One common economic phenomenon of third-world countries is the high tendency not to be able to financially sustain themselves. According to the Central Intelligence Agency (2022), a plethora of these countries like Nigeria, Ghana, Togo, Congo, Sierra Leone, and Equatorial Guinea, among others, tend to continually borrow funds from countries with developed economies and other global financial institutions. Ironically, the enlisted Sub-Saharan African countries, though with fewer borrowings in comparison to loans from Western powers, have little or no economic prosperity to show for it (CIA, 2022). In other words, many African countries continue to depend on Western powers for survival (Mhango, 2017). This has been a growing trend since many of the developing countries attained the status of political independence some four to six decades ago. There are realities around the core inability of the governments of developing countries to finance many state-owned projects, including recurrent expenditures.
Hence, many scholars and pundits have argued that even though these borrowing countries have some political sovereignty on paper, they are not in reality viably independent as they still have their economies being dictated by Western powers (Emeh, 2013). The third-world countries of Africa with peculiar traits of poverty, mismanagement, and corruption have continued to rely on the rest of the world, in terms of borrowing for virtually every need or project of survival (Emeh, 2013). This gesture of dependency remains immedicable, as it involves behavioral tendencies of a society that force it to continually depend on another to meet up with its basic survival needs (Mhango, 2017). Looking at this theory of dependency, Max-Neef et al. (1992) projected that the development of a country is usually a product of the deeds, thoughts, and creativity of the leaders at the helm of affairs. Nonetheless, there have been instances where economic developments have come to a country through damage done to other countries, as witnessed by the African continent through the actions and inactions of Europe (Rodney, 1972 cited in Mahuntu, 2011).
This article will go into the history of the Bretton Wood lending system, its advantages, and other impacts on developing economies. It will dissect some of the angles and intricacies of loaning and borrowing, the interest involved, the parties that benefit, and the ensuing economic realities that trail such perpetual borrowing. The article will also look into the concept of “debt-trap diplomacy”, a situation where the loan system is geared in favor of the lending bodies at the peril of the borrowing party. Most importantly, this article will argue that global lenders have, over the years, continued to “police” third-world countries using the conditionalities of loans. Policing the third world refers to the policies, politics, and economies of third-world countries that are being directed and controlled from the seat of global power, and of course by other instruments of financial institutions.
It is important to talk about the current loan system, as more and more African countries continue to rely on loans for their daily survival, even with little or no transparency around the borrowed funds (Nwannebuike, Ike, & Onuka, 2016; Dinneya, 2006). A good chunk of such loans is ending up in the private pockets of ruling elites, as corruption remains unabated (Nwannebuike, Ike, & Onuka, 2016). Additionally, many African territories are currently being lost to Chinese influence, controls, and powers, as a repercussion of reneging on the agreed terms of loans (Strauss, 2013). It is hence becoming crystal clear that the reason/aim why loans are being taken is never attained. It is then a thing of concern when the futures of generations yet unborn are mortgaged under the conditionality of policing through debts that could cede their land, inheritance, and developments to foreign interests.
Amid the available millions of dollars being borrowed, a sizable percentage of third-world inhabitants have continued to wallow in abject poverty, and a high level of corruption in positions of authorities has continued unabated (Nwannebuike, Ike, & Onuka, 2016). Democratic ethos and institutions in Africa are daily threatened in the wake of insecurity, illiteracy, insurgencies, and underdevelopment that continue to confront developing countries whose only level of leadership ingenuity is to borrow funds.
This article will examine the unfettered borrowing pattern of the incumbent ruling government in Nigeria in relation to developments and its possible futuristic backlash. It will assess the attendant socioeconomic implications of the same in the world’s largest black country, as well as critically look into lending parties’ raison d’être.
A historical background of debts in Nigeria
Nigeria, as a case study, which had its independence from Britain on 1 October 1960, is an oil-rich region of West Africa and a leading economy in Sub-Saharan Africa. It has had a prosperous and promising standpoint of origin (Ogbaa, 2013). Nigeria, which was thought and argued to be a rising star in Sub-Saharan Africa, was building its economic frontiers largely from the agricultural sector (Ogbaa, 2013). Within the same period, oil had been discovered in large commercial quantities (Walker, 2009). These natural resources, which were supposed to spell great booms for the country’s economy, ended up spelling more doom in the years that followed (Walker, 2009). Economically speaking, Nigeria was making great waves within the international community at the time, and even waxing quite an influence within its continental space, until the worst was happened through maladministration and corruption of the successive governments. Hence, the country has, for survival, relied on continued, unabated, and unchecked borrowing since the late 1970s, when the country’s foreign debt stood at $3.744 billion. This astronomically increased to $20 billion by 1983 (Nwanze, 2019).
