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Economic consequences of debts
By
DD Phiri - 05-04-2002 |
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In the play Hamlet, Shake-speare, through the mouth of Polonius, says “neither a borrower nor a lender be”. This is the advice which most individuals and governments have found to be economically inappropriate.
A famous American millionaire W. Clement Stone used to say show me a millionaire and I will show you someone who uses OPM meaning other people’s money. Indeed, one is struck by the fact that some of the world’s richest people, like Australian media tycoon Rupert Murdoch, borrow heavily from banks and that sometimes these money moguls come close to bankruptcy. Somehow they weather the storms because, as Keynes observed, “if you owe a bank one thousand pounds you are at its mercy, if you owe it one million pounds it is at your mercy”.
How and why? If you fail to pay back a thousand pounds or dollars, the bank may hound you to a bankruptcy court, seize and sell your collateral security. This won’t make much news to the public. It will be a ripple on a calm sea. But rumour that the bank is failing to collect a million pounds worth of debts can frighten other customers of that bank so much that they will panic and start withdrawing their money. Sooner or later, that bank might be facing insolvency.
In Malawi, we have not yet known the collapse of a bank, largely because banks here have been branches of giant British banks that have been cushioned with public funds and guarantees. But elsewhere in African countries where the launching of private banks has been generously allowed, bankruptcies have been quite common. Usually, these banks have found themselves in trouble because of giving loans to their directors or to politically influential people on non-commercial terms.
Credits have been found to be necessary for the growth of an economy. Indeed in poor countries, poverty tends to persist because borrowing facilities are scarce. As a Swahili man observed “kama huna pesa hupate pesa”. If you do not have money you cannot have money (a loan in this case). If you go to financial institutions to borrow money, they view you as a source of undue risk until you have demonstrated that you will put the loan into profitable use and that you have liquid assets to surrender as security.
The loan seeker, who argues that if he had all the assets the bank demands as security he would not need a loan, fails to change the credit giver’s heart. So the vicious circle continues.
In developed and wealthy countries recently there has been a borrowing binge which has triggered recessions. When corporations all round are doing good business and the prospects for hefty profits are bright, banks have been known to be ready to lend. But then comes the deceleration. The big corporate borrower fails to realise the hefty profits. He asks for extension of the repayment time. Another tycoon finds himself in the same position. Rumours spread, followed by bank withdrawals. Foreign shareholders and depositors in such banks are the first to jump out of the sinking ship.
An economy that was booming on bank loans starts to experience a recession when the credit squeeze starts. Failed repayments of loans were behind the 1997 economic troubles in the Far East and they are said to have contributed to Japan’s prolonged recession. The economic agonies of Argentina stem from the same causes: excessive borrowing by corporations and the state.
In Uganda, President Museveni turned the economy around from the brink by borrowing up to four times the total borrowed by his predecessors. But now Parliament there and donors are saying that no further loan contracts be entered into unless they contain a grant element.
Governments borrow both internally and externally. They borrow internally by issuing Treasury Bills which are pieces of paper acknowledging debt to the lender payable in less than a year. Governments also borrow from abroad from other governments, banks or corporations.
These external loans are the ones that are difficult to repay because they are paid in foreign reserves or currencies. Countries earn foreign currencies by exporting their products and commodities. Getting the country’s exports bought in large quantities is not easy.
Borrowing abroad has also political overtones. The age of corrupt dictatorships is now in the twilight, largely because donors are insisting on good governance and show concern for the poor of the recipient countries.
During the first 30 years of African independence, political bigwigs shamelessly diverted public funds, including loans, to personal accounts. They practised ‘African socialism’ which, according to Krobo Eduse, one of Nkrumah’s colourful ministers, meant ‘you chop small and I chop small.’ This ‘chop small’ was actually 10 percent of government contracts.
When one reads about government budgets of various countries, one is struck by the similarities in their objectives. They are all talking about poverty alleviation, problems about structural adjustment and setting up organs to combat corruption in its various forms. This similarity can be explained by the fact that all these countries seek development and financial assistance from the same rich countries and international lending institutions.
The conditionalities attached to the grants and loans are seen by leaders in the recipient countries as interference in the internal affairs of a sovereign state.
However, the victims of corrupt practices welcome what they see as donor concerns about their plight. Where corruption has become chronic and pervasive, it is well nigh impossible to get rid of it without support from abroad.
President Moi of Kenya has had to employ three British experts to map out a strategy for rooting out corruption. How successful will this approach be? Wachira Kigotho, columnist of Business in Africa, writes in the February 2002 issue: “Kenyans are keenly watching to see whether Moi is going to play his old game of appointing anti-corruption bodies only to disband them when they start getting too close to the truth.”
If foreign loans will bring about financial probity, then they are worth having. |
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