By Amin Kef Sesay – 15th August 2019
The enormous challenges facing the Finance Minister JJ Saffa and the central bank Governor, Prof. Kelfala Kallon has a lot to do with the low-income country like ours having racked up a sugar loaf high mountain of national and international debts that swallow up a huge chunk of national income in debt repayment interests and capital.
Under APC, we racked up so much debt that we were unable to pay it back — with potentially devastating consequences not just for the economy but for the citizens, many of whom are living in extreme poverty. That was the sobering finding of a report by the IMF and which drove them away towards the close of 2017.
The only immediate way out of this debt trap conundrum is for either the government to default on repayment for a few years or beg its creditors for relief. It could be recalled that about two decades ago, IMF signed a historic agreement to wipe the slate clean for 36 poor countries that were being crushed by their loan interest and repayment bills.
Though we have not outright defaulted on repaying our debts which amount to 2 billion dollars and more, Finance Minister Saffa can tell you that he is cutting deep to pay off the debt. We are in the same boat with fellow African countries such as Chad, Eritrea, Somalia, South Sudan, Sudan and Zimbabwe, though truthfully we have hope of the economy picking up gradually due to ongoing economic reform processes that have been unleashed and are bearing fruits. The problem is, the amount of debt we have taken, compared with how much income the economy generates presently.
What happens when a country can’t pay its debt? What are the consequences for ordinary citizens? The government is morally and constitutionally bound to offer all sorts of services to the citizens — keeping public order, maintaining health clinics and schools, providing food to people at risk of famine, investing in new infrastructure that can help grow the economy and so on. Government with unsustainable levels of debt must divert ever more of the budget away from such services so they can meet the debt payments. The most vulnerable citizens are often the first to suffer.
And what if a government does default? It gets far worse because the entire economy can be thrown into paralysis when a government can’t meet its existing debt obligations that make it very hard to access new money. Lenders that provide this type of financing aren’t going to want to throw good money after bad. And to keep up daily operations, government needs continual access to credit.
These operations include not just the provision of services to citizens but business activities that generate much of a government’s income — extracting and exporting natural resources, for instance. These kinds of operations can become impossible without day-to-day credit. Just like for a small business, you need to be able to borrow on a day-to-day basis for your cash flow.
And as the day-to-day turns into year-to-year? The consequences can be just as debilitating. Once a country has defaulted, it can forget about taking out loans or floating bonds to fund investments in infrastructure or other measures that would help grow its economy long term. Pretty much every type of lender that poor countries rely on is going to balk.
This includes even international financial organizations, such as the World Bank, whose mission is to provide poor countries with low-interest loans or outright grants to help them develop. The thinking of officials at the World Bank is going to be, we don’t want the money to just go to another creditor. And so a kind of deadly feedback loop could be created: The country’s debts would prevent its economy from creating the growth needed to pay off those very debts.
The agreement wiping off the debts of the world’s poorest countries was supposed to end debt crises like these once and for all. For about 10 years, the agreement was remarkably successful. All sides had recognized their sins — the governments of the borrowing countries that had taken on the excessive debt and also the lenders that had pushed what had been in many cases clearly unsustainable loans — including governments of rich countries like the U.S., commercial banks from those countries and even the IMF and World Bank. In exchange for writing off the debt everyone vowed to be more responsible.
But after a decade, memories start to get cloudy. Some countries quite frankly just took advantage of the availability of money. Cases of outright fraud and corruption in Mozambique, Moldova, Gambia and Sierra Leone under APC from 2007 to 2018 — in which government officials borrowed money on behalf of their nations, then apparently pocketed it for themselves. Adding to the problem, instead of cutting their national budgets to account for the lost revenue, these countries turned to borrowing to make up the difference.
And then they failed to use the money for productive investments. In many of now highly indebted poor countries, about half the increase in borrowing was not associated with an increase in investment. It was just used to spend more on current spending, things like salaries.