African debt crisis may impact world

Investment Analysis Clubs Macro Economic Trends and Risks
1

https://www.nytimes.com/2024/08/28/business/african-debt-crisis.html

Africa’s Debt Crisis Has ‘Catastrophic Implications’ for the World

Crushing obligations to foreign creditors that have few precedents have sapped numerous African nations of growth and stoked social instability.

By Patricia Cohen, The New York Times, Aug. 28, 2024

…
Africa’s foreign debt reached more than $1.1 trillion at the end of last year. More than two dozen countries have excessive debt or are at high risk of it, according to the African Development Bank Group. And roughly 900 million people live in countries that spend more on interest payments than on health care or education.

Outsize debt has been a familiar problem in the developing world, but the current crisis is considered the worst yet because of the amounts owed as well as the huge increase in the number and type of foreign creditors…

If nothing is done to help countries manage the financial crunch, “a wave of destabilizing debt defaults will end up severely undermining progress on the green transition, with catastrophic implications for the entire world…

In recent decades, the pool of potential lenders has exploded to include thousands of private bondholders and a major new geopolitical player: China…The monumental increase in the number of private bondholders and creditors has further complicated efforts to resolve debt crises…

The systemic problem, said Indermit Gill, chief economist at the World Bank, is that lenders who also made bad decisions by extending too much credit often don’t pay a financial penalty… [end quote]

While the U.S. provides grant money to foreign aid recipients, China lends and insists on being repaid. Many African countries are zombies that borrow to repay interest on other debts. This drains money out of the real economy.

Africa’s population is the fastest-growing in the world. Poverty and political unrest has already caused emigration.

Wendy

5 Likes
2

While the U.S. provides grant money to foreign aid recipients, China lends and insists on being repaid. Many African countries are zombies that borrow to repay interest on other debts. This drains money out of the real economy.

Technically, any time a borrower obtains money from a lender, repayments of that loan are going to drain money from the “real economy.” The concern is whether the intended and actual use of the funds being lent had any practical benefit to that “real economy.” In the case of Africa, it is highly likely that any lending from any country was tightly bound to the following goals:

  • creating external financial dependency while creating local infrastructure useful to a remote power
  • currying favor with a despot to preserve “influence” in the region or thwart growing influence of an enemy
  • currying favor with a despot to preserve access to lucrative contracts within the country

The careful reader will note that none of those have anything to do with improving basic living conditions for citizens of those countries. Rather than aiding their “real economies,” much of this lending is focused on preserving the corruption that is creating the poverty and strife.

If this debt load winds up tanking the world economy, it’s possible it won’t make one bit of difference to the average person in Africa because they were not likely benefiting from these funds anyway. It was all being skimmed at the top.

WTH

14 Likes