Debt Relief in Africa: Different Credit Paradigms, Different Development Outcomes

For the past 15 years, at the instigation of the World Bank and China, Africa has implemented an “infrastructure-led growth” strategy funded by China. Today the IMF recognizes the limitations of this model in a report on Ethiopia released in early 2020. The damage is done, however, as we reported in two previous plays. The first outlines the application of this strategy in Ethiopia and the resulting economic imbalances (China’s infrastructural model for African growth fails). The second describes the impact on Djibouti’s debt (Djibouti’s Chinese debt). What we denounce in these two pieces is the ideological stance of the actors – the World Bank as well as Chinese actors. With the China-funded projects in Africa, both were so confident that they screwed up their feasibility and profitability studies, which did not take into account all of the geopolitical and geo-economic factors of these projects.

Ethiopia and Djibouti are not the only victims. Even if the details may differ, Yuan Wang and Uwe Wissenbach tell an identical story with regard to the railway line built between Mombasa and Nairobi as that of the Djibouti – Addis Ababa railway line. When the Kenyan government came up with the idea of ​​modernizing the railway line between the capital and its port, it had four options. The first was a plan to rehabilitate the existing metric gauge network; the second was to upgrade the existing network to a higher standard with the same gauge; the third was to upgrade the existing network to a standard gauge system on the same network; and the fourth suggested building a standard gauge railway on a new line. Although a refurbished metric gauge network would have been the most suitable option economically and financially, as in Ethiopia and Djibouti, the most expensive formula chosen was a great solution (a real showcase for Chinese technologies) but absurdly expensive for very poor countries and given the very limited profitability at the moment.

These experiences should be put into perspective, especially the railway line between Djibouti and Addis Ababa. The choice of the Moroccan TGV was obvious because it was viewed by the Moroccan opposition press as an expensive investment, oversized and only intended to nourish the image of the King of Morocco. I will not discuss the relevance of these observations, which partly agree with those I made for the Djibouti-Addis Ababa rail project, but with one major difference: the Moroccan TGV is a clear commercial success and not a “white elephant”. At the same time, the archived material offers particularly instructive comparison elements.

The financing plan was drawn up in 2011 by the French development agency (Agence française de développement, AFD) for a project with a view to 2018. The large number of sponsors is immediately noticeable. Instead of a closed confrontation between the China Exim Bank and the government of Djibouti (or Ethiopia, depending on the railway line), no fewer than eight donors are participating in the Moroccan project. In other words, the assessment of feasibility and profitability has not been left to two isolated and possibly complicit partners, but has been entrusted to a multitude of actors with potentially diverging interests. Granted, French funding (three contributors with € 920 million out of a total of 1,800) is in the majority (51%), Moroccan funding (one contributor and the state budget) comes second (28%) and funding from Arab funds (four contributors) follow with 21%.

It is also worth mentioning the funding conditions, at least for the French funds, for which information is available. The French Fund for Private Sector Support (Fonds d’études et d’aide au secteur privé, FASEP) finances 4% of the project in the form of a grant. The French Fund for Emerging Markets (Réserve des pays émergents, RPE) finances 35% of the project in the form of a 40-year promotional loan (1.25%) with a 20-year grace period. The RPE is a special fund for the development and promotion of French companies and technologies specifically tailored to the rail sector. Finally, the AFD is financing 12% of the project in the form of a 2.2% unsubsidized loan over 20 years with a 10-year deferred payment, thereby financing the sleeper works and the viaducts on this site.

We therefore find that the largest loan – the RPE loan, which was actually intended for the purchase of French rolling stock (Alsthom) – offers interest and maturity terms that are far more suitable for a developing country than the terms of China Exim Bank for poor countries such as Ethiopia and Djibouti (in 2010, when the Moroccan project was launched, Morocco’s GDP per capita was four times that of Ethiopia and 75 times that of Djibouti). The original contract between Djibouti and Exim Bank provided for a loan with an interest rate of LIBOR + 3%, which at the time of the crisis in 2019, we reported, resulted in an annual interest rate of 6%, while the RPE formula uniformly guarantees a fixed interest rate of 1.25%. Both loans were government guaranteed loans. The Exim Bank loan had a term of only 15 years with a 5-year grace period; Again, the RPE loan offered much more suitable terms for a developing economy: a 40-year term with a 20-year grace period. The latter conditions leave a better margin for some profitability before the lender has to be repaid. The RPE rate is a subsidized rate, so note that AFD’s unsubsidized loan (2.2%) is also much cheaper than Exim Bank’s – even if LIBOR were zero.

From a simple accounting point of view, an investment is only worthwhile if the internal rate of interest is higher than the interest rate paid on the loan. It is understood that the lower the interest rate, the more likely the project will work and the more likely the lender will be repaid. However, there is a large gap between the returns calculated in the preliminary studies and the actual returns, as shown by a French parliamentary report on French high-speed rail lines presented to the French National Assembly in 2016. Usually and more To get such a return, especially in a developing country, an investment in rail infrastructure would require very long-term funding, sometimes even 50 years, if not 75 years.

Let’s take another look at Morocco, where Morocco has a fleet of thirty “new generation” locomotives in 2020 with a French loan of $ 150 million, a term of 40 years, a 10 year grace period and an interest rate of 0.0016% “(Alstom) with their devices and spare parts. Also, the features of this loan obviously make it much more affordable and sustainable for a developing country than the China Exim Bank terms above.

These Moroccan experiences show that “traditional partners” are still present and active in Africa and continue to offer solutions. So what can we conclude from a comparison with China? That France would do better than the Chinese? Certainly not. In the above two articles, I emphasized that China provides tied loans that require exclusive dependence on Chinese products. The two Moroccan examples show that France, like China, can use the loans it has granted to support its economy, even if this is not necessarily and systematically done. By granting an RPE loan, France is directly supporting Alstom, which manufactures the TGV multiple units (first loan) and Prima locomotives (second loan) that it delivers to Morocco. France is making use of the Keynesian multiplier theory, according to which any increase in demand would lead to a disproportionate increase in GDP. Low interest rates (1.25% and 0.0016% respectively) are certainly an excellent commercial argument; At the same time, they also signal the profitability of the French economy: Morocco is not really expected to repay its loans, the Keynesian multiplier takes care of the repayments before Morocco.

A country’s indebtedness does not result from the mere indication of its financial weight; its importance will always depend very much on its use for the development of this country. Therefore, it is not so much the amount and duration of the loans that can be problematic, but the benefits of the projects financed by these loans. The question of indebtedness is closely related to the mutual responsibility of the borrower and lender parties. The report of the International Conference on Financing for Development, held in Monterrey, Mexico, March 18-22, 2002, makes this clear in paragraph 47: Creditors and debtors must be held equally responsible for preventing and settling an unsustainable debt situation.

Given the current situation, financiers must live up to their responsibilities, especially if they have exaggeratedly praised an economic strategy that is proving to be inadequate. As I mentioned earlier, lenders have taken advantage of the Keynesian multiplier to make their loans profitable, so the economic and social benefits of debt relief outweigh the disadvantages of violating the financial doxa. Assuming that such a rejection will be accepted by the G20 members – including China, which a priori opposes, like Xi Jinping’s speech on the 18th, making a multilateral facility to buy back their claims that could be managed by the IMF and set up, as Hamid Rashid and Joseph Stiglitz demand.

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