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Where the global debt crisis hits hardest

06 November 2015

Countries need to learn from recent history and restructure financial and aid systems to prevent future crashes, says Tim Jones

AT THE same time as people in the UK benefit from zero inflation during their weekly shop, the price of food is rocketing in many developing countries. In Zambia, the price of maize, the staple food, has increased by a quarter in the past two months.

Oddly, however, low inflation in the UK and high inflation in Zambia are caused by the same thing: a global crash in prices for cash crops, metals, and fossil fuels.

Many developing countries continue to depend on such raw materials for their income from exports. Recently, the price of these commodities has fallen because of a slowdown in economic growth in China. This loss of income has caused exchange rates to fall, which increases the price of anything imported.

Zambia has been hit by a fall in the price of copper to a nine-year low. Geoffrey Chongo, from the Jesuit Centre for Theological Reflection, in Zambia, says: “The fall in the currency is having a big impact because so much is imported. Food and energy prices are soaring.”


DEBT payments are also affected by falling exchange rates. Unlike the UK Government, which borrows money in its own currency, developing countries have to borrow in foreign currencies. So, when the exchange rate falls, the real cost of the debt shoots up.

In Ghana, this means that the government will be spending one third of its revenue this year on debt payments that leave the country. So there is less money around for public services and welfare spending, just at the time when people are suffering from higher prices.

At the start of the 1980s, there was a similar crash in commodity prices. Together with an increase in interest rates in the United States, this caused a debt crisis across much of the developing world. As money flooded out in debt repayments, countries were forced to cut social spending, and so poverty increased rapidly. In sub-Saharan Africa, the number of people living on less than £1.20 a day increased from 200 million at the start of the decade to 380 million by 2000.

Both borrowers and lenders are responsible for creating debts; it takes two to tango. In the 70s, American, British, and Japanese banks, which were awash with money from high oil prices, had lent vast amounts to developing countries without asking how it would be repaid.


THE verb Jesus is quoted as using most, “aphiemi” in Greek, means to “cancel, or liberate from, a debt”. A global movement responded to the debt crisis of the ’80s and ’90s to call for a jubilee, a debt-cancellation, to mark the millennium. It took until the mid-2000s, but, eventually, $130 billion of debt was cancelled for 36 countries, including Ghana and Zambia.

After debt-cancellation, the proportion of children completing primary school in Ghana increased from seven in ten to virtually ten out of ten. In Zambia, the proportion of children dying before they are five has fallen from three in 20 to one in 20.

Debt-cancellation succeeded in getting countries out of the two-decades-long crisis, but it did not address the structural problems that caused the crisis in the first place.

Unlike an individual or company, governments are not subject to bankruptcy rules. This means that, when a debt crisis arrives, there is no legal way to make lenders reduce unpayable debts. What tends to happen is that institutions such as the International Monetary Fund lend more money, bailing out the reckless lenders and leaving the country concerned with a debt that it can never repay.

This is exactly what has happened over the past five years in Greece, where more than 90 per cent of the bailout loans have not benefited the government, but have been used to pay off lenders such as German, French, and British banks. Besides prolonging the crisis for many years to come, they incentivise lenders to keep behaving recklessly, because they know that they will be paid off.


WE MAY not have to wait long for the next proof of this. After the global financial crisis that began in 2008 — again caused by reckless lending and borrowing by private banks — lending to the most impoverished countries began to boom. Between 2008 and 2013, loans more than trebled to low-income countries, as Western countries sought to give more of their “aid” money as loans. And new lenders such as China emerged, while low interest rates in the UK, US, and eurozone led speculators to look for higher returns elsewhere.

The UK Government gives much of its “aid” money through institutions such as the World Bank, which then passes it on as loans, valued in dollars. Although these aid loans are meant to come at low interest, the fall in exchange rates means that payments can increase rapidly. The effective interest rate that Ghana is now paying on its World Bank loans is nine per cent — and this could go higher the more the currency falls.

Just as for an individual or a company, when the debts of a country are too large, they need to be cancelled. But structural changes are also needed to prevent such debt crises’ happening in the first place. This requires measures to show lenders that they will no longer be bailed out if a debt crisis arises, and the publication of the details of all loans before they are signed, so that they can be scrutinised by Parliament and the media.

It also means working on tax justice, so that countries are less dependent on loans in the first place; and not giving “aid” loans that can cause debt crises.

We need to learn from history to prevent its being repeated.


Tim Jones is Policy Officer of the Jubilee Debt Campaign.

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