Why borrowing isn’t always the best way forward

By Prosper Munyedza | Jul. 12, 2024 | 8 Min read

Generally a country can borrow domestically and/or from foreign suppliers of loans.

MY SAGE recently raised an important yet often ignored maxim which potently explains why oft-times central government policymakers are derided for embracing and accepting what clearly would be unfavourable terms and conditions on loans from offshore multilateral lenders.

It appears like a textbook case for dereliction of duty for reasonably well-educated and not too intellectually-challenged policymakers to be numbered among those who would have given their unequivocal assent to bizarre policy adjustments and novelties as a necessary and sufficient condition for a country to get loans, until one scrutinises the milieu within which said policymakers were traversing.

Generally a country can borrow domestically and/or from foreign suppliers of loans. As with individuals, borrowing usually signifies that one’s resources are insufficient for their requirements. Whether the requirements are needs or mere wants, a mammoth size brain isn’t required to figure out that most cases of national debt result from a government spending or having spent more than its revenue. In technical terms, that means government’s expenditure exceeds its revenue.

Governments usually prefer domestic borrowing to foreign debt. There are several reasons for this preference, the most compelling being, the relative ease with which domestic debt can be repaid and the fact that it is often settled in domestic currency which is normally easier for governments to get compared to foreign currency. Borrowing domestically doesn’t come without its own fair share of deleterious downsides, chief of which being its crowding-out effect on private sector borrowing and the attendant potential stifling of domestic investment effect. Government domestic borrowing is akin to an elephant going to drink from the same well as your average goat, sheep and fowl. An elephant can drink an average well dry in one watering session thereby leaving nothing for the relatively tiny goat, sheep and fowl.

Borrowers usually do not wield as much power as lenders do in a lending transaction. Let me illustrate this scenario with a somewhat unsophisticated example. Suppose, you are in the process of cooking sadza and you run out of mealie-meal before your sadza has reached your desired thickening stage and you realise that you may need to borrow a bowl or so of mealie-meal from anyone who happens to have such to spare nearby. If there are many people from whom you could borrow on account of having been a trustworthy borrower of goodstanding who honoured their obligations in the past (read returned the borrowed bowls of mealie-meal as per your promises) and if there happens to be many from whom you could borrow the mealie-meal, you could afford to pick and choose or even turn down the not so desirable types or brands of mealie-meal according to your taste. If, on the other hand, there is only one source willing and able to provide you with the bowl of mealie-meal, a situation known as Hobson’s choice, you just take any type of mealie-meal whether locally milled, ground on millstones, millet, wheat, sorghum you name it, regardless of the type you already have in your pot; you can’t afford to be choosey! In essence, you’d suddenly have been transformed into a beggar! We are all accustomed to the saying that would suddenly have become applicable to you which goes, “Beggars can’t be choosers!” The fundamental points I am making here regarding government borrowing is that how a government repays its obligations when they fall due and the magnitude of the debt really matter because they demarcate the borrowing field within which the government may play the game of borrowing.

If a government has performed poorly, as far as debt repayment is concerned, it becomes a high risk borrower which, if any lender would be willing to loan funds to it, the said lender would demand a higher price for the loaned funds, that is, a higher interest rate would be charged for the loan, which is known as factoring in of a high risk premium on the loan. Another possible way to employ in addressing the riskiness of lending to a heavily indebted borrower that many lenders impose is to ask for collateral. Payment guarantees would be asked for before the loan is disbursed to insure the lender against a high likelihood of default on repayment by the borrower.

Lenders may also come up with stringent terms and conditions for loans to high risk borrowers. This is done to ensure that the lender is able to monitor the borrower which enables the former to quickly detect any action that could likely cause the latter to default. This province is where the seemingly ludicrous terms and conditions that multilateral lending institutions formulate for mainly Third World high risk borrowers reside.

