Global financial system does not favour African and smaller nations
DURING the Covid-19 pandemic of 2020, Zambia became the first African country to default on its debts. Zambia’s case raised questions about the global financial architecture that disadvantaged smaller countries. When discussing Zambia’s debt, President Hakainde Hichilema noted that his country was at the receiving end of a cruel global system.
Organisations such as the International Monetary Fund (IMF) and the World Bank have had a strained relationship with Africa, and this stems mainly from Structural Adjustment Programmes (SAP). SAPS consisted of loans given to countries to alleviate economic challenges. The idea was to adjust the structure of a country’s economy, improve international competitiveness and restore a country’s balance of payments. Although, at least in theory, the IMF and World Bank initiatives could be viewed in a good light, their negative impacts on African countries cannot be ignored.
One of the key strategies of SAPS was the introduction of free market economies, which contrasted with African leaders who had opted for a more socialist approach that required a planned economy. It was, therefore, not surprising that leaders like former Ghanaian president Kwame Nkrumah and his Tanzanian counterpart, Julius Nyerere, were vocal about the role of Western institutions.
The main criticism of the IMF and World Bank was that there was arrogance in their dealings with Africa, with issues like poverty being exacerbated rather than eradicated.
When Hichilema refers to a cruel global system, his statement must be seen within the historical context that led to the creation of the IMF and World Bank. A key event that would change the global economic architecture stems from former American president Richard Nixon’s decision in
August 1971 to delink the dollar from gold. Before the Nixon administration made the decision, countries would trade based on the gold reserves they had. After the end of World War II, the US dollar was equivalent to gold, and this became the global standard. The Nixon administration’s decision in 1971, which was done without warning, represents the financial global system aptly as it serves the interests of powerful countries, and this ties closely to the challenge Zambia has faced with its debt.
Zambia has struggled to settle its debt, which, at some point, had reached 120% of its gross domestic product (GDP). The debt crisis has proved how various actors play a role in hampering progress in settling debt. Zambia had reached a deal with private bondholders, but China objected to this under the guise that the agreement was unfair. Similarly to the modus operandi of Western institutions, the G20 countries created a “Common Framework” for debt relief to assist less affluent countries that were struggling to pay off debt. Other African countries, such as Chad and Ethiopia, have also been included in the framework, but more needs to be done to help the countries.
A key element lacking from the G20 framework is confidence, and this might stem from the strained relationship that less affluent countries have had with global financial institutions.
During the pandemic, G20 countries introduced initiatives, such as the Debt Service Suspension Initiative (DSSI), to assist less affluent countries in settling their debts, as many of the countries’ economic activities had been disrupted by the pandemic. The DSSI was important because it saw a pause in debt payments from less affluent countries. The countries were further assisted in restructuring their debt. In addition to the G20’s efforts, the IMF directed money to the tune of $21 billion to support the countries.
Zambia was affected by the pandemic. Additionally, Zambia also faced a drought that had a devastating effect on its citizens.
Hichilema has long hoped that efforts to address the debt issue would have been made by now so that the country could allocate resources elsewhere, but this has not been the case.
Zambia’s efforts in addressing its debt confirm that the global financial system favours affluent countries. When Zambia approached the IMF to address the country’s debt, it showed faith in the global system, but the stand-off proved that the global system serves the interests of those who shaped it.
History has proved to Africa that Western institutions such as the IMF and World Bank have done little to assist with debt relief measures.
When mentioning debt and how it has affected Zambia, Hichilema likened it to a python around Zambia’s neck. This can be said of several African countries that continue to grapple with a financial architecture meant to protect the interests of wealthier countries.