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Can Modern Monetary Theory solve Africa’s debt crisis ?


For centuries, indebtedness has been a feature of African economies. Debt has been so heavy and unsustainable that it is often thought to be irrevocable.

Is indebtedness really irredeemable? And can monetary sovereignty as defined by Modern Monetary Theory (MMT) settle African states problems with their creditors? These questions, among many others, have been debated in a 4-day conference held in Tunis, under the theme “The quest for economic and monetary sovereignty in 21st century Africa”.

From November 6th to 9th, economists gathered by The Rosa Luxembourg Foundation, the Global Institute for Sustainable Prosperity (GISP) and the Politics of Money/DfG Network have examined the history of Africa’s debt and analyzed its political, economic and social implications for the continent’s 54 states.

Africa’s debt: a burden of the past

When examining sovereign debt through the lens of history, many speakers first identified the moment of independence (1950’s – 1960’s) as a turning point. African countries then moved from wealth-generating colonies to theoretically independent countries. But the yoke of political and military colonization had been replaced by the burden of an increasingly growing public debt.

The freshly independent states inherited a heavy colonial debt. This debt transfer has been described as “illegitimate” and “illegal” by several civil society movements in Africa and around the world.

Since its creation in Belgium in 1980, the Committee for the Cancellation of the Third World Debt (CADTM) has been denouncing the “collusion” between ex-colonizers and IFIs.  “The World Bank is directly involved in some colonial debts. In the years 1950’s and 1960’s, it granted loans to the colonial powers for projects allowing them to maximize their colonies exploitations”, Robin Delobel, member of CADTM-Belgium wrote earlier this year.

Also read (FR) : Franc CFA: Saga d’une monnaie (néo) coloniale 

In his article entitled “When will reparations for colonial debt be made?” the activist pointed out that “debts contracted with the World Bank by the Belgian, English and French authorities for their colonies were then transferred to the countries that gained their independence without their consent”.

There came the advent of neocolonialism.

Then came the 1970’s, a decade of massive developments plans. African governments undertook large-scale projects and borrowed heavily to finance the construction of dams, ports, hospitals, railroads and schools. It was promoted by IFIs that external finance would grant prosperity. However, by the mid 1980’s, most governments found themselves overwhelmed by debt and debt service that had to be paid in foreign currency.

Besides, not all the loans were used to build infrastructure and generate growth. Many post-colonial governments were ruled by the military and armed conflicts were recurrent in several regions of the continent. A study published by the Stockholm Peace Institute in 1971 and quoted by the monthly magazine Africa, showed that during the period between 1950 and 1969, Egypt’s major weapon imports reached 1500 million US dollars. That was more than half the total arm imports of all other African countries during the same period. Corrupt regimes and dictators have also contracted debt for their own benefit.

It was promoted by IFIs that external finance would grant prosperity. However, by the mid 1980’s, most governments found themselves overwhelmed by debt and debt service that had to be paid in foreign currency.

Faced with this risk of insolvency, and in an unprecedented neoliberal intransigence, IFIs, such as the International Monetary Fund (IMF), began to impose Structural Adjustment Plans (SAP) on their debtors. In order to benefit from IMF’s loans and finance, their teetering budgets and balance of payments, indebted governments were forced to liberalize their markets and privatize several state-owned companies. But these so-called reforms, which first meant to enforce payment, were paradoxically (enough) constraining any possible future debt settlement.

The trap of indebtedness

Tunisia is one of the countries that have been stuck in this trap. Since the 1970’s, the government has become literally obsessed with foreign direct investments. It adopted laws (in 1972, 1993 and 2016) that granted generous tax and financial incentives to foreign, yet low added-value, investments.

Tunis has thus deprived itself of a huge amount of tax revenue. “We identify these tax incentives as tax expenditures, because it is a shortfall for the state,” said Amine Bouzaiane, the Tax Justice Officer at the Tunisian NGO, Al Bawsala.

Tax incentives proved to be ineffective and costly, even by the IMF, as foreign investors would have invested even without these incentives.

