In the case of oil-exporting countries like Angola, many of the loans are backed by a lien on future oil revenues. Oil-backed loans are doubly attractive to creditors: first, because they typically pay interest rates well above the average and, second, because the contracts stipulate that the proceeds from the country's oil sales will go into offshore accounts from which debt service is deducted before any revenues go to the oil-exporting country.
A 'key component' of Angola's unexplained loss of $32 billion, according to the International Monetary Fund report, 'appears to be due to the transfer of funds to escrow accounts held abroad in excess of the debt servicing for which those accounts were intended.'
The revolving door is an example of what economists call a 'principal-agent problem' that occurs when some people depend on others as agents to conduct business on their behalf. In finance, the hazards arise on both sides of transactions when banks lend other people's money and governments borrow in other people's names.
On the creditor side, bankers are supposed to serve the interests of their depositors and shareholders by making prudent loans that will be repaid with interest. In practice, however, loan officers often are rewarded mainly for 'moving the money,' getting the loans out the door – an issue that has attracted attention at the U.S. Federal Reserve in the wake of the subprime mortgage crisis.
On the borrower side, government officials are supposed to negotiate and disburse loans to serve the interests of their citizens. Instead they may borrow in the name of the government, line their personal pockets and those of their cronies, and leave the public saddled with the debt.
The hemorrhage of Africa's scarce resources can be curbed. Efforts by African governments to recover wealth stolen by past officials have won international backing from the Stolen Asset Recovery Initiative launched by the World Bank and United Nations Office on Drugs and Crime. Internationally, tougher anti-money laundering laws and tougher enforcement of existing laws are needed to staunch illicit financial flows from Africa to safe havens abroad.
More transparent information about financial inflows to African governments would also help. The Publish What You Pay campaign, launched by global civil society organizations a decade ago in the wake of disclosures about the theft of Angolan oil revenues, promotes disclosure of corporate payments for natural resource extraction. Similarly, a Publish What You Lend campaign could strengthen transparency and accountability in financial markets.
Last but not least, African countries can and should selectively repudiate odious debts incurred by past regimes where the borrowed funds were not used for the benefit of the public,and creditors knew or should have known this to be the case.
Bankers threaten that repudiation of such debts would bring new hardships as the debtor country is cut off from access to new borrowing. But with selective repudiation, legitimate creditors would have no reason to fear, as their debts would continue to be honored. Moreover, repudiation will benefit the many countries that currently pay more in debt service than they receive in new loans.
These steps would not only benefit the people of Africa today, but also strengthen future incentives for the exercise of due diligence by creditors and for responsible borrowing by governments. Banking on capital flight is a symptom of deeper defects in our international financial architecture. What's needed, in Africa and abroad, are reforms tough enough to ensure that banks serve the people rather than fleecing them.