This debt position was heavily decried by Obafemi Awolowo, the Premier of Western Nigeria and the foremost politician at the time. Awolowo had condemned the obvious national bankruptcy, economic downturn, and resultant monetary slumps, which were evident in external debts with high-interest rates, because of what Awolowo affirmed to be the cluelessness of the government of the day (Awolowo, 1983 cited in Nwanse, 2019).
This $20 billion debt skyrocketed to over $35 billion because of penalties and late payment charges in the 1990s (BBC, 2006). By April 2006, Nigeria settled total debts of about $30 billion owed to the Paris Club, an international lender of 19 countries which has the United Kingdom as a major player. Some $12 billion was paid in cash, and some $18 billion was written off, while a figure of around $5 billion was owed to the World Bank. This effort earned Nigeria the title of the first African nation to have achieved the feat at the time (BBC, 2006).
About six years after maintaining a clean slate by settling the Paris Club debts, in 2012, Nigeria’s total debts had risen again to an amount of $44 billion, of which $5.9 billion were external loans and $38.1 billion internal loans (Francis, 2012). The then Minister of Finance and current head of the World Trade Organization, Dr. Okonjo Iweala, further posited that the astronomical debt profile of the country and its wrongful impact on the Nigerian economy was getting uncomfortable (Francis, 2012). While loans from within imposed some very high lending rates, many scholars have argued that foreign debts have always left the country’s economy under the whims and caprices of external lending institutions, like the World Bank, International Monetary Fund, Paris Club, and London Club, among others (Nwogbaga & Onwa, 2016). Despite decades of borrowing, developments were never attained in Nigeria through these loans, because of the difficult conditionalities attached to the loan facilities (Eke, 2009).
As of December 2021, Nigeria’s debt stood at a sum of about $95 billion (N39.56 TN), which is set to accelerate beyond $120 billion (N50 TN) this year, following an increment of 20% year-on-year since 2020, as analyzed by Debt Management Office latest data (Komolafe, 2022). Isaac and Rosa (2016) argue that a nation’s borrowing may not always be bad when the debts are well managed in a properly functioning economy, especially when such funds are put into effective construction of public project infrastructure. But what has been witnessed over the years in Nigeria is the mismanagement of public funds, including loans, which has generated a poor resultant effect on the economy (Obi, 2014). Clearly, in Nigeria’s history, public debts have not been in tandem with investment and economic growth, considering the weakness in the financial market and reductions in the competitive level of the country (Ogbonna et al., 2019).
Since the genesis of Nigeria’s public debt in the late 1970s/1980s, the country has been through economic hardship with poverty and stagnation to show for it. Oftentimes, fingers have been pointed to the country’s corrupt leadership, going by the Western powers’ analysis, while readings from the soil have indicated colonialism, neo-colonialism, and imperialism of Western domination. However, Isiani et al. (2021) maintain that the most pressing position has been Nigeria’s economic linkage with the IMF and other instrumentalities of external loans that have over the years enmeshed the country in deeper debts through their imposed conditionality. For example, the Structural Adjustment Program of the IMF loans in the 1990s cemented the country’s economic doom until today (Isiani et al., 2021).
Realist lens on loaning
Realism as a major concept of international relations focuses on ideals of actuality and real-life absoluteness (Antunes & Camisao, 2018). This means that the dealings of countries with one another are not based on some supposed ideals, but rather their primary relationship is based on competitiveness and aggressive pursuit of individual interests, and such pursuit would always result in conflicts of interest (Antunes & Camisao, 2018).
Another key theme of Realism according to Antunes and Camisao (2018) is the unchanging human nature that will always want more powers and economic gains toward maintaining their ego, which tends to make individuals or individual countries quite selfish and states security conscious. In other words, Realism remains a very broad concept and foundation in international politics with its general belief in the interrelationship among countries which is driven by interests, such that every individual country is out to acquire as much power, influence, and wealth as possible, at the expense of others.
According to Wohlforth (2008), on the theory of Realism, human nature possesses some inherent traits which are directly transmissible to the understanding of nations’ interrelationships. He argues that human beings are not kind-hearted, benign, or gracious; rather humans would engage in any course of action based on their laden interests. States, like men, are essentially selfish and competitive. Why then do states keep loaning money to other states? States are considered the only actors that matter in international relations, from a Realist perspective. Based on this, states would do anything, including giving loans to subjugate lesser states and to maintain the dominance of their relevance in the community of nations (Goodin, 2010). Similarly, Mearsheimer (2001) argues that powerful states are also known to always be on the lookout for more economic and political opportunities to retain international influence, military dominance, and political preponderance over smaller countries. He posits further that there is a major and enforcing rational argument that great powers would do anything to ensure they remain on top of the world strata.
