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Africa's Odious Debts

How Foreign Loans and Capital Flight Bled a Continent

Zed Books Ltd

Tales from the shadows of international finance

In the simplified world of introductory economics textbooks, credit markets provide a valuable and straightforward service: they move money from savings into investments. The savers lend their money and are rewarded with interest. The investors borrow money on the expectation that the returns to their investment will cover the cost of interest payments. Banks connect the supply and demand sides of the credit market, and for this service, known as financial intermediation, they earn remuneration in two forms: fees, and the spread between the interest rates they pay on deposits and receive on loans.

In this textbook world, all is what it seems. Borrowers act in good faith, taking loans only when their expected benefits exceed expected costs. Bankers exercise due diligence, issuing loans only when they expect the borrower to repay. And no one would lend hundreds of millions of dollars to the Mobutu regime in 1989.

In the real world, matters are not so simple. Mobutu was a particularly flamboyant exemplar of a much broader class of individuals who have spun debts contracted in the name of the state into personal wealth, much of it stashed abroad. These individuals are aided and abetted by bankers who are willing and eager to make loans to governments with few questions asked, while at the same time courting deposits from 'high net worth individuals' who skim the borrowed funds into private accounts.

In the shadows of international finance, large sums of money routinely slip across borders, beneath the surface of officially recorded transactions and outside the box of the standard economics textbooks toolkit. To understand the realities of African development and underdevelopment, we must peer into these shadows.

Masters of disasters

When compelled to acknowledge the diversion of public loans into private pockets, international creditors sometimes seek solace in the thought that at least a fraction of their loans was used legitimately. 'If you take the amount of 30 percent loss,' a senior World Bank official told political scientist Jeffrey Winters, 'it means 70 cents [on the dollar] got used for development after all. That's a lot better than some places with only 10 cents on the dollar.' In testimony before the US Senate Committee on Foreign Relations in 2004, Winters explained that 'places with only 10 cents on the dollar' was a reference to 'certain Bank clients in Africa where nearly all of the loan funds are misallocated, diverted, unaccounted for, or simply stolen'.

If these loans vanished without a trace, they would simply bypass the vast majority of Africans, with no impact on their well-being. From their perspective the loss would merely be what economists call an 'opportunity cost', forgone development that could otherwise have been financed with the missing money.

But the costs to the people of Africa go well beyond missed opportunities. The use of foreign loans for illegitimate private gains distorts both the politics and the economies of African countries. It bolsters the power of corrupt elites, and in so doing enhances their ability to manipulate government policies to advance their interests above those of their countrymen. And because these are loans, not grants or outright gifts, they leave behind a legacy of debt-service obligations that often persist long after the individuals who profited from the deals have departed from the scene.

The outcome is disastrous for African development. But it is lucrative for individual players on both sides of the credit market. As a result, private incentives are not aligned with the public good. A few examples will illustrate how this disjuncture has revealed itself in Africa.

Nigeria: the price of soft financial management The decade from 1984 to 1994 saw 'the most rampant corruption and governmental dysfunction in Nigeria's history', in the words of Steve Berkman, former lead investigator in the World Bank's anti-corruption and fraud investigation unit. The World Bank ought to know: it loaned Nigeria $4.6 billion during this period.

One of the recipients of World Bank loans was Nigeria's National Electric Power Authority (NEPA), the government agency responsible for generating and delivering electricity throughout the country. NEPA nominally had 4,700 megawatts of power-generating capacity by 1989, but its peak load was less than half that amount at 1,900 megawatts. Even that load could not be delivered on a reliable basis, forcing many firms and households to invest in their own backyard generators. Nigerians joked that NEPA stood for 'No Electric Power Anytime' (its successor, the Power Holding Company of Nigeria, or PHCN, was quickly rebranded 'Problem Has Changed Name'). Berkman explains why NEPA nevertheless chose to expand further its generating capacity:

A new power-generating station can cost hundreds of millions of dollars, and that translates into large kickbacks for those in government who can facilitate contract awards and smaller kickbacks for those involved in supervising the civil works and procuring supplies and equipment. It can also result in lucrative subcontracts for shell companies owned by government officials, their relatives, and close associates – subcontracts in which payments are received for services not rendered or for material and equipment supplied at grossly inflated prices.

In addition to bid-rigging and kickbacks, Berkman describes other practices that were commonplace in Nigeria: the procurement of unnecessary goods and services 'for the sole purpose of facilitating these activities'; the parking of funds in accounts from which interest earnings were then siphoned; and the creation of 'phony documents to cover up the diversion of funds from government accounts to private accounts'. Procedural safeguards for disbursement of World Bank project loans could be 'easily breached', Berkman reports, 'through the submission of fraudulent documents to support the withdrawal applications'.

