Debt burden: Why global financial system needs urgent and swift reform

 

African nations have been advocating for significant reforms in international financial institutions (IFIs), over the years, to create an equitable environment for the continent. This push includes demand for greater representation at the International Monetary Fund (IMF), World Bank, and other global standard setters.

The current international financial architecture is skewed against African countries, leaving many grappling with high financing costs amidst emerging challenges and limited fiscal space. History is made this year as the IMF Board prepares to certify a third seat for Sub-Saharan Africa in November 2024.

As Mo Ibrahim, the Founder and Chair of the Mo Ibrahim Foundation notes, this move marks a decisive step towards enhancing African representation in the multilateral system. It is understood that supplementing different perspectives and balancing decision-making processes remains essential for ensuring the efficiency and sustainability of multilateralism.

Africa constitutes nearly 20 per cent of the global population. It plays a critical role in development, security, and economic dynamics, yet it has historically lacked adequate representation in the Bretton Woods institutions (BWIs). Notwithstanding the addition of a third seat for the region, it is crucial to recognize that its voting shares remain unchanged for a long time. This should be the pivotal point following the last IMF and World Bank Annual Meetings held in Marrakech, Morocco—the first such meetings on the continent since 1974.

Broadly, Sub-Saharan Africa continues to face erosion of quota shares, which remains linked to a country's relative economic standing. Countries in the region find it challenging to match the financial contributions of wealthier nations to the IMF, affecting their voting power and access to maximum resources. Africa has the lowest voting power relative to other regions.

Going forward, it is reassuring to see a few reforms emanating from the IFIs. The World Bank, for example, has recently approved changes to its internal lending guidelines, which will result in an additional $30 billion in lending capacity over the next decade. This additional funding will support developing countries and emerging markets in addressing climate change and other global challenges. The IMF also plans to add one more board member from sub-Saharan Africa to its governing body and Board of Directors. In addition, the IMF endeavours to hire highly qualified African professionals, particularly, with an eye to enhance representation and diversity. These steps are a positive move towards ensuring fair representation for Africa and other under-represented regions (URRs).

Therefore, and as Mo Ibrahim rightly points out, increasing African representation in the BWIs will lead to fairer and more effective decision-making, besides greater accountability. The IMF and World Bank, often seen as lenders of last resort, provide billions in loans and assistance to address balance of payments problems (BOPs) and encourage reforms that are designed to achieve macroeconomic stability, growth, and poverty reduction.

Critics, however, argue that some of these policies tend to restrict access to credit and loans, forcing governments to make difficult tradeoffs, including stringent tax reforms, or eliminating essential subsidies for food and energy. These tend to have political and social implications for poor households, as witnessed in many countries in the Global South.

While some of these measures stand at forestalling any defaults, the burden of high-interest loans restricts funding for critical sectors, including education, health public, and infrastructure.

Morocco's Economy and Finance Minister, Mrs Nadia Fettah, exemplified this point during the October 2023 Annual Meetings, stating that the financial strain from servicing debt means less investment in vital sectors. We hasten to add that this situation forces the poorest African countries to allocate more funds to debt repayments than to health, education, and infrastructure combined, which undermines their development prospects or the capacity to meet sustainable development goals (SDGs).

The United Nations Conference on Trade and Development (UNCTAD) aptly highlights that every dollar spent on debt servicing is a dollar that cannot foster development initiatives. Over the past decade, developing countries have experienced a 64 per cent rise in interest payments, with Africa seeing an alarming 132 per cent increase. This has detrimental effects on spending on education, healthcare, and broader productive investment. 

Notably, between 2019 and 2021, 25 African countries—  about half the continent—spent more on interest payments than on health, illustrating the critical need for reform in the global debt architecture. Debt distress, defaults and the increasing debt burden on the fiscal budgets of countries in the Global  South are a threat in the current context of multiple crises.  This provides immaculate evidence for the inherent fragility of the current financial architecture and the mounting obstacles in eliminating global inequality and poverty. It is, therefore, important to fast-track the implementation of key reforms around the debt issue with a central focus on;

• Implementing the climate agenda to finance climate adaptation with non-reimbursable financing in the Global South.
• Establishing a debt restructuring process under a multilateral framework, including smooth operationalization of the Common Framework for debt treatment.
• Creating a multilateral credit rating agency to balance the credit rating assessment of countries’ economies.
• Applying responsible lending criteria in terms of eliminating conditionalities such as austerity and negative impacts, while safeguarding responsible borrowing on the efficient use of resources for the collective benefit of all people.

Addressing these issues requires a comprehensive overhaul of the financial system beyond mere representation. Most African leaders agree on the urgency for reform within the global financial architecture.

During the 59th Annual Meetings of the African Development Bank Group and the African Development Fund in Nairobi, Kenya, in May 2024, and the African Caucus Meetings in Abuja, Nigeria, in August 2024, I emphasized the necessity for Africa to mobilize resources for infrastructure and industrialization to drive rapid economic growth.

In closing, reforming the global financial structure remains imperative.  This includes efforts to ensure better debt resolution, an inclusive international tax system, augmented access to the global market with affordable funding, concessional lending resources, and a scale commensurate with the region’s financing needs. The prevailing “Great Funding Squeeze” and rigid structure of the current global system stand at odds with   Africa's aspirations, creating an existential threat. Addressing these integral constraints, therefore, remains fundamental to ensuring climate action and realising the SDGs.

Dr James Alic Garang is the Governor of the Bank of South Sudan and the Chair of the East African Community Monetary Affairs Committee