The new debt crisis
17 February 2016
In the markets of Mozambique before Christmas there was a sudden increase in the price of food. The price of maize shot up by a quarter, tomatoes by a third and cooking oil by over 10%.
Paradoxically, this surge in food prices is linked to the same reasons why prices in other parts of the world are falling.
For the last decade, Mozambique has been basing its economic development on exporting primary commodities – gas, coal, aluminium and titanium. With China’s rapid growth, prices for such commodities were high and Mozambique was praised by the likes of the IMF and World Bank. In May 2014, quoting Mozambique’s high economic growth rate of over 7%, IMF Executive Director Christine Lagarde said:
“I would like to commend Mozambique on this impressive performance. Africa has taken its destiny into its own hands. Now is the time to build the future.”
As commodities were sold the money rolled-in for multinational companies and elites, with too few pointing out how little of this was reaching ordinary people. At the same time as the economy more than doubled per person, the number of people in Mozambique classed as malnourished by the UN increased by 1.5 million, and the number of people living on less than $2 a day according to the World Bank increased by 4.1 million.
And now this ‘boom’ is turning to bust. China’s demand for commodities has fallen, and there is no growth elsewhere in the world economy to replace it. Commodity prices have plunged. This means falling exchange rates, which increases the cost of all goods which are imported and exported, leading to the price rises now for the people of Mozambique.
Another impact of the fall in exchange rate is that it increases the relative size of debts. Most of Mozambique’s debt is owed to people outside the country in foreign currencies such as dollars, whether that be the World Bank, the Chinese government, or speculators in the City of London. When the exchange rate falls, the relative size of debt payments increases.
The IMF now says Mozambique will be spending 13% of government revenue on foreign debt payments in 2016 and 2017. A decade ago, payments fell to 2% of government revenue after the Southern African country had $6 billion of debt cancelled following the global Jubilee campaign to drop the debt.
However, off the back of the Western world banking crisis of 2008, lending to impoverished countries boomed. Pushed by low interest rates in the west, and attracted by the commodity boom, speculators piled in. Loans to low income countries tripled between 2007 and 2013.
Loans also increased with the expansion of new lenders such as China, whilst Western governments increased the amount of ‘aid’ money they gave as loans.
In the 1980s and 1990s, many countries in the global south were hit by a cataclysmic debt crisis. In sub-Saharan Africa the number of people living in extreme poverty increased by 125 million. The crisis came after five years of reckless lending in the 1970s were followed by falling commodity prices and rising US interest rates in the early 1980s.
History may not repeat but it does rhyme. Across the world the signs of debt crisis are beginning to show. Ghana and Mozambique have already resorted to borrowing more money from the IMF to pay off reckless lenders, just as happened in Greece. Zambia, Senegal, Sierra Leone and Tanzania are other countries with falling commodity revenues and tumbling exchange rates. ‘Middle income’ countries are also being affected. For example, Brazil is in recession, weighed down by the foreign debts of private companies.
Since global finance was deregulated in the 1970s there has been wave after wave of crisis affecting people on all continents, from the Third World Debt Crisis of the 1980s and 1990s, to the Asian Financial Crisis, the Western banking crisis and the Eurozone debt crisis. Stopping this cycle requires regaining control of finance: regulating the movement of money between countries, limiting bank lending in the boom times, tackling tax avoidance and evasion, and bringing in bankruptcy procedures so lenders know they will no longer be bailed out for their reckless loans.
For many countries in the global South, it also requires finding a new economic model not based on commodity exports. The revenue from commodities is all too easily captured by multinational companies and local elites, whilst their wild swings in price contribute to these destabilising cycles.
The current falls in commodity prices and exchange rates are worrying for people in many countries. A new vision is needed for economic policies to be based on providing good jobs and cutting poverty and inequality, rather than the illusion of ‘growth’ of the last decade.
Find out more about the new debt crisis on www.jubileedebt.org.uk
Photo by Patrik Samuel Tauchim/flickr