In the case of 'structural adjustment loans', which were not tied to specific projects but rather served as carrots for implementation of economic policy reforms prescribed by the Bank, there were even fewer controls on where the money went. Berkman wryly characterizes such loans as 'an excellent device to move a lot of money with a minimum of effort and without any accountability afterward'.

These problems persisted under General Sani Abacha, who ruled Nigeria from 1993 to 1998. Abacha accumulated personal wealth estimated by the World Bank at $2 billion to $5 billion. Nigerian president Olusegun Obasanjo would subsequently charge that Abacha 'siphoned $2.3 billion from the Treasury, awarded contracts worth $1 billion to front companies, and took $1 billion in bribes from foreign contractors'.

A 2007 World Bank review of public expenditure management in Nigeria finds that financial reporting and monitoring remain a 'very weak area', leaving the government 'open to diversion of funds and outright corruption'. The review concludes that this state of affairs is not accidental, but instead is the result of deliberate decisions: 'These deficiencies are not technical so much as environmental, insofar as for many years "soft" financial management has been part of how the Federal Government has wanted to run its affairs.'

Soft financial management afflicted Nigeria's use of both foreign loans and oil revenues. 'Nigeria owes $34 billion, much of it in penalties and compound interest imposed on debts that were not paid by the military dictatorships of the 1980s and early 1990s,' finance minister Ngozi Okonjo-Iweala observed in January 2005. 'We make annual debt repayments of more than $1.7 billion, three times our education budget and nine times our health budget.' Terming this situation 'unsustainable', Okonjo-Iweala called for debt cancellation. Two months later, the Nigerian House of Representatives passed a resolution calling for a halt to external debt-service payments on the grounds that the country's economy had been 'devastated by a series of military regimes from 1984 to 1999 who stole billions of dollars from state coffers'.

In October 2005, spurred by the outcry in Nigeria, the Paris Club of creditor countries agreed to write off $18 billion of the $30 billion debt owed by the government to official lenders, led by the governments of Britain, France, Germany and Japan. As part of the deal, the government agreed to repay the other $12 billion, or roughly 40 cents on the dollar. Since the debt by that time included $4 billion in interest arrears, this was equivalent to 46 cents per dollar on the original loan amounts. If it is true that 'only 10 cents on the dollar' went into bona fide development, the Nigerian people did not get an enviable bargain.

In January 2006, eighteen US Congressmen called on the US Export-Import Bank and the US Agency for International Development to waive repayment of the $400 million they were still owed under the Paris Club deal. 'Much of Nigeria's debt can be considered odious,' they wrote to the US Treasury Secretary, 'given the fact that the original loans were made to authoritarian regimes – many of which were then looted while interest and penalties accumulated.' Nigerian critics expressed similar reservations about the deal. But buoyed by high oil prices, the Nigerian government paid the final instalment of the $12 billion in April 2006, thereby completing the largest single transfer of wealth to foreign creditors in African history.

Congo-Brazzaville: oil-backed loans Some African petroleum-exporting countries and creditors have forged an even tighter nexus between foreign loans, capital flight and oil. In 1979 the Republic of Congo (Congo-Brazzaville) took its first 'oil-backed loan' – a loan collateralized by a lien on future oil exports. The creditor was Elf, the French oil company. In the years that followed, oil-backed loans, often carrying much higher-than-average interest rates, became popular among private creditors, oil companies and African rulers.

To circumvent IMF strictures against this irregular borrowing, as well as to facilitate transfers into private accounts, oil-backed loans are often concealed by routing them through offshore entities. French researcher Maud Pedriel-Vassiere describes the modus operandi:

The scheme is substantially the same in every case. First, one or several offshore companies receives a loan at preferential interest rates from a bank or buyer of crude oil. Then, these offshore companies lend to the sovereign state at significantly higher rates. The difference between the interest rates is ultimately collected by the original creditor, while the representatives of the regime and their close associates receive a juicy commission, as do various other middlemen.

Banks that have provided oil-backed loans to the Republic of Congo include Crédit Agricole, Crédit Lyonnais and Banque Paribas. The exorbitant interest rates on oil-backed loans in effect mean that creditors are able to obtain crude oil at a cost considerably below the world market price. In 1993, desperate for cash to pay state salaries as its oil exports were going to service its earlier oil-backed loans, Congo's government took a fresh $150 million loan from the US-based firm Occidental Petroleum, to be repaid with 50 million barrels of oil: a price of $3 per barrel at a time when the world market price was $17 per barrel.

