By Ndongo Samba Sylla and Peter Doyle
This piece was written before the Coronavirus outbreak. It is a timely proposal of action. Given the high exposure of the developing world to the virus in contexts of medical and other logistical shortcomings, the damage to their productive capacity is likely to be much more severe than for the advanced world. This fact is already reflected in particularly sharp virus-stirred capital outflows from these countries. All this greatly increases their exposure to the present global structures for sovereign insolvency, and the urgent need for those structures to be radically reformed—as the authors propose with the Pre-Emptive Sovereign Insolvency Regime (PSIR).
In a radical call for reform of the IMF’s pro-creditor and anti-growth approach to indebted countries in Africa, Ndongo Sylla and Peter Doyle argue that the continent has a choice to make. Creditors, using the IMF, must be stopped from forcing devastating output losses by imposing high primary surpluses.
Within a decade, just to keep up with the flow of new entrants into its labour markets, sub-Saharan Africa needs to create 20 million new jobs every year. This is a huge challenge. But it is also a thrilling opportunity—to harness the energy and creativity of all of Africa’s young.
However, after it reviews these issues in Africa, the IMF’s immediate message—literally in the same sentence—is to pivot to ‘budget cuts to secure debt sustainability!’
That is plain wrong. For Africa to meet its development objectives, the IMF must radically change its pro-creditor anti-growth approach to highly indebted/insolvent countries.
In particular, the IMF’s priority is that to support job-creating new debt, the first task is to pay old debt, even if doing so means cutting budgets and activity to pay off old creditors.
Sadly, the IMF persists in choosing these priorities despite the lessons to be learned about the failure of that strategy where it has been tried and fully implemented.
For example, Jamaica, in the past decade, has followed this IMF playbook. Its government was instructed by the IMF to run huge primary budget surpluses—meaning that tax revenue exceeds total public spending excluding interest payments—to pay down debt.
Unlike most, Jamaica stuck to those instructions long enough to see what the results were.
So what were the results?
Well, Jamaican public debt has fallen, from 140 percent of GDP a decade ago to 95 percent now. But under this old-debt-first IMF priority, jobs fell from 2009, barely regaining their 2009 level from 2016 and the country’s GDP per capita also declined.
This is all in stark contrast to similar countries, notably our fastest growing African countries, including Kenya, Uganda, Botswana, Namibia, and Mauritius, where instead of falling, GDP per capita rose some 25-35 percent in the same global environment.
All that is no surprise. With resources thus directed to pay down old debt, Jamaica could not apply them to invest in hurricane protection and recovery, water management, or schools, or to reduce taxes to spur business.
The contrast with the fastest growing African countries show just how much output was forgone in Jamaica in pursuit of this old-debt-first approach—40 percent of 2009 Jamaican GDP. That is the order of magnitude of output foregone in Jamaica in just one decade.
Such output losses forced by creditors have happened before. In Victorian times, a tailor could be jailed by creditors when she defaulted. In jail, she made no dresses. The creditors didn’t care about that loss of output. They just turned the screws on her family to pay up.
We now regard all that as barbaric, and, over their violent opposition, personal insolvency laws have been changed to prevent creditors from disregarding output losses like that.
But creditors (including the Chinese), through the IMF, still do that to sovereign debtors.
And not just in Jamaica. The IMF right now is demanding high primary budget surpluses in the medium term including in Mozambique, Zambia, Zimbabwe, Angola, Chad, Equatorial Guinea, the Seychelles, Congo, and South Sudan—all to pay off old debts.
As Jamaica shows, that is a recipe for stagnation at best. The IMF is wrong to point the finger of blame at debtors for failing to exhibit enough commitment and energy to it. It is hardly the jailed tailor’s fault that she cannot produce!
Instead, the world and Africa have a choice to make. Because just as with individual insolvencies—where other arrangements were put in place to block creditor disregard for output foregone—it is perfectly technically feasible to install better insolvency arrangements for Sovereigns too.
We detail such alternative arrangements, what we call ‘A Pre-Emptive Sovereign Insolvency Regime’ (PSIR), which are constructed on the same basis as those which have applied to US banks for over half a century—through which many hundreds of banks have successfully been restructured. A fuller account of the proposal may be found here.
The key is that the IMF would force debt write downs when public debt ratios cannot be stabilized without raising the budget primary balance above 2 percent of GDP, not, as now, only when debt ratios rise unsustainably.
So old creditors would not be able to force output losses by imposing high primary surpluses via the IMF. But beneficiaries would have to fulfill other conditionality so as to secure the consequent growth and jobs dividend. On this basis, the IMF would finance the beneficiaries’ transition to new creditors.
Had these arrangements applied to Jamaica from 2009, its debt would have been written off to levels consistent with low primary surpluses. That would have allowed Jamaica to invest and grow in the past decade, just as our fastest growing African countries did, and just as Africa as a whole needs to do now, instead of just grinding down old debt.
Absent those arrangements, Jamaica had no choice but to conform. But it should not have been faced with that “choice”. Given the results, including spurring disorderly emigration, no other country should face that choice again.
The benefits of a PSIR go far beyond delivering the output potential of those countries which are highly indebted now. By removing their IMF ‘high primary balance backstop’, it mobilizes all creditors to press for substantive accountability and transparency up front, instead of colluding with corrupt and inept leaders to impose illegitimate and wasteful debt onto Africa’s poorest citizens. It would also slow capital inflows during commodity booms.
As with debtor-prison regimes of personal insolvency, only old creditors stand in the way of this output-boosting, job-creating, anti-corruption, and commodity-boom-smoothing reform. The 1987 warning by the late Thomas Sankara, the charismatic President of Burkina Faso, echoes more loudly than ever: ‘If we don’t repay [external debt], lenders will not die. That is for sure. But if we repay, we are going to die. That is also for sure.’
It is time to choose. Is Africa to be subjected again to the debtors’ prison it endured with the Structural Adjustment Policies (SAPs) in the 1980s and 1990s, being forced to raise primary surpluses to pay debt at the expense of output and decent jobs, or does Africa stand up to insist that Sovereign Insolvency Arrangements be brought out of the 19th and into the 21st Century, to make millions of new jobs per year possible?
The IMF’s founding mandate was to secure output, not debt. If Africa rescues that global body from the clutches of creditors by insisting on these reforms to the sovereign insolvency regime, Africa would bring the IMF back into compliance with its mandate. This would set the stage for the realization of the potential of all of our people.
Africa should call for the world and the IMF to abolish sovereign debtors’ prisons now.
Peter Doyle is a former senior economist at the International Monetary Fund. He resigned in 2012 because of the Fund’s “incompetence” and failure to warn about the urgency of the global financial crisis.
This blog post was first published by ROAPE.