FFrom his home in Nairobi, banker turned financial vlogger James Mumo contemplated the state of Kenya’s post-pandemic economy. “It’s hopeless for a normal businessman just trying to support his family,” he says.
The economic crisis caused by the pandemic and subsequent shutdowns have left many struggling: 1.7 million Kenyans lost their jobs between April and June 2020, while 20.8 million borrowed funds using a program provided by the famous mobile operator Safaricom, double the number of last year. A Nairobi-headquartered financial services conglomerate has bought a yard to store all the cars it repossessed after customers failed to repay their loans.
Mumo, who uses his YouTube channel to share financial advice after years in banking, is worried. “People are suffering because they can’t access cheaper finance from banks,” he says. Kenyan banks allowed customers to apply for loan holidays as the country went into lockdown, but that did little to fill the void for many who were struggling to survive without regular income, leaving them vulnerable to loan sharks. “Predatory finance is really taking root in this country right now,” he says.
Governments in the developing world are struggling to adjust to widespread financial losses from Covid-19, compounded by debt repayments to private creditors. The grouping of the largest economies, the G20, is meeting this weekend in Saudi Arabia and will urge private credit institutions to suspend debt repayments, ideally to allow more spending to fight the pandemic.
Big banks and asset management companies hold trillions in debt. Members of the Africa Private Creditor Working Group hold more than $9 billion in assets in Africa, while asset management firm BlackRock holds nearly $1 billion in bonds in Ghana, Kenya, in Nigeria, Senegal and Zambia.
The International Monetary Fund and the World Bank provided a slew of funds to countries in need of emergency financing earlier this year, in a bid to soften the financial blow of the pandemic and aid in the response. . The G20 also agreed to suspend government-to-government repayments under the Debt Suspension Service Initiative (DSSI) to which 43 countries have signed up.
But private creditors have so far resisted, and the G20 lacks a mechanism to force them. “It is clear that a voluntary approach has not worked and will not work,” says a coalition of civil society groups including Oxfam, Global Justice Now and Christian Aid.
The refusal to refinance the debt shifted the burden from governments to national banks and ultimately to citizens.
According to Mumo, in Kenya the average citizen is stuck, forced to stay at home but deprived of any financial support such as furlough schemes. The result has been an increase in the number of people seeking private credit, whether from the growing number of digital lending platforms in the country linked to the microcredit industry, or from individual private lenders.
“If you can’t get a bank loan, it’s quite possible that someone will say, let me give you a contact,” Mumo says. This sometimes includes bank staff, he adds, who can refer clients who have been denied bank loans to their own microfinance companies, charging them high interest rates.
“These are the kind of people who are willing to give you money without too many strings attached, because they earn a lot more from you,” he says. “If you borrow $1,000 from them at 15% a month, in six months they’ve pretty much doubled their money, so they’re willing and ready to give you money. Some only offer two hours to get your money back,” he says.
Kenya refused to enter the DSSI, fearing, like a number of other eligible countries, that it would lead to a downgrade in the country’s credit rating, causing long-term damage.
Analysts say the lack of a debt suspension for banks and asset management companies thwarts the benefits of the DSSI for countries that join it. Nearly a third of what DSSI-eligible countries owe to private creditors.
“The G20 suspension initiative was actually bailing out private creditors,” said Dario Kenner, an analyst at the Catholic Overseas Development Agency. Kenner says money saved from bilateral debt suspension under the DSSI is being redirected to servicing external debt. Sometimes this debt is held in foreign currency bonds called Eurobonds whose repayment costs have increased due to currency fluctuations and high interest rates. “In effect, these countries are using the money freed up elsewhere to keep paying private creditors,” he says.
A joint statement by the IMF and the World Bank in October said that three countries participating in the DSSI had unsuccessfully asked private creditors to join the initiative. “So far, most DSSI-eligible countries have found that the costs of requesting debt service rescheduling from their private creditors outweigh the short-term benefits,” a- he declared.
Anti-corruption watchdogs and the UN also point to the role of banks and private creditors in facilitating the flow of illicit money from the developing world to developed countries, laundering huge sums earned by crime, corruption and tax evasion, an amount that sometimes exceeds foreign aid inflows.
Kenner says pressure remains on governments to act on debt relief. “It would be virtually impossible for a bank or an asset manager to act alone,” he says. “Each creditor awaits the other. That’s why we say G20 governments need to step in, the fact is that countries need this money now to fund health systems.
HSBC, Goldman Sachs, UBS, Legal & General and JP Morgan were unavailable to comment on the issue of developing country debt suspension, or declined to comment. A BlackRock spokesperson said the restructuring “must be weighed against the asset manager’s duty to protect the savings of the millions of people whose money has been lent to these countries.” they added that most of their investments “are held through index funds, which means that we have no discretion to sell these bonds, so it is in the interests of our clients that these countries prosper and succeed. “.