Despite the world now being three years into the post Covid-19 recovery, the issue of debt and debt default remains a live one for many relatively poor countries in the world, including on the African continent. Take my country, Kenya, which has worked so hard perhaps too hard to avoid defaulting on debt. The country has reissued Eurobonds to prolong their maturity albeit at a rate higher than the original interest rate and attempted to raise taxes and cut spending on already unemployed and poor citizens, partly in order to seek around $1bn of loans from the International Monetary Fund (IMF). As African Business reports (see page 8), the countrys attempts to align policy with the wishes of multilateral lenders has sparked a citizens revolt and substantial violence.
The interest rates on Kenyas IMF borrowings range between 0% and 4.5%, and most must be repaid in between 4.5 and 10 years.
The word must is important here because in the current financial system, the IMF is assumed to be a preferred creditor a country or organisation that has priority in being repaid if a debtor needs to default.
Locked-in syndromeTraditionally, the IMF and other multilateral development banks and institutions have been seen within the international financial system as having preferred creditor status (PCS). Put simply, they come before others in the payment queue. PCS means that for a country like Kenya, which has relied primarily on multilateral organisations for external debt, even if the country were to default, 49% of its borrowing would be locked in essentially un-relievable or un-restructurable, except through applications for entirely new lending. In the IMFs case at least, that would come with conditions most citizens find unfathomable, at least at this stage of Kenyas development.
No wonder Kenya has tried to avoid default.
