearly half of developing countries’ debts. Private lenders often refuse to participate in debt restructuring, which can scupper the whole process, as states are reluctant to accept reduced repayments if this simply means the money will be diverted to private bondholders.
Activists have argued that as the legal systems of England and New York govern more than 90 per cent of international lending, they should change their laws to require private lenders to accept write-downs – for example where restructuring schemes are agreed by a majority of creditors. They point out that changes were previously made by the UK Parliament in 2010 to enforce the Heavily Indebted Poor Countries (HIPC) initiative, which cancelled debts.
‘The English jurisdiction and the New York jurisdiction are designed to favour the creditors rather than the borrowers, and therefore the possibility of getting any sort of fair outcome is quite unlikely,’ said African Forum and Network on Debt and Development (AFRODAD) Executive Director Jason Braganza, emphasizing the need for change. He added that many African governments did not have resources for expensive, lengthy legal cases.
In Zambia’s case, the investment giant BlackRock is its largest bondholder with $220 million, which it bought at rock-bottom prices. Due to the high interest, it could make 110 per cent profit, according to the campaign group Debt Justice.13 ‘It is imperative that BlackRock and other bondholders agree to fully engage in a large-scale debt restructuring, including significant haircuts to make Zambia’s debt sustainable,’ 100 economists and development experts wrote in an open letter.13
All change not small change
Debt cancellation has done wonders for some countries to free up resources for vital social spending. In the late 1990s, Ghana was drowning in $4 billion of debt, and became a beneficiary of the HIPC and Multilateral Debt Relief initiatives.14 In 2000, debt servicing accounted for 80 per cent of domestic revenue but through the schemes, this was lowered to 27 per cent in 2006, freeing up resources to finance poverty reduction and economic development. This allowed Ghana to abolish primary school fees, increasing the enrollment of pupils to 92 per cent that year.
Zambia also qualified for relief, enabling it to scrap fees for antiretroviral drugs in 2005, which remain free to date. HIV infection rates have been significantly lowered as a result. However, in neither case was partial cancellation a full debt solution. Ghana returned to the IMF for help in 2022, with debt levels back up to nearly 80 per cent of GDP.
The IMF’s insistence on austerity to pay off international lenders sees it replicating colonial era power dynamics and patterns of resource extraction. Experience in Zambia, Greece and elsewhere shows it is disastrous for citizens, while failing to resolve indebtedness. For real solutions we must look elsewhere: possible strategies include debt audits to highlight questionable debts and gain leverage for negotiations. More widely, debt cancellations and legal changes to bringing private lenders in line with write-downs will be crucial. But such strategies will still be limited as long as the international system and terms of trade continue to keep formerly colonized countries poor.
- Reuters, ‘Zambia owes nearly $27 billion in foreign and local public debt’, October 2021, nin.tl/3AgeiEv; Nosmot Gbadamosi, ‘Is China responsible for Zambia’s debt crisis’, Foreign Policy, September 2022, nin.tl/3ELBY6J
- African Development Bank, ‘Zambia Economic Outlook’, nin.tl/3GumftE
- Grieve Chelwa, ‘IMF Deal: Cry, My Beloved Zambia’, Africa Watch [personal blog], 7 September 2022, nin.tl/3tAMVla
- Encyclopedia Britannica, ‘British South Africa Company’, nin.tl/3O9YWr0
- International Monetary Fund, ‘IMF Quotas’, October 2022, nin.tl/3Gl8ltS
- Gideon Bulwani, ‘The impact of IMF policies on the public service wage bill in Zambia’, Education International, 22 April 2022, nin.tl/3UOIDCI
- National Assembly of Zambia, ‘2023 Budget Address…’, September 2022, nin.tl/3UVcHN2; National Assembly of Zambia. ‘2022 Budget Address…’, October 2021, nin.tl/3hSnloW
- Rachel Savage, ‘Zambia’s bondholders slam IMF debt relief targets as “arbitrary”’, Reuters, 15 September 2022, nin.tl/3g8wzwO
- Kimberly Amadeo, ‘Greek debt crisis explained’, The Balance, May 2020, nin.tl/3tzH1R7
- Council on Foreign Relations, ‘Timeline: Greece’s debt crisis’, nin.tl/3E9VUyx
- Jonathan D Ostry, Prakash Loungani, and Davide Furceri, ‘Neoliberalism: Oversold?’, International Monetary Fund – Finance & Development, Vol. 53, No.2, June 2016, nin.tl/3THGHuh
- Debt Justice, ‘Ecuador’, nin.tl/3THGUO5; Eric Toussaint, ‘Ecuador: Resistance against the policies imposed by the World Bank...’, Committee for the Abolition of Illegitimate Debt, April 2021, nin.tl/3TIBbYb
- Committee for the Abolition of Illegitimate Debt, ‘Over 100 experts call on BlackRock to cancel Zambia’s debt’, 17 September 2022, nin.tl/3V4tsEP
- Adu Owusu Sarkodie, ‘Ghana’s debt makes development impossible: here are some solutions’, The Conversation, 20 February 2022, nin.tl/3OaDcey
