The World Bank President David Malpass and the Managing Director of the International Monetary Fund (IMF) Kristalina Georgieva have warned against rushed, secretive, non transparent loans to low-income countries, including in Sub-Saharan Africa.
Speaking in Washington D.C. on Monday on debt management for lower-income economies and how countries can best mobilize the funding necessary for development while ensuring public debt sustainability, Georgieva and Malpass argued that while it could feel good in the short run to have quick cash and non transparent loans from some actors, in the long run, it is more harmful to the recipients.
The chief ‘culprits’ were non Paris Club actors – China, private lenders, and several other new and old players, including the African Development Bank.
David Malpass argued that the African Development Bank and their counterparts in Europe and Asia often ‘rush’ to lend money to low income countries, a situation that may often lead to debt management and sustainability challenges.
He said the African Development Bank was pushing billions into Nigeria without proper assessment, causing more problems, adding that the same trend to lend quickly was being observed in the European and Asian Development Banks.
According to Georgieva, financing does not always flow where it is most needed, often because of lack of transparency and fear of risks associated with investment.
She said more transparency often leads to more sustainable development and more funding from creditors, as trust increases, and risks are clearly determined in advance.
The World Bank and the IMF recommended, once again, that lending through the Paris Club was more sustainable, more transparent and more beneficial to the borrowing countries than lending through many private actors who often hide the terms of the loan to the public, with non disclosable closes in contracts.
Georgieva said public loan should be public and not secret, explaining that it is in everyone’s interest to improve transparency and reporting.
“Countries operating without transparency are likely not to do too well,” Georgieva said.
She said China and other new lenders are becoming more aware of the need for transparency in debt management and sustainability, as they are already faced with situations that put their investment at risk.
Georgieva cited the example of Senegal where there has now been more transparency and better reporting in recent time, explaining that lenders now know that Senegal’s debt is 10 percent of GDP and can build stronger partnership with the West African country knowing that the books were open and their investment was not at risk.
She said transparency should not only be demanded by the World bank, the IMF, the Paris Club and other actors, but Africans and low income residents themselves should insist that public loans should be public, adding that you can take a horse to the river but you cannot force it to drink.
According to Malpass, debt transparency brings more lenders, arguing that contracts with non disclosable closes are detrimental to the people in low-income countries even when the leaders in those countries are satisfied with the conditions known only to them.
Malpass and Georgieva argued that poor debt management and lack of debt sustainability lead to inequality, poverty and several other avoidable crises.
The conversation between the IMF boss and the World Bank President in Washington DC on Monday followed the release of a joint IMF-World Bank report that shows that public debt in lower-income economies (LIEs) has risen in recent years, with half of the countries covered in this report now assessed to be at high risk of or already in debt distress.
The report said the pace of debt accumulation has slowed somewhat since 2017, helped by gradual recovery in oil-exporting LIEs.
Accommodative global financial conditions and expanded funding from non-Paris Club creditors have allowed LIEs to mobilize larger volumes of external financing, however, without enough transparency and accountability.
The report said expanded access to credit has provided opportunities for borrower countries to accelerate development, provided that the additional funding is used effectively. But increased reliance on funding on commercial or near-commercial terms has raised the exposure of LIEs to interest rate, exchange rate, and rollover risks.
In addition, recent experience indicates that the increasingly diverse creditor base and types of debt instruments used can complicate (and lengthen) the process of debt restructuring, where such restructuring is needed. Rising debt servicing costs, now at multi-year highs, are diminishing already constricted fiscal space.