Throughout the recent IMF and World Bank Spring Meetings in April 2023, there was non-stop talk of “Africa’s debt crisis” and “reform of the international financial system” – but little talk of what such changes mean in reality.
Indeed, heads of state are also bringing this issue to light. Kenya’s President Ruto recently had a riveting discussion with Mo Ibrahim in my hometown of Nairobi, with finance taking up a huge part of the conversation – from African agency affected by loan conditionalities, rising global interest rates that make it harder for borrowing countries to repay their loans, to the difficulty in accessing development finance.
However, a few days later, when the head of the IMF, Kristina Georgieva, visited Nairobi, the conversation – at least in public – seemed to be confined to what reforms Kenya and other African countries can make (especially in trade) – rather than what the IMF can do for Kenya and other African countries.
This “doctor-patient” binary of the IMF is not new. The IMF is – at least for African countries – the only lender of last resort and prescribes conditionalities and policy reforms, ostensibly to support economic stability. However, even the IMF’s own evidence, and evidence accumulated by many other institutions, has demonstrated that these conditions and reforms often do not lead to reduced debt or growth and can even impair development, with countries like Tunisia are starting to push back on these prescriptions. The IMF needs to learn from these pushbacks and adapt its policies to incorporate borrowing countries agency.
Although the IMF has disbursed some emergency funds to support countries to manage and recover from the COVID-19 pandemic, they have not been at the scale required, and many have been short-term and relatively expensive. To put this into context, our calculations suggest that African governments spent around US$130 billion to respond to COVID-19 over 2020-2021.
Indeed, the lack of scale can be seen in the IMF’s 2021 SDR allocation which saw African countries receive approximately 5% of the total US $650 billion allocation, totaling US $33.8 billion. While the SDRs were established in 1969 after the establishment of the quota system, after African economies were young, COVID-19 was an opportunity where the IMF could have dealt with the distribution inequalities.
Georgeiva’s visit to Kenya could have been an opportunity to turn this relationship around – for the IMF to listen to demand-led reforms for the international financial system. There are numerous reforms that President Ruto and his team could have proposed, based on the Mo Ibrahim discussion as well as a set of clear African finance ministers’ demands articulated just after the spring meetings.
But what sorts of reforms are necessary? Let’s have a look at two
Austerity measures. The IMF loans have strings attached, and the 1980s and 1990s in Africa are a perfect example of the Structural Adjustment Programmes (SAPs) that have been criticized for not growing the economy.
Despite criticism of the SAPs, the IMF continues to disburse loans to LMICs with austerity measures, as my colleagues have argued in the case of Zambia. These conditionalities all sectors of the economy, from agriculture to the energy sector. Kenya’s government scrapped off fuel subsidies in 2022, leaving Kenyans vulnerable to high fuel prices. The spillover effects of high fuel prices must be considered as fuel prices cut across all sectors, including agriculture. In fact, an independent study conducted in 2021 showed the relationship between some agricultural goods and an increase in fuel prices. The eventual cost of food includes the transport of fuel.
The Debt Sustainability Analysis. The IMF defines debt analysis as the ability of a state to pay off its debt in an economically and politically viable way. The Debt Sustainability Analysis (DSA) was created in 2002 after years of criticism over the IMF’s exceptional access programme, especially after experiencing barriers experienced in resolving the Argentinian sovereign debt crisis. The DSA is conducted by both the IMF and the World Bank, and while their intention might have been to avoid any more barriers, the DSA has caused more problems for LMICs for two reasons.
First, the DSA influences potential investor decisions, the decisions of regional banks, and that of the IMF and the World Bank by categorising countries into moderate, high, and debt distress. The latter two categories have African countries as the majority. African countries, resulting in this fuelling the Africa Risk Premium which sees African countries pay higher interest rates – between 10 – 20% on the loans they take – as said by President Ruto during his interview with Mo Ibrahim. Second, the DSA is a critical factor of consideration for the debt restructuring process that involves external lenders such as the Paris Club and other private lenders.
Considering these factors, the IMF and the World Bank must increase transparency and accountability with how the DSA is conducted, to allow for fairer examination of debt.
The lack of transparency and accountability is further exacerbated by the asymmetrical governance structure between the controllers of the funds vis-à-vis those that utilise the funds. The inverse is needed for real accountability, and this is a perspective that needs to be incorporated in any further discussion of SDR allocations as well as the review of IMF quotas due in December 2023.
The reform of the international financial system is vital for Africa and the world. But it will only happen if African leaders and governments hold these institutions accountable at every opportunity. Leaders like President Ruto need to use the opportunities of leader visits such as Georgieva to make our foreign and economic policy demands clear to our development partners – to ensure it is a partnership, not a doctor-patient relationship. Africa needs easy access to development finance, loans with the same interest rates as high-income countries – DSA reform is key to this. Through this, Africa will develop its infrastructure and increase its agency to take hold of its development needs. As a Kenyan who sees the need for development daily, I want to see Kenya and other African countries act like doctors, not just patients.
Article by Ivory Kairo. Kairo is a policy analyst and communications assistant at Development Reimagined, an African-led International Development Consultancy. Twitter: @ivory_kairo
