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Causes of developing debt crisis
Commodity prices
Picture Zambia's finance minister trying to balance the budget. Copper makes up 70% of Zambia’s exports. Suddenly, prices crash on the London Metal Exchange - not because of anything Zambia did, but because China's property sector slowed. Export earnings drop by half overnight. Debt payments stay the same. Crisis.
This isn't hypothetical. Between 2011-2016, copper fell from $4.50 to under $2 per pound. Zambia, which borrowed during the boom years, suddenly couldn't service its debt.
This isn't hypothetical. Between 2011-2016, copper fell from $4.50 to under $2 per pound. Zambia, which borrowed during the boom years, suddenly couldn't service its debt.
Currency and Interest rates
The power of the US dollar worldwide is making the problem worse. Most of Africa’s foreign debt is owed in dollars. This means that when the US Federal Reserve raises interest rates to fight inflation at home - a decision made with zero consideration of Africa - Africa’s debt becomes more expensive overnight, and debt crises erupt across the continent. When the Fed raised rates from 0% to 5% (2022-2024), for example, servicing foreign debt became more expensive for low-income countries overnight.
Debt and the Finance Markets
Vulture funds
Private businesses are buying up Sovereign debt for countries that are in distress, unable to make repayments, at a low value.
They are then going to court to sue the countries for full repayment, resulting in huge profits leaving countries unable to provide medicines, education and food for their own people.
They are then going to court to sue the countries for full repayment, resulting in huge profits leaving countries unable to provide medicines, education and food for their own people.
Financial trading
When commodity prices boom, international banks and wealthy investors aggressively push loans to African countries. These creditors loan money at 6-10% interest while borrowing at 0-1% themselves. They know the risk; that's why they charge high rates. When prices inevitably crash, these same wealthy creditors demand full repayment regardless of human cost.
Regulation and accountability
Sovereign debt is an un-regulated market, where the actions of Lenders and Governments is not transparent and can result in Private Finance companies charging very high interest rates and countries acquiring debt that they cannot repay.
Consequences of debt
Cardinal Stephen Ameyu Martin Mulla on South Sudan
I write to you with a heart carrying the reality that our people face today. Nearly 10 million South Sudanese need humanitarian assistance. Flooding has displaced a million people this year. Food insecurity is widespread and malnutrition is rising.
"Alongside all of this is the burden of external debt. Years of instability forced our nation to borrow in order to function. Today, so much of our national resources are diverted to servicing that debt, instead of paying for growing food, healthcare, education and building peace. When debt repayment takes priority over essential services, the poorest suffer most.
"Alongside all of this is the burden of external debt. Years of instability forced our nation to borrow in order to function. Today, so much of our national resources are diverted to servicing that debt, instead of paying for growing food, healthcare, education and building peace. When debt repayment takes priority over essential services, the poorest suffer most.
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