Realism as a theory has its origins in the work of Niccolò Machiavelli’s The Prince of 1532. Realism invariably means that the state gives the highest considerations and priorities to the concept of power-politics in its relations with other states. The main themes and cornerstone of Realism squarely rest on the key principles of state-centrism, self-centeredness, lack of central authority in the international system, rationality, and power (Goodin, 2010). This proposition goes to advance the powerful states’ deeds of advancing loans to smaller countries for the former to retain influence among other gains over the latter (Mensah et al., 2017).
Liberalist perspectives on borrowing
Liberalists argue that mutual agreement, cooperation, and interdependence should be the basis of state relations, rather than power struggles (Shiraev, 2014). They advocate for the existence of intergovernmental institutions to regulate the conduct of state relations especially, as regards economy, financial aid, and cultural integrations. Liberalism entirely frowns at military resolutions of state conflicts; instead, diplomacy and cooperation are pushed as the main ingredients of states’ promotion of peace. Considering the cooperation and interrelationships that exist among states, countries tend to engage in loaning funds to each other, liberalists would argue (Shiraev & Vladislav, 2014).
According to Doyle (1986), Liberalism has its tenets around freedom, respect, foreign policy restraints, the intention of peace, and democratic development. Free will remains a centripetal viewpoint of Liberalism around which other values revolve. Liberalism embraces the intertwined forces of peace and fundamental human rights, such as equality before the law, freedom of speech, freedom to own properties, free movements of individuals, and an open market economy alongside other civil liberty (Doyle, 1986). With all these human relations enhancements in place, Liberalists would see borrowing from external countries as the way to go. Human cooperations and intergovernmental relations which tend to shun wars and conflicts are also a promotion of the Liberalist perspective (Doyle, 1986).
In some of the new conceptions of Liberalism, the focus is on genuine interest and concern for others. This focuses on the desire and readiness to provide for other people who are lacking in materials and financial desires, the promotion of both equality and equity even at state interaction levels with individual resources for the sustenance of others (Kanazawa, 2010). Considering this context, foreign debts are seen as a necessity for survival and more of an economic willingness of social welfare contract extended from the haves to the have-nots. Here, humans are seen as being indebted to one another in welfare survival and commonalities of human boundaries including ethnic identities (Kanazawa, 2010). Rosalind and Landau (2021) argue that the democratic ideals of constitutionalism as well as judicial review that promotes Liberalism have become almost globally ubiquitous. This means that an act by one country can influence the same act within its neighborhood or territory.
In 1991, as the Cold War ended, liberal ideas blossomed as newly liberated East European countries moved in the direction of the blossoming Liberalist position by establishing memberships of the European Union and with the North Atlantic Treaty Organization. Therefore, Liberalism and globalization ensued as breaths of uniformity, as a result of the operationalization of free trade and the extension of liberal capitalism on the world stage (Paul, 2021).
Dependency theory
The general concept of dependency is a common occurrence in human development as found in the interrelationships of humans to humans. According to Tenzin and Lee (2022), dependency is seen as some interrelations and connections among humans which makes one side rely on the other for many reasons: funding, mentoring, parenting, guiding, financing, and housing, among others. Some of the above kinds of relationships can be readily found around children and parents, lecturers and students, employers, employees, developed and underdeveloped countries, and so on. Tenzin and Lee (2022) argue further that every society is seen in a global web of oneness in today’s world tending to enforce some ways of dependency, rather than being an island unto itself. Dependency theory has become pertinent and dominant in academia today, as some countries appear to want to remain in a permanent dependent condition while being policed, dominated, and with their choices of freedom limited (Tenzin & Lee, 2022). Dependency theory holds the core perspective that underdevelopment of the third-world countries is tied to the drift of wealth and assets from the poor regions to the rich developed society, which keeps the Western world perpetually in riches, through retaining the third-world economy at the base of the pyramid (Namkoong, 1999). The dependency theory, which developed in the late 1960s, maintains that poor states continue to be poor, while the rich ones remain rich through the integration of the poor states into the unbalanced world system.
The concept of dependency theory according to Ghosh (2001) refers to uneven alignments between two levels of economies, the metropolitan economies (developed), and the periphery (underdeveloped), with a focus on the dominance of the latter by the former. In other words, the phenomena of development of the first-world countries and the lack of development of the third-world countries can be said to be wittingly or unwittingly intertwined through the interrelationship of these systems.
