Browsing: Sovereign Debt

Return of the gold standard

African countries looking to anchor their currencies on either gold, or a combination of gold, precious metals, and other minerals would need to start with legislation which would make it legal for the governments of those countries to redeem paper currency with either those minerals or a derivative of those minerals.

Zimbabwe in late August began an initiative where it sold actual gold coins to its citizens which had been minted by that country’s central bank. This move was initiated to halt the slide of the currency on the parallel and official markets. This county’s policy so far has been successful in slowing down the trend of inflation which had begun to run amok.

It would be remiss to attribute the slowdown inflation to the gold coins. The country dramatically tightened its monetary policy by increasing interest rates to over 200 per cent in May 2022 and temporarily banned commercial bank lending. One of the disadvantages of the gold standard is that governments struggled for decades to make the system work globally. The gold standard reached its watershed when Richard Nixon in 1971 took the United States dollar off the gold standard.

To have only 3 of the eligible countries in Africa signing up for the initiative is tragic especially given the global economic environment of the world presently. A crippling sovereign crisis is looming on the African horizon. Catalysts of the crisis include a strong United States dollar which has been resurgent during the year.

Debt on the on the books of most African countries is denominated in the greenback and its strength will have an adverse impact on their public finances and their ability to service their loan obligations timeously.

This problem is further compounded by rising interest rates which are certain to make the cost of debt that much more expensive for countries that already cannot afford to be overextended financially.

The debt of most African countries is in the hands of private creditors who in recent time have become as important as their multilateral counterparts. These private creditors are less likely to be concessionary in terms of discussions around restructuring of debts.

In terms of foreign exchange reserves, according to HM Treasury, Britain has net official reserves of US$ 114 billion whereas it plans to embark on an economic plan to pull itself out of the stagflation quagmire by spending no less than US$ 173 billion dollars. If Britain were to use all its foreign exchange reserves to meet the cost of its economic plan it would run short of money and still have a deficit of US$ 59 billion dollars before fully implementing its plan.

Fair enough and granted, governments do not always have to spend cash that they have on hand. They can always borrow if they do not have sufficient cash to finance their operations.

Herein is the problem, the current economic environment does not support borrowing either by individuals, households, or governments. The cost of borrowing is just simply too high either by domestic debt or foreign debt. The Bank of England in acting against rising inflation has been raising interest rates. This translates to higher borrowing costs and reduced inflation.

Ghana’s case specifically plays out with the dramatic effect consistent with a Shakespearean tragedy. The west African nation ironically is a darling of the West in terms of foreign direct investment. Yet, its debt levels have breached what multilateral institutions consider to be sustainable. A painful irony in the case of Ghana is that it was offered the opportunity to renegotiate the terms of its debts through the World Bank’s Debt Service Suspension Initiative. However, Ghana did not elect to participate.

A second painful irony is that Ghana, this time around, does not owe most of its debts to multilateral institutions like the International Monetary Fund or the World Bank. It owes the bulk of its debt to private lenders like the world’s largest asset manager Black Rock, and its has expressed that it has no interest in renegotiating the terms of Ghana’s sovereign debt.

If Ghana had borrowed from the multilateral institutions mentioned formerly, it would have the scope to renegotiate its loans as these institutions tend to be more conciliatory and concessionary in their dealings with borrowers, unlike the private lenders who are driven by the profit motive and the need to create value for shareholders.