“Experience shows that there is often ample room for more effective and efficient use of investment tax incentives in low-income countries. Tax incentives generally rank low in investment climate surveys in low-income countries, and there are many examples in which they are reported to be redundant—that is, investment would have been undertaken even without them”, the Washington-based institution stated in a report published in October 2015.

Another self-inflicted constraint is the money lost due to free trade agreements (FTAs) and the “so called Tunisia’s open trade policy”. “Before the first SAP in the 1980’s, tariffs duties represented 25% of Tunisia’s tax revenues, in the 2020 draft finance bill the rate is about 5%”, Bouzaiane told law students at a lecture held earlier this month in Tunis.

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These unfavorable terms under binding FTA’s and investment treaties have been criticized worldwide by activists and economists like Prabhat Patnaik, Professor Emeritus at the Center for economic studies and planning at Jawaharlal Nehru University, New Delhi.“If governments have a popular mandate, they should withdraw from these treaties”, he told Barr Al Aman.

Over the last decade, Tunisian authorities have been overwhelmed by new dilemmas. The government responded to the outrage over unemployment by massively hiring in the public sector, which led to an inflated wage bill. Besides, corporate tax revenues have been shrinking as companies have been less productive. The country’s phosphates revenues have also declined due to protests over employment, transparency and fair development in the mining region.

In 2010, the state budget deficit was about TND 650 million (1% of GDP). In 2018, it amounted to TND 5.2 billion (10% of GDP). To fill the gap, the State has to borrow, and loans have to be contracted in dollars and euros.

On the other hand, the budget allocated in hard currency to the repayment of the foreign debt, of the principal and interest for the first half of 2019 represented almost one-quarter of all government expenditure.

In short, if a cartoon could summarize Tunisia’s debt ordeal, it would depict the country as a helpless Sisyphus who borrows continually to pay an ever-growing debt.

MMT’s prescriptions

So how can MMT help countries like Tunisia break free from this prison? “Through monetary sovereignty”, replied Fadhel Kaboub, associate professor of economics at Denison University, Ohio, and President of the Global Institute for Sustainable Prosperity (GISP).

A monetarily sovereign government, as he told Barr Al Aman, is a government that issues its own currency, collects taxes in that same currency, only issues bonds denominated in its local currency and operates under a flexible exchange rate regime.

Except from countries using the CFA Franc, which do not have monetary sovereignty at all as they have to deposit a share of their reserves at the French Treasury, the majority of African countries meet the first and second conditions of monetary sovereignty. The problem lies with the two last requirements.

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Tunisia, for instance, mainly borrows in foreign currencies that help the central bank build up its reserves and get access to more favorable interest rates and lengthier maturities.

As Tunisia’s local currency, the dinar, is very weak, paying down external debt and financing imports become more expensive, and thus lead to more deficit.

Beyond issuing bonds in local currencies and operating under flexible exchange rates, Kaboub added that energy and food sovereignty are the other two essential components of MTT.

Indeed, investing in renewable energies would not only drastically reduce the very expensive oil imports, but also mitigate climate change impacts. Agriculture, when directed at self-sufficiency rather than export, would minimize the exorbitant food imports, he said.

Mehdi Ben Guirat exposes MMT solutions to break the debt cycle. (The Quest for Economic Sovereignty in Africa in the 21st century. November 2019)

According to Mehdi Ben Guirat, professor of economics at Laurentian University, Ontario, “such measures would limit developing economies’ exposure to exogenous shocks, which will lead to less external debt and less conditional loans”.

Ben Guirat agreed with Kaboub on the need for developing countries to solve the “survivalist issues” of food dependency and energy deficit. He also stressed the importance of “champions programs”. In these programs, as he put it, the government identifies and finances priority sectors that have spillover effect and would therefore pull up the whole economy.

“There needs to be an ideological shift in terms of how the government operates”, he said.

Mohamed Haddad, Hoang-Xuan An & Nada Trigui contributed to this paper.

Hafawa Rebhi

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