Ghosh (2001) further buttressed his view that dependency theory has forthwith provided substitute means of learning and understanding the lack of development in third-world countries through the lens of new ideas, new dimensions and unfolding discoveries for understanding the development process of the borrowing of dependent countries. In a similar dimension, Frank (2001) reiterated that underdevelopment was enmeshed in third-world countries through how they were incorporated into the world economic system and international politics, with major players of Europe and America that had hitherto been present with their economic tools of world capitalism which tended to impoverish the periphery in a way that ensured the dominance of the metropolis over and every participating less developed country members. Frank argued that the inconsistencies of capitalism, as evident in its historical antecedent, are pointers to the fact the economic excesses are worked for by the majority, but ended up being cornered, controlled, and enjoyed by a tiny minority of the ruling elites. Frank pointed out that the third-world countries of Africa, Asia, and Latin America have remained unproductive due to their connections with the developed Western world.
However, Mhango (2017) has argued that the underdevelopment of third-world countries did not emanate from some dependency theory of imbalance of the international political and economic system. He argues that dependency theory does not connote a reliance of third-world countries on the metropolitan economies, instead he sees dependency theory as an emphasis that the developed economies have over the years relied on the enormous natural and human resources of the periphery.
Meanwhile, while dependency theory could explain the perpetuity of underdevelopment in third-world countries, some other scholars have advanced the argument that such an understanding of dependency theory is ill-conceived and somewhat lame to offer a disparity between developments or lack of it among states. Shah (2013), although acknowledging some welcoming criticisms of dependency theories, points out some other shortcomings therein. He claims that the main counter-productive position of dependency theory is its lack of largely practical corroborations to advance its claims, as provided by exceptions that do not quite support the core-periphery idea, evidently visible in the newly sprung Asian tigers.
Dependency theory is also considered to be vague in many instances of generic terminologies of development or underdevelopment without factoring in other variables within systemic operations including the transfer of technology, which can be made available and accessible to any readily interested body of leadership (Shah, 2013).
Debt-trap theory
While dependency theory has helped in establishing a certain understanding behind interrelationships among countries, and who benefits more in broad terms, another key concept from a similar perspective is the theory of debt-trap syndrome. Debt-trap concept or diplomacy is often referred to as some predatorial international economic relationship where a lending country or institution continually extends its effects and controls over the borrowing parties of the underdeveloped regions for the latter to maintain its superior effect on the international system (Fabricius, 2020). The borrowers, oftentimes the Western or other global powers, including Western-based financial institutions, extend the Greek gifts of excessive loans to the developing nations, who haven’t demonstrated any capacity for repayments, for the sole aim of defaulting, which in turn enlarges the coast of socio-political influence of the lenders over the borrowers (Fabricius, 2020). Notably among these lending powers is the Chinese government, which has strategically positioned itself through chunk loans being dished out to many parts of the developing countries and which has inadvertently enhanced Chinese influence on the territories of Africa in the known relationship of debt-trap crisis (Chellaney, 2017). Carmody (2020) argued further that the loans taken were never in good faith from the giver, as the Chinese government uses the loans to export its infrastructural goods and services including the labor force into the borrowing states. With this practice, many of the projects for which loans were taken have been found moribund in the exact format that the Chinese government prefers it to be. For example, Sri Lanka’s Mattala Rajapaksa International Airport, commissioned in 2013, is tagged the world’s emptiest airport, while Hambantota’s Magampura Mahinda Rajapaksa Port remains idle, sharing the same fate with the multibillion-dollar Gwadar Port in Pakistan (Carmody, 2020). Because all these are the desire of the Chinese government, the Chinese submarines docked at the ports of Sri Lanka, and two Chinese warships were recently positioned for service at Gwadar Port. The whole idea is that the bigger the debt crisis in smaller countries, the higher the Chinese political and economic influence grows on the continent, as seen thus far that China did leverage its influence on Cambodia, Laos, Myanmar, and Thailand to obstruct a united ASEAN force against China’s aggression in the claims of the South China Sea (Carmody, 2020; Chellaney, 2017). Al-Jazeera (2014), decried China’s investment of billions of dollars in Africa in return for the black continent’s large amount of natural resources, which would tend to cause more harm and impoverishment to the African indigenes (Kinyondo, 2019).
In a swing development, Nyabiage (2022) has argued that the West, rather than China, is responsible for the debt-trap conditionalities of developing countries. As against the Western powers’ accusations that China is to be held responsible for the debt crisis being faced on the African continent, a study by a British campaign charity, Debt Justice (2022) has revealed that African countries are owing monies to Western banks, asset managers, and traders in global oil in three-folds much more than what is owed to China (Nyabiage, 2022). The study indicated that 12% of Africa’s external debt was owed to Chinese creditors, while 35% is owed to Western private creditors, as revealed by World Bank data (Nyabiage, 2022; Debt Justice, 2022).
