Contract negotiation skills worsening African debt crisis

12 Nov 18

Governments in sub-Saharan Africa need to better understand the contracts they sign with private lenders, a conference has heard.

This comes as the IMF has warned that Africa is heading towards a new debt crisis, with the number of countries at high risk doubling over the past five years.

Currently, the private sector makes up a quarter (32%) of the continent’s external debt, which is estimated at $417bn.

But there is a lack of ‘capacity’ – skills and knowledge – within governments to negotiate ‘good deals’ with these private lenders, which means that interest rates are high, and the loans end up being much more expensive, speakers warned at a conference on Africa’s rising debt at the Overseas Development Institute last week.

Baba Musa, director of the debt management department of the West African Institute for Financial and Economic Management, said the “biggest challenge” is the lack of capacity.

“We need to focus on capacity building, to ensure countries are technically prepared for negotiations. They need to know exactly what they are doing [when they sign a contract],” he said.

Carolina Renteria, IMF division chief of public financial management, explained that many countries look to public private partnerships to close the infrastructure financing gap, but without the necessary skills to negotiate such contracts, projects “down the road are going to be so much more expensive”.

“There is a lot of learning that needs to be done within national governments to understand the risks behind [PPP] contracts,” she said. “It takes time to develop capacity and we need to recognise that.”

A panel on restructuring debt also highlighted that there is no incentive for private lenders to “lend responsibly”, because they will always be paid back – as bailout loans are given to countries to help pay their creditors.

Because of this, Benu Schneider, adjunct senior research fellow at RIS, said: “Creditors don’t have much incentive to renegotiate in times of crisis.”

Former president of the African Development Bank Donald Kaberuka also said in a keynote address to the conference that capacity was crucial, as well as fiscal discipline and increasing tax revenue.

Speaking on behalf of lenders, Isabelle Bui, secretary general of the Paris Club, a group of major creditor countries, said: “Resolution of the debt crisis is crucial, but prevention is even more important.

“We need a sustainable lending framework and better reporting and monitoring of debt.”

She added that there should be an “enhanced dialogue” between all stakeholders, including the private sector, which is increasingly playing a bigger role.

Sensing the negativity around private lending, Deborah Zandstra, partner at Clifford Chance, said it was important to remember that “access to funding and lending is a really good thing”.

According to the Jubilee Debt Campaign, a charity which campaigns for the cancellation of debt for struggling countries, around 20% of African debt is owed to China, while 35% is held by multinational institutions such as the World Bank.

The conference also called for increased transparency of private sector lenders, as well as for borrowers to record their debts – which many countries don’t.

World Bank acting chief economist Shanta Devarajan told the conference that the bank has a rule not to lend to countries that do not report their debts.

But he added that few people are aware of this rule, which is in the articles of agreements, so it is rarely followed. However, he said this “mandate should be enforced”.

The panel urged the G20 to use its meeting later this month to call on lenders and borrowers, including those in the private sector, to make public all loans and put them in one place.

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