by Lionesses of Africa Operations Department
Melinda French Gates writing in the FT recently and ahead of the IMF/World Bank spring meeting was quite clear (here): “There are two interlocking stories to be told right now about the forces shaping the economic outlook in the world’s poorest places. One is of billions of people on the cusp of crisis — reeling from climate change, pandemic fallout, skyrocketing food prices and crushingly heavy national debt burdens. The other is about the enormous unrealised economic potential of the women who live within these communities…”.
The IMF is the world’s lender of last resort (so they say), and the World Bank drives development. They came together last week, to discuss the globe’s current ‘omni-crisis’ and to provide, one would hope, actionable solutions. The problem though (if we ignore for a moment the pale-male inclinations of these institutions - as Melinda says in her article: “These institutions…were developed with little input from women or voices from the global south — and accordingly, have not always prioritised their economic potential.”) is that they are currently being held back from delivering what the globe needs.
The Economist magazine in their podcast ‘The Intelligence’ describe the IMF as ‘bunged up’ with ‘oodles of cash’, yet unable to place it. One assumes, the IMF is well aware of the issues hitting the globe and how they impact the poorer parts of the world, but its hands seem to be tied.
When a company goes bust, the net assets are calculated and are divided up with the ‘senior’ (sometimes ‘super-senior’) lenders first in the queue (called a debt waterfall) and shareholders a long way behind, unless you happen to be AT1 bond holders in Switzerland of course (our jokes may be poor, but you can’t claim they are not topical here - expect to see ‘expropriation’ mentioned many times when this hits the courts, standing room only…!).
However if a country goes bust (can’t pay its creditors), then the IMF swings into action and along with the govt and all the lenders and comes to some kind of ‘club’ solution that usually includes certain write offs, longer repayment time, new budgetary rules, whilst injecting a load of its own cash into the country to keep it afloat, hopefully able to rebuild.
Much of the time it is US$ borrowings that has brought the country to its knees. If as President we need to repay a creditor in our own currency, we can just ring up our friendly banknote printer and print some more. Obviously this will create massive inflation, but who cares - we need a solution now (especially if there is an election in two weeks), not a long term solution that will create pain and effort and a collapse in the polls. If we have borrowed in US$ to finance our country’s needs, please believe us when we say the US Treasury’s printing-press CEO will not be taking our calls…ever.
Trouble is, the knock-on effect on a country is massive. As a country races towards default, so the currency collapses, in rushes inflation which in turn makes imports (such as grains) more expensive, which further drives up inflation and hits the currency again…and so on…and so on. And here’s a ‘fun’ fact - when inflation hits, women get hit disproportionally hard (see here).
So the IMF calls a meeting and one person is missing - the Chinese lenders, because they do not want the IMF to be super-senior (repaid first) in any clubbing together - yet due to the very low rates of interest the IMF charge, it has always been accepted that the IMF should be first in the queue.
If the Chinese are not in any ‘club’ deal arranged by the others, their original deal will simply continue and they will get their money and interest back at the expense of the rest who have agreed to stand back and wait. The IMF is obviously not there to repay the Chinese lender at the expense of all others. So a stalemate happens and as usual, you guessed it, Africa pays…
Current interest rates of borrowings of sub-Saharan countries have gone through the roof, as the FT says here: "Yields…have soared to more than 10 percentage points above those on US Treasury bonds for much of the past year, a gap typically regarded as a sign of severe distress.” - Which in turn will drive many other countries towards default…(this story just gets better and better…).
What happens next? As the head of the IMF’s Africa department Abebe Selassie so rightly says: “Very, very important long-term investments in health, education and infrastructure will have to be delayed…”. In addition to which foreign currency to pay international suppliers becomes even more difficult to find, and even local interest rates increase, impacting yet again on our business costs. All of this whilst Africa is being heavily impacted by a massive cost of living crisis and massive inflation in imported grains etc, plus lack of electricity, water etc. The ‘story’ has become a perfect storm.
What about The World Bank? That too is held back. According to the FT, it has a paltry US$70bln available to lend to Africa. So why should the West be surprised if when there is a need, China fills it. China has become the world’s development lender and more recently the world’s ‘lender of last resort’: “Between 2000 and the end of 2021, China undertook 128 bailout operations in 22 debtor countries worth a total of $240bn.” (here) Yes, these are bailouts - so actual development lending often under their ‘Belt and Road’ Initiative is multiples of that - puts the World Bank’s $70bln in its place! China now lends more to the world’s poorest countries than all other bilateral lenders put together. (here)
So why else is it so difficult to get China around a table with all the other lenders, other than grumpiness at the IMF’s special status in the waterfall?
In a fascinating study entitled: “How China Lends: A Rare Look into 100 Debt Contracts with Foreign Governments” by Gelpern, Horn, Morris, Parks and Trebesch (here), they show that: “Three main insights emerge.
First, the Chinese contracts contain unusual confidentiality clauses that bar borrowers from revealing the terms or even the existence of the debt. [remember the shock at the massive size of Zambia’s Chinese debt when the new President opened the drawers to his brand new desk to find a load of extra IOUs to Beijing, here?].
Second, Chinese lenders seek advantage over other creditors, using collateral arrangements such as lender-controlled revenue accounts and promises to keep the debt out of collective restructuring (“no Paris Club” clauses).
Third, cancellation, acceleration, and stabilization clauses in Chinese contracts potentially allow the lenders to influence debtors’ domestic and foreign policies.”
It is not our place to complain about clauses in other’s contracts - these were all negotiated one assumes fairly and under constitutional rules, but given the amount of Western government visitors recently to various African nations, there is clearly a great deal of concern amongst the Western powers who have only just woken up to this Chinese takeover of Africa. From the USA alone, we have had Janet Yellen the former Fed Chair, Vice-President Kamala Harris and the Secretary of State Blinken all getting African red soil on their shoes.
As Yellen says: “Success in Africa means success for all of us. A thriving Africa helps support a thriving America. The United States is committed to working with you to deepen our ties: not for show, not for the short-term — but for the long haul.” (here). And more recently in possibly a dig at the IMF & World Bank (as well as the two respective govts) to sort things out she called for a “…constructive and fair” economic relationship between China and the US, adding that “[a] full separation of our economies would be disastrous for both countries. It would be destabilising for the rest of the world.”
Why could that include the IMF & World Bank? “When the IMF and the World Bank were created after the World War II, there was an understanding that a European would run the IMF and an American the World Bank. In addition, the US gets to choose the number two at the IMF.” (here from the BBC) so when she talks about the US, she is including the IMF and World Bank…
Will this make any difference? Failure on the global stage by politicians, by finance ministers in their negotiations with lenders and failure by the IMF and World Bank to bring the largest lender in Africa to the negotiation table to break this deadlock, is not only a shocking abdication of responsibility and dereliction of duty to the globe, but has a seriously meaningful knock-on effect with African economies, and when they are impacted, it’s always women’s businesses and (given women employ more women in their workforce), them and their employees who are impacted the most. (here)
Until those in power on the global stage recognise both the impact of their inactions on the ‘global south’ and on women, plus the truth in Melinda Gates’ comment “…the enormous unrealised economic potential of the women who live within these communities…”, the stalemate will continue and the current ‘omni-crisis’ will just look like a practice run for the real horror to come.
This is why we should care about the IMF/World Bank meetings, but if they do not soon find a way to bring China into the club, as the Economist stated in their podcast, this could put the IMF “on a path to irrelevance”…and that will be no good for anyone, least of all Africa and least of all (again), for women in Africa.
Stay safe.