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DW: Africa’s new sovereign debt crisis March 25, 2017

Posted by OromianEconomist in Uncategorized.
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Africa’s new sovereign debt crisis


Mail & Guardian Africa, 21 March 2017


Mozambique is the first major African nation in recent times to become unable to meet obligations to international creditors

A decade after the last major debt write-down, African states are again in difficulties. (DW/M. Sampaio)
A decade after the last major debt write-down, African states are again in difficulties. (DW/M. Sampaio)

Finance ministers and central bankers from the G20 group of the world’s most influential industrialised and emerging economies met in Baden Baden, Germany on the 17/18 March. The German NGO Erlassjahr.de (Jubilee Germany), which campaigns for debt relief, saw this as an opportunity to draw attention to the growing debt problems of many developing countries. The NGO has identified as many as 40 African countries which are showing signs of heavy indebtedness.

“This is not surprising because today’s economic indicators are telling a story very similar to the situation in the late 1970s and early 1980s which led to the Third World debt crisis,” said Jürgen Kaiser, political coordinator at Jubilee Germany. In the wealthy industrialised countries, interest rates are very low, but in Africa investors can fetch returns of between seven and 15 percent.  This leads to large capital flows from the North to the South.

The debt trap: declining commodity prices
“The low interest rates encourage countries to take out big loans which they then have difficulty paying back,” Kaiser said. The situation becomes particularly precarious when commodity prices fall. This leads to a subsequent decline in tax revenue in economies that are dependent on oil, natural gas, coal or other raw materials.

This latest debt crisis may come as a surprise to some people because numerous developing countries had a large share of their debts written down under the Heavily Indebted Poor Countries (HIPC) Initiative.  However, commentators who were convinced at the time that that this initiative launched by the World Bank, the International Monetary Fund and the G-8 group of leading industrialised nations, including Germany, would solve the developing nations’ debts problems turned out to be wrong.

Mozambique insolvent again despite debt relief
Figures released by Jubilee Germany show how unsustainable the HIPC initiative was. Among the 40 African states where the indebtedness indicators were flashing red, 26 went through the HIPC program. One of those countries was Mozambique. In January 2017, the country ceased paying back its debts on time. In 2012, Mozambique’s obligations to its creditors amounted to 40 percent of Gross Domestic Product (GDP), they now total 130 percent. Banks and investment funds were keen to lend Mozambique money believing it would be safe because the country possesses huge reserves of coal and natural gas. Those investors have been left empty-handed.

Debt explosion in Angola, Ghana, Kenya and South Africa
“Mozambique is a very dramatic case. It is the first country to cease repayments in such an abrupt significant manner since HIPC debt relief,” said Jürgen Kaiser. “But countries such as Gambia or Ghana, which also have an abundance of natural resources, are in a very critical situation as well. Senegal, which does not have much in the way of natural resources, is also in difficulties once again,” he added.

On analysing World Bank data of African nations’ indebtedness with foreign countries, it quickly becomes apparent that a large number of African economies have recently acquired dramatic levels of new debt. Between 2005 and 2015 – the most recent year for which figure are available – Angola, Ghana, Kenya and South Africa have witnessed a threefold increase in their debt levels. Smaller countries such as Cape Verde also borrowed fresh capital during this time frame.

The solution: international insolvency proceedings?
Currently there is no internationally recognised set of proceedings to settle the affairs of a country which has become insolvent. Many countries have such mechanisms for individuals and companies, but all attempts to create insolvency proceedings for sovereign states have been blocked by a lobby consisting of banks and nation states.

IMF Managing Director Anne Kruger proposed the creation of a Sovereign Debt Restructuring Mechanism in 2001. It would have been administered by the IMF, but the proposal was blocked by the United States. It wasn’t the only proposal. In 2014, the UN General Assembly adopted a resolution “towards the establishment of a multilateral legal framework for sovereign debt restructuring processes.” There were 124 votes in favor, 41 abstentions and 11 votes against. This resolution was non-binding and the chances of it being implemented are slim. One of the 11 states that voted against it was Germany.

“That could have been a mechanism that could have helped us move forward right now,” said Jürgen Kaiser referring to Africa’s present debt crisis. “Insolvency proceedings would mean that it wouldn’t be just the creditors who would decide when debts should written down on or not. In the past that practice has led to debt relief being dispensed too late, on too small a scale, or not at all.