Leading multilateral lenders have been accused left, right and centre of prescribing non-contextualised policy directions to loan recipients which often do not achieve the desired aspirations. Without spending much acres of space on that contentious issue, those multilateral institutions will simply be looking out for their own interests which include capital preservation and getting a fat return for their funds! A number of economists and pseudo-economists make sincerely cogent arguments for ensuring that unbeneficial terms and conditions (strings, if you like) ought not to have been countenanced. Without disparaging the foregoing analysts, I wish to remind them of the inviolable truth contained in the cliché “beggars can’t be choosers!” My sage also said, “If one were to go out there, begging bowl in hand, they can’t concurrently choose what’s going to land in that bowl!” Wielding a begging bowl serves as incontrovertible proof that one wouldn’t have been managing their affairs right hence they’d have lost the privilege to be deemed a sound funds manager. In other words, lenders in crafting those context-blind strings they attach to their loans, would be subtly sending the message, “We don’t trust you one bit with our money!” Granted, some of the strings attached are so convoluted that they end up garroting the borrower rendering them unable to generate sufficient amounts to use in repaying the debt, that, in turn, further sinks the borrower into murky waters of high risk borrowers which makes future lenders more wary of lending them more without tying a tighter noose around their necks akin to getting rotten sorghum meal to add to maize meal sadza!

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Multilateral lenders end up being blamed for causing instability in countries they lend money to due to the context-blind stipulations that they shove down the throats of their borrowers to their mutual detriment. Wherever this narrative is sponsored, critics often forget the initiating factor of the borrowing: which is refusal to live within one’s means. African governments should always remember that multilateral lenders are not their mums and dads. They are there to make huge profits out of their governments’ profligacies. In Africa, any gathering of the continent’s leaders is often associated with licentiousness in the form of humongous bills being run up through luxury car purchases to transport delegates to and fro places they would need to go to and come from. I was actually heartened by a picture of world leaders in a shuttle bus to Westminster Abbey on Saturday May 6, 2023 on the occasion of the coronation of the English King Charles! I hope one day they will similarly ride a bus in Africa! If only African leaders could attach greater importance to what really matters the most, the continent would soon take its rightful place as the richest continent given its bountiful natural resource endowments and trainable manpower that is willing to work as exhibited by the many migrants from the continent now assimilated in various industries of developed countries.

Instead of lamenting the stringent often unfavourable strings attached to loans by multilateral lenders to a significant number of African States, African government policymakers should be working on crafting debt avoidance developmental models that pivot on beneficiating the numerous mineral resources found in the belly of mother Africa for the benefit of all Africans. African leaders should not trivialise the huge sums of money that are spent on non-development initiatives. The continent cannot afford to waste a single ZiG, rand, shilling, dollar, or whichever currency its constituent countries use. Every single currency unit wasted is a single currency unit of potential development lost.

The African continent has huge deposits of gold and other precious minerals and that fact has been known since time immemorial. Be that as it may, are the global commodities or just gold markets located in any of the continent’s countries? No! Some may think that it doesn’t matter where markets are located, but let me remind you, dear readers, with location comes laws and laws can be used to favour those who craft them. Africa needs to really start learning to speak with one voice and work together as a united grouping. Imagine what could happen if the continent’s resources could be used for the true benefit of its owners. The sad reality that confronts any inquirer into why the continent continues to be characterised as the perennial begging bowl bearer largely lies in the erroneous belief of most of the continent’s policymakers that debt is the only potent tool to use in bringing about development on the continent.

Debt should not be viewed by African countries as a tool of choice but as a bridge for traversing obdurately turbulent financial waters. Immediately after crossing over such waters, focus should be trained on enhancing growth-enablers like infrastructural development. The continent should be on the forefront in attracting genuine investment in areas like green energy, zone-based development, promotion of investment through improving ease of doing business, working towards non-restrictive inter-continental skilled and professional human capital movement. Some may think that allowing unrestrained human capital movement within the continent would lead to brain drain in some countries and brain gain in others hence causing disproportionate skills clustering. Fair enough, that is a real possibility at the onset but as things stand there is a lot of underutilisation of some critical professionals due to stringent visa policies currently in place. Surely, a reasonable person would not disparage me for stating the fact that, for instance, there are countries in Africa that are sorely in need of medical professionals like medical doctors yet on the same continent, there are two or so countries that are unable to offer jobs to recently graduated junior medical doctors. Wouldn’t it have been beneficial to the continent at large if the barriers to movement were lifted thereby allowing such idle resources to be utilised on the continent through creating an enabling environment for positive migration to follow areas of greatest need? Same applies to a number of other professions.

Prosper Munyedza holds a Master of Science in Business Analysis and Finance degree with the University of Leicester and a Bachelor of Science in Economics honours degree with the University of Zimbabwe. For feedback, his email address is: [email protected]. He writes here in his personal capacity.