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KAMPALA, Uganda — Established in 1944 through the Bretton Woods agreement, the International Monetary Fund (IMF) and the World Bank have become central players in global economic governance. While they are formed within the U.N. and align with its charter, they are independent institutions with distinct roles. The IMF focuses on global monetary stability, offering policy advice and loans to member countries facing a balance of payment crisis. The World Bank, on the other hand, aims to reduce poverty by providing loans and grants to low and middle-income countries for development projects.
Despite their different mandates, both institutions often implement their programs in similar ways. Since the ’70s (a period marked by spikes in commodity prices and interest rates), the IMF and the World Bank have engaged extensively with African countries to address debt challenges. However, as of 2024, African countries such as Egypt, Kenya and Angola owe a combined $15.22 billion to the IMF.
Policies
The IMF and the World Bank policies are often structured to ensure that loans or assistance provided yield returns. One such policy, introduced in the early ’80s, was the Stabilization and Structural Adjustment Programs (SAPs), designed to address the interest rate spike and high commodity prices in developing countries. Initially implemented in Latin America, SAPs have faced significant criticism and raised questions about their long-term benefits.
SAPs aimed to help underdeveloped countries access loans with lower interest rates. However, these loans came with strict conditions that required recipient countries to implement specific economic reforms. These included shifting from food crops to cash crops to earn foreign exchange, cutting government spending on health, education and social programs, privatizing public enterprises and reducing the size of government workforces to lower costs.
In many cases, these reforms have had adverse effects, particularly in African countries. For instance, in 1977, Egypt experienced mass protests after the government removed subsidies on essential goods, a condition recommended by the IMF to secure a loan. This is just one example of how SAPs have led to economic and social disruptions, often worsening living conditions for African populations. The pressure exerted by the World Bank and the IMF on countries to implement these policies has had long-lasting negative consequences, raising concerns about whether these programs genuinely serve the interests of developing nations.
Interest Rates
A major reason African countries remain trapped in a debt cycle with the IMF and the World Bank is the high interest rates on loans. For instance, the World Bank charges Eastern and Southern African nations rates as high as 6.59%, compared to 2.66% for Jordan and 3.54% for Brazil. While interest rates are calculated based on a country’s economy and repayment history, African nations are often subjected to disproportionately higher rates. A study by Africa No Filter and Africa Practice revealed that African countries lose more than $4.1 billion annually due to a “bias premium,” highlighting systemic inequities.
Although the IMF claims to offer zero-interest loans to low-income nations under concessional terms, such borrowing often comes with stringent policy requirements. The World Bank provides loans primarily through two entities: the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). The IBRD focuses on middle-income nations, while the IDA caters to more impoverished countries. These loans come with varying interest rates influenced by economic conditions, perpetuating financial burdens on African economies.
These interest rates often trap African countries in a cycle of debt. Many African nations take emergency IMF loans to repay either the World Bank loans or commercial debts, perpetuating underdevelopment. For instance, recent protests in Kenya erupted over the IMF-backed tax hikes linked to a $3.6 billion loan. In comparison, similar unrest occurred in Nigeria after the government cut fuel subsidies. Additionally, Nigeria’s currency has depreciated after receiving a $2.25 billion World Bank loan. Critics argue that these institutions exacerbate economic hardship, with one analyst calling the IMF a “convenient scapegoat.”
Poverty: Debt Cycle of African Countries
The correlation between loans and poverty lies in the debt burden they impose on African countries. For example, in Uganda, 61% of public debt comes from foreign loans, with the World Bank being the largest lender. Between 2018 and 2021, Uganda borrowed $1.4 billion from the World Bank. Although the World Bank provided these loans at below-market rates, the debt burden significantly impacts the public, as the government must still repay these loans.
By 2022, Uganda owed $4.5 billion to the World Bank, contributing to a total public debt burden of $20 billion—equivalent to $400 per individual living in Uganda, where the population stood at 48 million. In 2023, debt repayments accounted for 47% of Uganda’s gross domestic product (GDP, reducing funding for infrastructure, social programs and health care, which in turn affects poverty reduction efforts.
The austerity measures often “imposed” by the IMF and the World Bank further undermine poverty reduction efforts. Policies such as SAPs, which involve currency devaluation and subsidy cuts, frequently lead to a higher cost of living and increased inflation. This affects low-income households, as they spend most of their income on necessities like food and electricity.
Solutions
The IMF and the World Bank significantly influence African economic policies while offering financial support during crises like high inflation, rising costs and slow development. Despite concessional terms, many countries rely on these loans. For instance, Egypt received a $12 billion IMF loan in 2016 following the 2011 Egypt revolution and lower-than-expected Suez Canal profits. In 2023, Ghana secured a $3 billion loan to address post-COVID challenges. Similarly, Ethiopia received $3.4 billion after defaulting on a commercial loan. While these loans provide crucial support, they often advance debt burdens and poverty.
African countries have to push for lower interest rates, fewer loan conditions and initiatives like open-border free trading to reduce reliance on foreign assistance. Such policies could lead to regional economic growth, turning loans into investments. However, as of 2023, 46% of Africans still needed a visa to travel within the continent, compared to Europe’s open-border policy, which facilitates seamless trade and collaboration.
In Summary
While the IMF and the World Bank play critical roles in providing financial assistance to African nations during economic crises, their policies and loan structures often contribute to a cycle of debt and poverty. Programs like SAPs and high interest rates have imposed significant burdens on African economies, leading to social unrest and slowing poverty reduction efforts. These organizations’ stringent conditions often prioritize financial stability over long-term development, leaving many countries trapped in economic dependency.
Seeking regional trade through open-border policies and reducing reliance on foreign loans can empower African economies to achieve sustainable growth. By prioritizing local solutions and strengthening intra-African cooperation, the continent can chart a path toward financial independence and inclusive development.
– Zacc Katusiime
Zacc is based in Kampala, Uganda and focuses on Politics for The Borgen Project.
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