IMF Director Says Africa Needs More Loans to Fix Debt Problem

Shipping containers sit beside railway lines running into the port in Mombasa, Kenya, on Sept. 1, 2018. Luis Tato/Bloomberg via Getty Images

In a speech released on April 6 to be delivered at the 2023 Spring Meetings of the International Monetary Fund (IMF) and the World Bank Group in Washington, IMF Director Kristalina Georgieva acknowledged that Africa is facing a “tremendous financial crunch” and is “being held back by unsustainable debt built over the years.” However, her solution to the problem isn’t without contradictions.

Georgieva’s proposed solution to Africa’s debt problem “is to call on countries in strong financial positions to give back some of their Special Drawing Rights [to the IMF], so that the firm can lend to African countries at concessional rates.”

This idea raises questions about the sustainability of continuing to take on more debt to solve an already existing debt problem.

The director also praised African countries for raising taxes on wealthy individuals and businesses, and she said she is seeing positive development in “resource mobilization,” a move that some economists argue hinders growth in the private sector.

Despite these contradictions, Georgieva remained positive about Africa’s future. She emphasized that Africa has the potential for significant economic growth if it can overcome its debt challenges.

Georgieva acknowledged the dire debt situation in which many African nations find themselves because of adverse economic conditions, and she stressed that the path forward lies in establishing a robust rule of law.

“Africa is faced with a tremendous financial crunch,” the director said. “You have to get to a point where the economy is functioning because policies are sound and institutions perform.”

Africa’s debt problem is complex and multifaceted. Although it’s true that unsustainable debt is holding back economic growth in many African countries, it isn’t clear that taking on more debt is the best solution.

Mark Weisbrot, co-director of the Center for Economic and Policy Research, has long been a critic of the IMF. In an article in The Guardian in 2019, for example, he posited that the IMF was harming the very nations it sought to help.

Weisbrot said that IMF economic policies failed to address global inequality and instead have contributed to exacerbating it, contending that policies often favor the politically connected and the super-wealthy rather than the general public. He suggested that the IMF fundamentally rethink its economic policies to reduce global inequality.

China’s Debt-Trap Diplomacy

Georgieva said that she had spoken with top Chinese diplomats who have agreed to work toward debt-restructuring agreements in Africa. There have been continuing accusations by the international community that China engages in “debt-trap diplomacy” with many developing nations, tempting them with unsustainable debt to gain political favor down the road.

A 2021 global research project by AidData shed light on China’s aggressive lending practices and exploitative nature. The study analyzed 100 loan agreements that China made with 24 countries, most of which were part of the Belt and Road Initiative. The study revealed that these loan contracts provide China with significant leverage by incorporating provisions that go beyond standard international lending agreements.

In fact, the agreements are so one-sided that they restrict the borrowing nations’ options and give China’s state-owned banks complete discretion over borrowers. China can even cancel loans or demand full repayment before the due date, according to the study’s findings.

“Such terms give lenders an opening to project policy influence over the sovereign borrower, and effectively limit the borrower’s policy space to cancel a Chinese loan or to issue new environmental regulations,” the study reads.

“Some of the debt contracts in our sample could pose a challenge for multilateral cooperation in debt or financial crises, since so many of their terms run directly counter to recent multilateral commitments, long-established practices, and institutional policies.”

A reversal of these aggressive lending practices by China would be a welcome development to many in the international community.