External debts in broader perspectives
Almost 40 of the 54 African countries (about 80%) have been coded as Heavily Indebted Poor Countries (HIPCs) through debts. Without much ado, external debts have enmeshed an economic burden on these HIPC, as the debts have been dubbed “unsustainable” over the years and they have continually repressed the economic growth of the countries (IMF, 2022). The main goal of the HIPC Initiative as created in 1996, the IMF (2022) argued, was to ensure the debt burden did not engulf any impoverished economy. African countries’ experiences have rather proven the opposite, as HIPCs have continued to swell, even with countries once granted debt reliefs easily falling back into debt crisis (Nwogbaga & Onwa, 2016). There have been criticisms regarding external debts from economic and political points of view. It has, however, been pointed out that it does great good for a country to only engage in public debt, when it is extremely important to do so, and when there are little or no other choices left. But the reality in Nigeria, like many other African countries, is an over-reliance on external loans, which has affected many aspects of their sovereignty.
External loans tend to influence the country’s political freedom. When the lender countries provide loans for underdeveloped countries, it gives room for the lender to meddle in domestic affairs by policing the conduct of the country in the international space, occupying the sovereign land of the debtor’s country, and dictating the economic and political shots of the country (BBC, 2012). As of the first quarter of 2020, the total debt of Nigeria to China was $3.121 billion (DMO, 2020). The BBC (2012) has pointed out China’s extending humongous loans to different countries in Africa with the intent of extending its influence over the continent. The BBC (2012) emphasized that China fully funded the African Union Headquarters in Addis Ababa Ethiopia, the same as the headquarters of ECOWAS (Economic Community of West Africa). The Chinese government did help through loans in building seven Parliaments in Africa. Railways, roads, stadiums, and houses in many African countries have been built with Chinese loans.
According to Abi-Habib (2018), between 2007 and 2016, a period largely under the presidency of Mahinda Rajapaksa of Sri Lanka, a plethora of loans were procured from the Chinese government to construct Hambantota Port. Sri Lanka could not repay its debts, and by the year 2017 the Chinese kingdom swiftly moved into Sri Lanka and has since occupied the Port for the next 99 years. This constituted a breach of Sri Lanka’s sovereignty. Today the port of Hambantota belongs to China (Abi-Habib, 2018). China has also been on the verge of taking over Uganda’s one and only international airport, as Uganda appears to be struggling in repaying the $200 million loan. It has been argued that loans and external debts serve as new instruments to police the affairs of the debtor countries (Varma, 2021). Nigeria is also one of the victims of external debts from both the Eastern bloc of China and Western powers, which potentially exposes the largest black nation to similar risks of losses in the nearest future.
External debts, loans, and corruption
From the theories of Realism and dependency, it can be argued that the aim of loaning is so the loan givers could expand their influential spectrums beyond their immediate shores, to keep African territories and other HIPCs perpetually dependent and underdeveloped. This is so apparent over the years with the embellishment of debt-trap diplomacy created around perpetual debts of African countries with attendant underdevelopment, as a result. This has raised many worries and concerns among citizens of the HIPCs regarding why developed economies continue to extend unsustainable loans to developing countries, despite the untold hardship and unmitigated insecurity in the borrowing countries becoming a threat to humanity in general. The unending external borrowing of Nigeria’s incumbent administration has continued to generate heated controversies and worries across the length and breadth of the country, even as the spate of insecurities and economic hardship continues unabated (Itua, 2020).
It can be stated that more often than not one key reason developed countries would engage in borrowing is to fund capital projects or attend to global emergencies, as witnessed during the breakout of COVID-19. In the West, there has not been a situation where funds are borrowed to meet recurrent expenditures of fat salaries and emoluments of government officials, as seen in Africa. Many pundits and concerned citizens of African countries have been so worried over this trend that they now accuse the loan givers of encouraging corruption and embezzlement in Africa. For example, citizens of Kenya, Nigeria, and Ghana, among other African countries, have been protesting and condemning the unending government borrowing from the International Monetary Fund, World Bank, and the Chinese government. According to the analysis of South African Broadcasting Corporation (2021), several media news organizations in Nairobi reported in 2021 that Kenyans are bitter and angry over the government’s umpteenth position to secure yet another $2.34 billion from the International Monetary Fund. As a result, over 200,000 citizens of Kenya were reported to have signed an online petition asking for an abrogation of the IMF loan. The citizens were worried that the government’s debts of IMF loans ended up being passed onto the last man in the street through all forms of taxation, which continue to make their lives unbearable. The “Business Daily” of Kenya, a major publication, having reported that the international lender instructed Kenya’s Treasury to foist a 16% value-added tax on fuel, stated that the IMF equally backed Kenya’s taxations in bank loans fees, gas, loans, and gambling, among other vital goods and services (Munda, 2022). There were many instances when citizens of Kenya also took it upon themselves to make telephone calls to IMF offices directly, asking the international lender to cancel all forms of loans being requested by their government, on account of being overburdened with debts from the IMF, lack of accountability, and huge corruption around all loans over the years (KTN, 2021).
