“There is nothing a nation should avoid as much as borrowing money abroad.” So confided Ulysses Grant to Emperor Meiji during his visit to Japan in August of 1879. After giving several examples of nations then enslaved by foreign currency-denominated debt, the eighteenth American president (1869–1877) suggested that his host get rid of his country’s external debt as soon as possible, especially given that it was not very large. “The sooner it is paid back the better it will be for Japan. Japan, if possible, ought never borrow any more from a foreign nation.” This advice did not fall on deaf ears—the Japanese learned a lesson. The same cannot be said for many African countries, aside from Algeria, which is rich in hydrocarbons and whose ratio of external-debt-to-GDP is lowest on the continent.
Ndongo Samba Sylla is a Senegalese development economist at the Rosa-Luxemburg-Stiftung’s West Africa Office in Dakar. This article first appeared in Mediapart and was translated by Louise Trueheart and Marty Hiatt for Gegensatz Translation Collective.
Apples and Pears
In 2018, at the Japan–Africa summit, the Japanese government publicly expressed worry over the continent’s level of indebtedness, with a public-debt-to-GDP ratio at around 50 percent. Out of pan-Africanist fervour, a renowned African economist expressed his anger on social media, condemning the way Japan dared to give lessons on the matter to African governments, when its own public debt is well beyond 200 percent. How could the Japanese government have the gall to take this condescending attitude with a level of public debt at least four times higher than the African average, he asked.
Unfortunately, this economist, like the overwhelming majority of mainstream economists, did not make the rudimentary—yet decisive—distinction between debt in national currency and debt in foreign currency.
The Japanese state is only indebted in its own currency. Like all governments that issue their own currency, Japan can never run out of money (i.e. electronic entries in bank accounts). It could therefore never be in a situation where it would not be able to pay the bonds issued in its own currency. Its financial independence means that its has no intrinsic financial constraint in its own currency and that it determines the interest rates at which it “borrows” itself. Its possible budget deficits are therefore financed in yen.
This is not the case in most African countries, whose public debt is mostly in foreign currencies. While they cannot become insolvent in their own currency, they most certainly can in a foreign one. When an African country borrows US dollars, it must also repay the debt in US dollars. This is because, as a general rule, creditors do not accept being paid in the African sovereign debtor’s currency. In order to be able to pay back the debt, the African country will need to generate foreign cash revenue, primarily in the form of additional export income. More precisely, it will need to have a trade surplus (exports must be higher than imports). Indeed, export income is a way to finance imports.
But the thing is, maintaining a consistent external trade surplus is not easy. On the one hand, African countries mostly export primary goods, which have two particularities: their prices are both unstable and determined abroad. When the terms of trade work in their favour, the country’s capacity to borrow from abroad and pay off debt increases. Conversely, when the terms of trade are not in their favour, their capacity to pay back debt decreases. Their currencies tend to depreciate, especially when capital flight is observed. This increases the foreign debt burden and also renders repayment more difficult.
On the other hand, African countries are dependent on a certain amount of essential imports. Even if the price of these imports increases, demand remains unchanged or does not drop significantly. Moreover, in the long term, the prices of manufactured goods imported by African countries evolve more favourably than those of their exports. This is the so-called “secular deterioration of the terms of trade”: in order to acquire the same amount of imports, African countries must export much more.
With the coronavirus pandemic, many African countries that + unreasonably accumulated foreign currency-denominated debts over the past decade are now nearly bankrupt. The plummeting prices of their export products, combined with the depreciation of their currencies, has put them in a financial situation that is all the more precarious given that economic activity has slowed globally. They must service foreign debt while their export income falls abruptly.
The Example of Senegal
When it comes to the capacity to obtain a trade surplus on a regular basis, two kinds of African countries can be distinguished. First there are those who are solvent on average; they can honour their foreign debts thanks to regular trade surpluses, but they are not immune to adverse economic conditions that could reduce their foreign exchange holdings. This is often the case with oil-rich countries. Second, there are those who cannot pay back foreign debt with a trade surplus and must therefore find other means. All the countries in West Africa that use the CFA franc are in this camp, except for the Ivory Coast.
Let us take the case of Senegal, whose trade balance has been structurally in deficit since 1967. In 2019, Senegal’s exports were worth approximately 2,000 billion FCFA, while its imports were at 4,200 billion FCFA—in other words it had a trade deficit of 2,200 billion FCFA. How can Senegal manage to pay back its foreign debt under such conditions? It must take desperate measures to attract foreign capital, such as foreign direct investment (FDI) and taking on even more debt.
But far from resolving the problem, FDI only makes it worse. Since foreign investment often finance projects (such as infrastructure, telecommunications, etc.) that do not increase export income, they tend to worsen the trade balance (through the import of equipment, technology, etc.). Moreover, the fact that FDI results in the annual repatriation of profits, exorbitant honorariums paid to foreign experts, and accounting tricks to cover up illicit transfers only reinforces the financial drain. Yet such perverse effects have not dampened the zeal of so-called liberal governments, who, since 2000, have been determined to “attract FDI”. Public development aid operates on the same logic as FDI, as it is often “tied” to—i.e. attached to the execution of—projects controlled by donors. It tends to aggravate the trade deficit and cause financial drain.