Political instability, exacerbated by the government's chronic fiscal crisis, soon spiralled into a civil war that claimed thousands of lives. Arms for both sides were financed through oil-backed loans. 'Rather than contributing to the welfare of the Congolese population,' an unpublished 2001 IMF report observed, 'the proceeds from oil-collateralized borrowing may have been used to finance combat operations during the civil war.' In the words of the former head of Elf, 'Thousands of Congolese died, and now the survivors must pay for the arms that killed their loved ones.'

Very little of Congo-Brazzaville's oil revenue – which accounts for 70 per cent of national income – has trickled down to the country's ordinary citizens. But the ruling elite has enjoyed a lavish lifestyle. Global Witness, the London-based organization that investigates abuses in the exploitation of natural resources, has documented the European shopping sprees of Denis Christel Sassou Nguesso, the son of Congo's president and head of the state agency that sells the country's oil. He spent thousands of dollars per month at shops like the Parisian fashion house Louis Vuitton, billing his expenses to offshore companies that 'appear to have received, with other shell companies, money related to Congo's oil sales'.

Mr Sassou Nguesso's shopping tabs became public information as a result of litigation by creditors known as 'vulture funds', which specialize in buying 'distressed debt' on secondary markets at a steep discount from its face value. These creditors, which are often hedge funds, then pursue legal actions in an effort to recover the face value, or something closer to it, with the aim of netting a handsome profit. In this case, the creditors were seeking to prove that the government was concealing oil revenues that instead could have been used to repay the debts. Since 1990 private creditors have extracted more than $500 million in settlements and court judgments from the Republic of Congo.

As of 2008, Congo-Brazzaville's external debt stood at almost $5.5 billion. In a nation of 3.6 million people, this amounted to more than $1,500 per person. That same year, according to World Bank data, 74 per cent of the country's population lived on less than $2 per day.

Gabon: The Bongo system In Libreville, the capital of Gabon, elegant glass and marble palaces line Omar Bongo Triumphal Boulevard. These edifices were constructed at a cost of $500 million by President Omar Bongo, who ruled the country for four decades until his death in a Barcelona hospital in 2009. A few months afterwards a New York Times reporter visiting Libreville described the grim scene behind the palaces – 'shacks and shanties stretching to the horizon, dirt roads and street vendors eking out a living selling cigarettes and imported vegetables'. The extreme juxtaposition of wealth and poverty in Gabon is a legacy of what its people call the 'Bongo system', succinctly defined by the Times as 'forsaking roads, schools and hospitals for the sake of Mr. Bongo's 66 bank accounts, 183 cars, 39 luxury properties in France and grandiose government constructions in Libreville'.

In response to a legal complaint filed by three non-governmental organizations, in 2007 the French police identified multiple bank accounts held by Bongo at BNP Paribas and Crédit Lyonnais. The police enquiries also revealed that Bongo's wife had purchased a luxury automobile at a cost of 326,000 euros (nearly half a million dollars), drawing the funds directly from the Gabonese treasury.

Eight years earlier, in 1999, the US Senate Permanent Subcommittee on Investigations revealed that Bongo also held multiple personal accounts in the international private banking unit of New York-based Citibank. More than $130 million had passed through these accounts – located in the Channel Islands, New York, London, Paris, Luxembourg and Switzerland – in the preceding fifteen years. Citibank responded to these revelations by closing the Bongo accounts, explaining to the Subcommittee on Investigations that it did so 'because of the cost of answering questions about them, rather than because of specific concerns about the source of funds or the reputational risk'.

During Bongo's rule, Gabon – or more accurately, the country's political elite – received billions of dollars in revenues from oil exports. Remarkably little of this windfall was invested in the country's development. Today Gabon has more kilometres of oil pipelines than it does of paved roads.

Gabon's oil revenues were supplemented by foreign loans, notably in the late 1970s and 1980s when the 650-kilometre trans-Gabon railway was constructed at a final cost of roughly $4 billion. The World Bank refused to lend money to build the railway on the grounds that the project was economically unviable. Declaring that 'even if we have to deal with the devil, we will deal with the devil', Bongo turned instead to commercial creditors, who were happy to lend the money at market rates. Together with the Inga-Shaba hydroelectric project in Mobutu's Zaire, the trans-Gabon railway became one of Africa's most famous white elephants – costly schemes 'stimulated by desire for political prestige and ready access to foreign financing', in the words of a former US aid official, resulting in 'massive external debt for little development impact'.

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Excerpted from Africa's Odious Debts by Leonce Ndikumana, James K. Boyce. Copyright © 2011 Léonce Ndikumana and James K. Boyce. Excerpted by permission of Zed Books Ltd.
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