Similarly in Nigeria, there have been cautions and condemnations of unabated borrowing from the international lenders, as citizens worry that the country’s problem is not a lack of enough resources, but that of corruption, money laundering, and inadequate accountability in the area of the country’s financial streams. With this in mind, many have wondered that such a country with an undoubted reputation for money laundering should be deemed fit for more and more billions of dollars in loans, when it could be deduced that the majority of such funds would end up in private bank accounts of the individuals in government far away in London, Paris or somewhere in the United States, from where the loans had originally emanated.
Acha, Akpanuko, and Unuafe (2013) argue that scarcity and lack are rampant globally, leading to worries and actions of concerns by world powers, international organizations, and scholars. However, despite the universality of poverty, its gruesome effects are felt much more in developing countries, where there is an abysmal standard of living, where criminalities of all kinds fester for survival, where there is a lack of basic amenities including power supply, health system and education, and where external loans continue to pour into the country, the same rate they fly back into foreign accounts of an individual through laundering (Acha, Akpanuko, & Unuafe, 2013).
According to Ndii (2021), African governments have continually over-relied on the bond market, Euro bonds as well as Chinese bonds in recent times, primarily to diversify the sources of their finance, and not in any way connected to becoming viable and independent entities. These acts, he argues, have continually forced the countries into problems of chronic structural financial shortages with policing conditionalities of supervisory roles being imposed on the “victim” countries’ economies.
Overview of the IMF/World Bank
The International Monetary Fund (IMF) is a global financial institution and one of the agencies of the United Nations, comprising 190 countries, with its headquarters in Washington, DC, The IMF (2022) states that its main focus is to advance world monetary cooperation, ensure the stability of finance, growth in the economy, bring about international trade, good employment, and eradicate poverty around the globe. The IMF was created through a Conference in Bretton Woods in 1944 originally with 29 member states, charged with the main aim of rebuilding the global monetary system. Today, the IMF carries out a principal duty of managing challenges of a balance of payments, as well as financial crises in the international system (Lipscy, 2015). Member countries donate monies to a pool using a quota system, from which countries with balance of payment challenges can loan funds.
On the other hand, the World Bank is a global financial organization that offers grants and loans to governments in low- and middle-income nations so they can carry out major projects. The World Bank was founded at the 1944 Bretton Woods Conference together with the International Monetary Fund. It took some time, but in 1947 it made its first loan, to France. It concentrated on providing loans to nations in the developing world in the 1970s before moving away from that goal in the 1980s. NGOs and environmental organizations have been a part of its lending portfolio for the past 30 years. The World Bank (2022) provides loans to developing nations to fight poverty. The bank participates in several international collaborations and projects and works to combat climate change. The World Bank states on its page to run a variety of training wings and collaborates with the UN Development Program and the Clean Air Initiative. Both an Open Knowledge Repository and its operations are part of the Open Data Initiative. The World Bank has come under fire for fueling inflation and impeding economic growth. Its governance has come under criticism as well for imposing measures of economic hardship on low-income economies. Major demonstrations against the bank have taken place even in its handling of the COVID-19 pandemic.
Conditionality of loans
Conditionality of loans simply means the loan terms, as prescribed by the IMF. A set of guidelines or requirements that the IMF requests in exchange for financial resources are known as IMF conditionality. According to Guimaraes and Iazdi (2015), the IMF demands collateral security from nations before handing out loans, but it also expects the government applying for help to implement policy changes to address its macroeconomic imbalances. The loan is withheld if the requirements are not met. Conditionality is related to economic theory and serves as a method of payback enforcement. The theoretical foundation of conditionality was the monetary approach to the balance of payments.
The International Monetary Fund and the World Bank offer loans (structural adjustment loans) to nations that are going through economic crises as part of their structural adjustment programs (SAPs). They aim to strengthen the nation’s global competitiveness, restructure its economic system and balance its budget (Guimaraes & Iazdi, 2015). The two Bretton Woods institutions, the IMF and the World Bank, demand that countries seeking loans adopt specific measures to get new loans or accrue lower interest rates on existing loans. These initiatives usually focus on boosting privatization, opening up markets to foreign business, and reducing the deficit (Lall, 1995). Because of how they may affect the social sector, the conditionality provisions affixed to the loans have drawn criticism. Poverty eradication has been mentioned as the main goal of structural adjustment proponents, including the World Bank. The implementation of SAPs and the absence of participation from the borrowing countries draw criticism frequently. Buira (2003) mentioned other areas of the conditionalities with the issue of shifting public expenditure away from subsidies toward the direction of broadly distributing essential pro-growth, pro-poor services like primary education, primary healthcare, and infrastructure investment. Other imposed reforms are tax reforms that widen the tax base, reduction of marginal tax rates, minimizing market distortions, deadweight loss, competitive exchange rates, and currency devaluation to boost exports (Buira, 2003).
