How debt is impoverishing low income nations

Poverty is no longer the problem in Sub-Saharan Africa and other low income countries. It is the economic debt that spans from household debt to national debt that is impoverishing countries where the world’s poorest live. Investment into Sub-Saharan Africa has largely been driven by government into government projects rather than private enterprise. Its not because there are no innovators or entrepreneurs but they are virtually unseen by the international creditors and investors, unless off-course they are held in hand by a foreigner. This sentiment about foreigner-driven investment into Africa is beginning to be in bad taste because the underlying reasons have not been effectively explained. It takes those on the continent to believe the default reasoning is due to structural racism from foreign investors who also struggle to include enough black people in their investment firms.

I didn’t get enough of an Economics class to understand how much debt will be a burden to low income nations around the world in many more years to come until I got into debt myself. National debt continues to be handed down generation after generation and if the current trends of borrowing persist, then debt will be a chronic problem. The supply and demand forces are at the center of continuous borrowing and the price tag for these debts is very high, hence nations will find it harder to crawl out of their low income status. Loan sharks at a macro level have become more clever on their terms and conditions and there is outright competition in the league of great economies on who will lend to whom and under which circumstances. A rich nation can decide to lend its money at any interest, or can decide to spend it all on its people. With grants and donations getting smaller everyday from Western nations, China just got better at giving high risk loans, and its lending diplomacy has gone unnoticed for years. No country has filed for bankruptcy YET, but many are headed in that direction as incomes from tax payers shrink, and multinationals continue to plowback profits to investors in the West.

Taxpayers incomes are shrinking because of consumer and business debt. The floodgates have opened for foreign investors from the East to lend to households in low income nations for medical emergencies, school fees, rent, and business expenses through mobile lending platforms. It is harder to get loans from local banks who have fewer foreign investors, than on any mobile lending apps. the problem not whether they lend or not, but the exorbitant primal habits of these lenders who have don’t have a liquidity problem. Local banks can lend 500dollars at an interest rate of 7.5–15% in a period of one year to a low income household to start a business. A mobile money app will lend the same amount with an interest rate of upward of 30% and a repayment period of between 14 days to 90 days. This means in the same economy, one lender is getting ten times as much from the same initial amount. Whatever your Business Ethics lesson looked like, I don’t see how an emergency would warrant this manner of extortion to people who barely make a dollar a day. This is not good business, neither is it clever, its simply greedy and inhumane. And with very few jobs coming these days where businesses have been forced to shut, I wonder in which economy these investors are planning to get back their profits.

There is no post-COVID comeback story to talk about in low income economies. There was no cash given to families, or grants to businesses. Businesses have been thrashed, mortgages cancelled, and very few have savings. This is where the loan sharks come in to rescue, or rather to put the last nail on the coffin of chronic debt. They give money without minding how you pay back. Most countries in Sub-Saharan Africa have a third of their GDP committed to repayment of debt for the next 25–50 years. Debt that is cyclical since governments are taking in more debt to pay existing short-term debt. Where businesses are shutting down, there are lesser taxes hence the need for more borrowing since countries are not living within their means. Economies are having to choose higher taxes or more debt, seems more debt is the lesser of two evils.

Sampling these personal lending apps, some are cross border apps, and countries they are lending to is Nigeria, Philippines, India, Mexico and Kenya. These countries hold so much promise to get to middle income status but debt is crippling those prospects besides other endemic problems like corruption and misuse of public resources. If governments are heavily indebted and are not offering any meaningful assistance to citizens, majority of youth will turn to these apps which will destabilize their incomes in the long-term. Less savings means that governments will have trouble paying retirees in future, or even rely on domestic borrowing due to lesser deposits. While banking regulations have allowed fluidity of digital lending, its incumbent upon governments to muzzle digital lending apps with stricter regulations since the damage is obvious, unless changes are done. China which lends to these governments and whose citizens invest in these lending apps will not allow the countries in debt to muzzle their private investment. Therefore the government and its citizens owe China collectively and individually which is the worst form of neo-colonialism Sub-Saharan Africa has experienced post-independence.

I have watched carefully Biden post-COVID spending plan which is nowhere near America is Back diplomacy. Its not whether America should spend its money on its own citizens. Its how and what it should lend at a profit to low income nations being exploited by China. Its the West that should end this impoverishing debt situation, because China, when left to its own devices wields imperial power as a lender. Sub-Saharan Africa is not the stock market, far from it, its a place where wages are small and far between. The first step for the West is to have their own private firms inject dollars into indigenous banks, or foreign banks operating in Africa lend to small holder citizens with the aim of giving loans sustainably. This will solve the liquidity problems and give Chinese investors a run for their money. Governments should commit to have all lenders play by the same rules. No one rules out debt will help economies rise, but unsustainable debt allows the lender to have more than the debtor bargained for. If governments can honor commitments to Western nations with the same agility they do to China, then Sub-Saharan Africa would be a good place for business.