Yonas Biru, PhD
This is a back of the envelop analysis on international debt to show BBC’s analysis of Ethiopia’s debt crisis is rubbish. Our intellectuals are better advised to spend their energy in making sure the loans in question are used properly rather than doing their #NoMore አቶቶ ቡቱቶ on US and European streets.
Ethiopia should borrow from Western countries, the World Bank and IMF like there is no tomorrow. These are loans that come without collateral. Countries such as Ethiopia get a near zero interest rate loans with a five-year grace period and 30-year term. PM Abiy was right to say “Borrowing from the IMF and the World Bank is like borrowing from one’s mother.” The only loan we should worry about is from China.
Why Ethiopia Needs to be Wary of Taking Additional Loans from China
When it comes to development loans, China uses a pawnshop strategy. Pawnshops make money from desperate individuals who turn over custody of their valued possessions such as wedding rings and computers with valuable data as collateral for the loan. China follows the same strategy except for the fact that its borrowers are nations rather than individuals. Its collaterals come in the form of geopolitical seaports, flagship national airports, oil fields and strategic rare earth mining projects.
Once it traps vulnerable nations, China takes advantage of Africa’s economic woes, seeking new collaterals as a condition to restructure debts at risk of defaulting. When Zambia owing China over
$6 billion had difficulty servicing its payment, China wanted the nation’s mining assets as new collateral to restructure its loans. As Financial Times noted, the Zambian government was “alleged
to have diverted donor funds meant for social sector spending to make debt repayments.”
China’s debt-trap strategy has four signature schemes that makes it different from other bilateral or multilateral loans that developing countries rely on.
First, it’s loans to developing countries are kept confidential. They are neither reported to nor recorded by international institutions such as the International Monetary Fund (IMF); the World Bank; or the Paris Club, an organization of creditor nations.
Second, China’s preferred clients are countries with rampant corruption. A study by the Brookings Institution shows that of the 50 most indebted countries to China, 25 are from Sub Saharan Africa (SSA). A closer look at the data indicates, of the 25 SSA countries, 23 are listed in the top half of Transparency International’s corruption ranking, including South Sudan, the Republic of the Sudan and Angola, ranked second, forth, and fifth most corrupt nations in the world, respectively.
Third, data from the IMF shows China’s loans are geared toward countries that have historically been vulnerable to debt crises. Of the 50 countries in the Brookings’ above-noted list, a large majority of them were countries who suffered debt crisis in the 1990s and received international
debt forgiveness.
Fourth, Chinese loans are based on market rates with short payment periods, leading to larger annual repayments and resultant defaults. By contrast, traditional loans by institutions such as the World Bank, IMF, and members of the Paris Club carry near zero interest rates and are further buttressed with generous grace periods and long payment plans of up to 30 years to make them easier to service.
This is what happens when you borrow from the West/World Bank/IMF.
They lend you knowing full well that you will not be able to pay it back. Then they lend you more, so you can service your outstanding loans. If you still cannot pay it, they will lend you once again. That is when it gets interesting. Self-anointed members of the West’s moral police, who see themselves as the conscious of the West, start to speak up against international debt burden on poor countries. They use pictures of starving African children and shame the West for demanding debt payments. We are talking about Liberals, Millennials, Gen Zs, International Development NGOs, and Religious Activists. Sometimes even communist leftovers sneak in as a moral voice. They start making noise calling for debt forgiveness or debt restructuring.
Debt forgiveness and debt restructuring allows nations facing financial problems to eliminate, reduce and/or renegotiate their delinquent debts to improve their credit worthiness so they can continue to borrow more. That is when the West and the World Bank and IMF come with more generous loans with near zero interest rates, five-year grace period and 30-year term loans. As
long as Liberals, Millennials, Gen Zs, Religious Activists and Communist Leftovers exist, the cycle will repeat itself.
The good thing for countries such as Ethiopia is that Gen Zs are even more liberal than Millennials. Trust me I know this firsthand. My youngest is a member of the Gen Z generation. She makes her older siblings (Millennials and high-octane liberals) look like Trump supporters.
In conclusion, we should not prepare complicated economic tables and graphs to link debt with economic stagnation and being dependent on Western nations. Just keep on borrowing until they stop lending you. Do not complicate a very simple thing. Take all the loan they give you and file for a new loan the next day. Spend your energy to make sure the loan money is used for development.