Impacts and criticism of IMF/World Bank Conditionalities on weak economies
The World Bank has been touted as supporting global inflation and a world where international trade is state-dominated coupled with the monetary system it was formed with, also the World Bank’s free market reform policies are frequently harmful to economic development when implemented incorrectly, too quickly, in the wrong sequence, or weak economies (Stiglitz, 2007). Stiglitz further argued that the World Bank and the IMF created the counterfeit Washington Consensus in the 1990s, a set of policies that included privatization, downsizing government, market liberalization, and deregulation. The Washington Consensus was criticized for ignoring equity, employment, and the implementation of changes like privatization, even though it was intended to be a strategy that would best encourage development. Stiglitz contended that the Washington Consensus overemphasized Gross Domestic Product growth and underemphasized whether growth was sustainable or raised living standards.
Scholars have claimed that the major goal of many of the World Bank’s and IMF’s development initiatives is not to reduce poverty. Instead, the initiatives frequently increase the use of bureaucratic state power; for example, the case studies of development programs in Thaba-Tseka demonstrate how the World Bank mischaracterized the economic circumstances in Lesotho and disregarded the political and cultural makeup of the country when formulating its projects. As a result, the projects were unable to assist the impoverished, but they were successful in growing the government bureaucracy (Ferguson & Lohmann, 1994).
The Economist (2012) hammered on the custom of having an American lead the bank, which was adopted since the United States supplies the majority of World Bank funding. The Economist noted in 2012 that World Bank economists frequently advise governments to reject cronyism and hire the best candidate for every critical position when they travel to developing nations to disperse aid and advice. It is wise counsel. It should be taken by the World Bank.
The World Bank’s leaders, including then-Chief Executive Kristalina Georgieva and then-President Jim Yong Kim, put pressure on staff members to change data to inflate the rankings for China, Saudi Arabia, Azerbaijan, and the United Arab Emirates, according to a 2021 independent investigation of the World Bank’s Doing Business reports by the law firm WilmerHale (Wang, 2021).
One of the most important criticisms of the World Bank has been its impact on poor countries as a result of structural adjustment measures (Graeber, 2009). Numerous developing nations experienced economic crises as a result of the 1979 energy crisis, the World Bank responded by offering loans for structural adjustments that provided aid to impoverished nations while demanding policy changes to lower inflation and fiscal imbalance (deVries, 1996). The countries with institutional frameworks that made it simple to implement structural adjustment measures had the greatest success, while in Sub-Saharan Africa both economic growth and inflation worsened.
The policing role of the Bretton Wood instruments
There are non-objectivities, financial clout and political philosophies of the Bank which are unfair conditions attached to loans and aid from the World Bank Group leading to the policing tendencies and dominance of third-world affairs by the most powerful nations within the Washington Consensus (Klein, 2007). Klein makes several allegations against the World Bank Group, including that it demanded telecom privatization in exchange for Hurricane Mitch aid, forced Ghanaian students to pay for their education in exchange for a loan, pushed for the elimination of food subsidies in post-invasion Iraq, and forced Tanzania to privatize its water system.
The International Monetary Fund, established in response to the economic depression of the 1920s and 1930s, is the globe’s independent United Nations agency charged with the duty of ensuring the world economy’s growth and stability (IMF, 2013; Fritz-Krockow & Ramlogan, 2007). At its creation, IMF had 46 member states, which grew to 189 member states. There are six goals, all of which are to ensure the economic stability of member states. Arguably, these goals have not been met by many African countries, including Nigeria. Key among its functions is “the surveillance” over members’ economic policies. This surveillance tilts toward policing the economy of the underdeveloped country through impositions of unfavorable conditionalities for the benefit of the advanced countries (Isiani et al., 2021). Following the initial 40 years of the business of the IMF in Africa, its imposed measures were pre-empted economic adjustments with the pursuit entirely of a decrease in the budget deficit, stringent financial regulation, plus currency depreciation (Isiani et al., 2021).