Sovereign debt restructuring was not on the agenda of the G20 meeting of finance ministers and central bankers at the weekend, but if more developing countries follow Mozambique’s example and default on loan repayments, then it could be that G-20 will be forced to tackle the issue of debts levels.

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Tyranny, Debt & Underdevelopment: Ethiopian Rail Corporation’s Debt: How Big Is It? January 31, 2017

Posted by OromianEconomist in Illicit financial outflows from Ethiopia.
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Odaa OromooOromianEconomist
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The Ethiopian Reporter (ER) newspaper has been presenting shocking facts about extents of corporate bankruptcies. These have escalated particularly since #OromoProtests started in November 2015. Such reports are becoming commonplace so much that we do not even pay much attention to them. We have been reading about a series of scandals related to Sugar Corporation, METC (the Military Engineering Complex), and lately that of the Ethiopian Railway Transport Corporation (ERC).
In this piece, I will briefly comment on the latest scandal, related to ERC’s murky finance. The ER stated quoted ERC management report and presented troubling accounts of the corporation’s escalating debt, currently standing at birr 102.5 billion or USD 4.6 billion. Let’s put this figure in a context – how big is it relative to the size of the Ethiopian economy?
  • Birr 1,031 or USD 46, if expressed as debt per person (dividing the figure by population of Ethiopia)
  • 7.4% of GDP (expressing it as a ratio to Ethiopia’s national income)
  • About 50% of the income generated in the whole of Ethiopia’s industrial sector
  • 180% of the whole of Ethiopia’s manufacturing sector (nearly twice the size of total income generated in the manufacturing sector, including small scale handcrafts)
By any stretch of imagination, ERC’s debt is a colossal figure. It is not something that Ethiopians would take as yet another financial scandal regading some corporate entity. At the end of the day, it is Ethiopians who would foot this bill. After all the money does not simply melt away, it must have been pocketed by some group who have been busy siphoning off public money. It is not without reason that the authorities have been so much addicted to mega projects. Such big projects have been convenient mechanisms for embezzlement.
We all recall circumstances through which the Addis Rail was started. A very large construction project was completed, completely revamping the Addis Road Networks. Though expensive, this was necessary. The ring road and the rest were completed. However, Addis residents barely started driving on the new and fresh looking roads when the government came up with some crazy idea – yet another mega project, a gigantic city rail network!
Ironically the rail infrastructure was put in place by digging up the newly build asphalt roads. It was madness. A logical next step would have been a tram rail system, which requires only a minor modification – burying the rails in the asphalt road so that the roads would be shared by trams and other vehicles. That option was not acceptable to the authorities because it was not big enough to generate perpetual business opportunities for their cronies.
Now we witness a rather ridiculous situation. By coincidence, the day the Addis Rail started operating, I was back home. The next day, as I was driving in Addis, I witnessed something sounding a comedy show – only one coach rail was moving up on that ugly structure. Well, in that case, if it is only a single coach that moves on it, then what is the point putting up that amorphous structure? I hear the number of coaches moving on those rail networks has been two, three, or four at most.
The bottom line is this. That kind of system can be supported only by a vibrant economy – a healthy economy that generates decent income for citizens! In a normally functioning and genuinely rapidly growing economy, business opportunities expand in all corners of a large city like Addis Ababa. This induces movements of people, commuting between their places of work and residences as well as between premises to do business. In the process income is generated and their capacity to pay for fares get enhanced. If all these things are in place, the public transport sector such as the ERC can balance its books, including meeting its domestic as well as foreign debt obligations.
The situation in Ethiopia is quite different, in fact rather perverse. To begin with, the Ethiopian Economy is growing rapidly only on paper and in official government statistics. The fact on the ground tells the exact opposite. There isn’t much vibrant business opportunity. People wish to travel but that wish remains only a desire – government policy has curtailed their capacity to pay fares at a rate that would make ERC profitable. So, ERC operates at much smaller rate than its full capacity, perhaps 10% to 20%. If circumstances would not change, ERC will never ever able to pay its debt. The principal and interest will accumulate and debt would escalate, as it already has, leaving behind a level of debt whose size will become larger and larger over the years as a share of GDP, industry and manufacturing. The debt per citizen will most certainly become even larger.
It should be noted here I confined my analysis only to the case of ERC. If I closely examine the implications of other financial scandals, it is possible to reveal how alarming each case is. In a nutshell the whole of the Ethiopian economy is in a dire state, whose severity is much more grave than most Ethiopians and the donor community may realize. The sooner the on-going madness is put to stop the better.