March 15, 2012 / 3:13 PM / 8 years ago

RPT-AFRICA MONEY-Should Africa challenge its "odious debts?"

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By Ed Stoddard

JOHANNESBURG, March 15 (Reuters) - Africa is bleeding money to such an extent that a new book argues the world’s poorest continent is a net creditor to the rest of the world and should not have to pay its “odious debts”.

Debt forgiveness for Africa has long been an activist battle cry popularised by celebrity voices such as Bono, and the concept of odious debt - incurred by rulers but bringing no benefit to the people - is not new.

Authors Leonce Ndikumana and James K. Boyce bring the issue up to date with the latest data and make an argument that capital flight and debt are interlocked.

And drawing on legal precedents, the authors, economists at the University of Massachusetts, make the case that the region should not be accountable for squandered or pillaged loans - which takes the debate beyond simple debt relief.

What is needed, they say, is an impartial international institution to adjudicate disputes over such debt.

Their broad numbers are in line with other estimates such as those crunched by watchdog Global Financial Integrity but they also attempt to measure what was lost because of missed investment opportunities.

The book estimates that from 1970 to 2008, the 33 Sub-Saharan countries for which good data is available lost over $700 billion to capital seepage.

If this capital was invested abroad and earned interest at going market rates, the authors calculate that the accumulated loss over the four decades was $944 billion.

By way of eye-popping contrast, they say the total GDP of all sub-Saharan Africa in 2008 stood at $997 billion - so what the region lost was almost the size of its entire economy.

“These sums far surpass the same countries’ combined external debts, which stood at $177 billion in 2008. This means that sub-Saharan Africa is a net creditor to the rest of the world,” the book asserts.

Capital has flowed out through a number of channels.

Trade misinvoicing is one common way to spirit money offshore which can be measured through publicly available direction of trade data compiled by the International Monetary Fund. With exports, under-invoicing is used, for imports over-invoicing.

As an example of how it could work, a company or official could say a piece of imported equipment costs $100 million when in fact it was exported with an $80 million price tag.

The importer can also score if the government makes scarce foreign exchange available at favourable rates.


Capital flight has also danced to the tune of debt.

The authors write that for “every dollar of foreign loans to sub-Saharan Africa, roughly 60 cents have flowed back out as capital flight every year.” This means in their view that over half of the region’s debt is “odious”.

Capital flight can be linked to foreign borrowing in a number of ways. Loans from creditors abroad can be diverted from public to private accounts via kick-backs, ghost projects or outright theft and then parked in tax havens.

Capital seepage can generate demand for replacement funds - as the country is being starved of cash - creating a revolving door of money gushing in and gushing out.

Other examples include debt-driven capital flight. This occurs when the influx of money from lenders pushes up the value of the domestic currency.

But as the stock of debt grows and markets realise money must flow out to repay it, the currency depreciates. The flight capitalist profits by moving money offshore while the currency is artificially inflated, and can also score when it devalues.

Regardless, if the debt is odious, it should not have to be repaid, the authors argue.

Among other precedents they say this was laid down in 1923, when an arbitrator declared Costa Rica did not have to repay debt to the Royal Bank of Canada because it had been lent to the military dictatorship which previously ruled there.

The authors say a debt can be considered odious if it is incurred without the consent of the people, if it was not used for public benefit and if creditors knew these factors.

That will sound like a familiar scenario to many an impoverished slum dweller in Kinshasa, Luanda and Johannesburg. (Editing by Catherine Evans)

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