Another longstanding policing role of the World Bank and IMF (Bretton Woods Project, 2019) contends that the economic policy conditions they support – often attached or “recommended” as part of loans, projects, technical assistance, or financial supervision – undermine the sovereignty of borrower nations by restricting their ability to make policy decisions and eroding their ownership of national development strategies. This is especially true of the IMF, which acts as a lender of last resort for governments with balance of payment issues. This has meant trouble for institutions policing a sovereign state, as it has been with the Nigerian economy. Bretton Woods Project (2019) argues further that while historically the IMF and the World Bank mostly used SAPs to implement conditionality, currently the IMF demands a purpose letter from nations seeking loans. The letter stipulates that preceding actions, quantitative performance standards, and structural benchmarks – the latter of which continues to include systemic macroeconomic policy reforms – must all be met before the IMF will sanction a loan request. The IMF’s 2018 Review of Program Design and Conditionality concluded that the number of structural conditions is increasing despite efforts to “streamline” the number of conditions in response to harsh criticism. Concerns regarding the limiting of developing countries’ policy options are raised once more.
In Nigeria, the failure of successive governments to generate enough revenue to support a crucial sector led to new borrowing, which led to an increase in debt. In 2018, the nation paid over 2.3 trillion naira to cover its debt, which as of that year totaled over 21.5 trillion naira. The ratio of debt servicing costs to total spending is 29.8855%, which means that almost 30% of government spending goes toward debt servicing costs, which would discourage investment and slow economic growth (Efuntade et al., 2020). Using the ADL model and correlation analysis, Inna investigated the relationship between foreign debt and economic development in emerging economies between 2006 and 2016. The study found that the analyzed countries’ economic development was unaffected by their external debt (Shkolnyk & Koilo, 2018).
Conclusion
It is traceable that both external and internal reasons, including the nature of the economy, monetary policies, reliance on oil, fraudulent foreign exchange receipts, and the 1985 origin of Nigeria’s external debt, can be blamed for the country’s current debt issue. The external debt was low until it skyrocketed in 1978 because Nigeria participated in the global capital market. Debt service payments were made within the management’s guidelines up until 1982, and due to the relative prominence of private loans in 1983 it became uncontrollable. Signs of the severity of the debt crisis were shown by a load of external debts and large amounts of the debt service payment, all being a sign that the situation with the high and indiscriminate interest rate increase has gotten worse, especially within the Structural Adjustment Program period.
Nigerians have been confronted with a challenging balance of payments situation due to a difficult growth rate and negative net foreign exchange flows owing to the country’s significant external debt burden and trending downward in oil prices. Beyond all of these, developments have become sluggish in Nigeria owing to uninformed and greedy political leadership that has set the pace of the country’s start-up at independence as influenced by the British colonial powers. Similarly, other African countries have had their fair share of underdevelopment because of the reluctant nature of the European powers to truly ensure genuine independence for many of their former colonies. Incidentally, almost all of the 54 African countries have continued to battle the resultant effect of socio-political and economic dimensions of colonialism and neo-colonialism in the aftermath of their independence, which has continued to foster debts in the African setting. Lack of transparency and shady intent of conditionalities being fostered on the borrowing countries has continued to keep the underdeveloped nations at the base of the pyramid. High-interest rates, and late payment fees among other charges have always made the debts to be out of reach, ultimately forcing the African borrowing nations to operate at the dictate of the whims and caprices of the lenders.
A number of accusing fingers have pointed to the aiding-and-abetting of corruption being played out by great powers in carrying out money laundering from underdeveloped Africa back into Western systems. In countries that are driven by credit facilities and regular checks against laundering, many have criticized the Switzerland and British banks that have continued to play as a haven for looted funds from African leaders. To this end, the notion of borrowing has been defeated as a noble cause. Today, individual citizens of Africa are crying out directly to the World Bank and the IMF to desist from lending to their countries, as the loans have remained unabated, unchecked, unverified, and unmonitored, as the reason for the loan is never achieved.
Since it has been argued that the debt profiles of a country often lead to wrongful impacts on the economy, with the imposition of economic ill-fated conditionalities, many wonder why Nigeria continues to swell up its debt profiles, which continue to keep the country’s monetary system and economy at its lowest ebb. Untold hardship, unprecedented insecurity at all levels, poverty, unemployment, and a sharp increase in criminality have become the tale of the Nigerian state since the commencement of the current political dispensation, despite the unabated amounts of external loans the government leadership has imbibed.
Many also wonder why African countries would borrow from a system that will impose neocolonial advancements on them. While internal loans often come with a high-interest rate, external loans are such an instrument to which the borrowing African countries lose many of their rights and give up some of their sovereignty. Many of the unfavorable conditionalities of the IMF are never imposed or attached to the Western world countries themselves, despite that they owe the largest debts within the Bretton Woods institutions. This reason, however, is not far-fetched. Many of these countries are the largest donors of funds to the institutions. They own the largest stake in the system to subjugate other lesser borrowing countries.
History in Nigeria has shown that the higher the debt profiles in a political administration, the more corruption in the dispensation, as embezzlements are never seized in the country where there is little or no accountability of public funds.