In these conditions, if it is to service its foreign debt and facilitate the repatriation of profits made in local currency (which must therefore also be converted into hard currency), Senegal has no other option than to permanently re-indebt itself. For this strategy to work, Senegal must do everything in its power to maintain the “trust” of its creditors. This implies the adoption of a fiscal policy that is orthodox (with low budget deficits) and discriminatory (regular foreign debt service is prioritized over domestic debt payment and social services), as well as the erosion of what passes for its sovereignty in favour of the International Monetary Fund (IMF). This is not a sustainable strategy. Sooner or later, the time will come when the country will no longer objectively have the means to service its external debt, other than by making socially unacceptable sacrifices.
In financial parlance, a Ponzi scheme is a type of scam consisting of paying interest payments due to investors (in our case the service of ongoing debt) with money obtained from new investors attracted by the prospect of high earnings (in our case the issuance of new debt). Taking a closer look, this is the strategy Senegal has innocently employed since 1960: continuously contracting foreign currency-denominated debts that are serviced by permanently contracting new foreign currency-denominated debts. This financial strategy could have more devastating outcomes than over the past two decades in the absence of remittances from the Senegalese diaspora (which amounted to about 10 percent of GDP in 2019).
As a textbook case, Senegal is of threefold interest. Firstly, it is the most eloquent proof that a development strategy based solely on foreign financing is inherently counterproductive (in the long term, between 1960 and 2015, real income per capita in Senegal has stagnated). To be clear, international finance is part of the problem. It can only play a positive role for countries that first rely on the mobilization of their domestic resources (a concept that certainly should not be reduced to an increase in the tax/GDP ratio) and that prioritize domestic financing. This assumes that governments have effective control over their credit systems—over who gets credit and at what rate—which should never be left solely in the hands of the private sector.
Secondly, the case of Senegal allows us to examine the constraints (including the erosion of sovereignty) that countries lacking their own currency face in times of crisis. Being a member of a monetary zone (the West African Economic and Monetary Union), Senegal has the financial status of a local authority (or, to be more precise, the status of a colony). One characteristic of local authorities and colonies is that they depend on taxes for their expenditures, as opposed to states that issue their own currency. The latter are able to spend without being constrained by the amount of taxes they collect. To spend, they need only to ask their central bank to credit (i.e. add figures to) bank accounts. Since the government of Senegal does not issue its own currency, it cannot draw from the central bank in the way rich countries and certain emerging countries are in response to the current crisis. Furthermore, Senegal has no control over the interest rates on the bonds it issues in CFA francs. The fact that interest rates on CFA franc-denominated bonds are sometimes higher than those prevailing on international financial markets tends to favour contracting foreign currency-denominated debt, which exposes countries like Senegal and the Ivory Coast to foreign exchange risk (a risk tied to variations in exchange rates). Only governments for whom sovereignty is nothing but a word can accept this type of situation. Finally, the Senegalese government, like other countries of the WAEMU, has no control over the allocation of credit. Foreign banks decide who is allowed how much credit and at what rate. Hence the exclusion from bank credit of the agricultural sector and SMEs–SMIs, which are the basis of prosperity.
With the coronavirus pandemic, this absence of monetary sovereignty has immediate implications. Given that the government cannot count on tax income in the face of slowing economic activity, its ability to make the necessary spending in order to meet the demands of the country’s present health and economic challenges is dependent on outside generosity: debt forgiveness, moratoriums, development aid, and more debt. In the current configuration, which it needs to get out of, Senegal is not in control of its own destiny, and so it must request external financial support. As the brilliant British economist Wynne Godley wrote in 1992, “the power to issue its own money, to make drafts on its own central bank, is the main thing which defines national independence. If a country gives up or loses this power, it acquires the status of a local authority or colony.”
Many African countries that do have their own currency are also obliged to request external financial support. But their advantage over Senegal is one that few of them use: they have no intrinsic financial constraint in their own currencies. In principle, they can finance any project that relies on local resources under their control. For example, if Guinea had all the expertise and materials in place to build a pharmaceutical plant, it would have no obstacle to financing that with Guinean currency. The country’s central bank could facilitate the process. But, of course, few African countries have a resolute policy of mobilizing local resources. To do so would require a political determination that no longer existed on the continent since the assassination of Thomas Sankara in 1987.
Finally, the case of Senegal allows us to see that foreign currency debt is not so much the cause of underdevelopment as it is its symptom. It is the result of a primary specialization within the global economy with limited or inexistent monetary sovereignty, unreasonable level of openness to trade, the domination of key sectors by foreign capital, and unequal social structures that sustain a model of accumulation in which economic growth only reaches a minority of the population relying mostly on imported goods for their consumption, etc. As long as this structure of dependence is maintained, the cancellation of foreign debt—if it is even possible—will change nothing. It would only give the governments a slightly wider budgetary margin in the short term and spare them from having to inflict more misery on already weakened populations.