Sudan at the IMF: Behind Appearances of Financial Orthodoxy


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Public campaigns in the streets of Khartoum against US sanctions

On 30 June, the International Monetary Fund (IMF) resolved to grant Sudan access to its Heavily Indebted Poor Countries (HIPC) Initiative. Under this Initiative, the IMF coordinates debt reductions and cancellations for a participating country with its external creditors, a possibility that is now open to Sudan.

As a precondition to its entry into the Initiative, Sudan was obliged to clear debt arrears to international financial institutions, a task that was largely achieved with aid and bridging loans from foreign countries. This article analyses what is at stake in the HIPC decision, and draws on comparisons from Sudan’s history after independence to analyse the motivations of Sudan’s foreign partners and donors.

 

Indebted, poor, but also under siege

In 2019, a popular uprising toppled Sudan’s military president, Omer al-Bashir, who had ruled the country since taking power in a coup in 1989. Sudan is currently undergoing a negotiated transition to democratic rule. The transitional government faces a difficult economic situation and the legacy of sanctions introduced under the previous regime.

Sudan was placed under sanctions by the United States in 1997 due to Omer al-Bashir’s support for armed Islamic groups in the region. In 2014, the European Union strengthened the international sanctions against Sudan due to armed conflicts within the country. US sanctions against Sudan were nominally lifted in 2017, but Sudan was still designated as a State Sponsor of Terrorism by the US State Department. This meant that Western companies remained unwilling to invest in Sudan due to a fear of criminal prosecution in the US, leaving Sudan under a regime of ‘sanctions by default.’[1]

Sudan has been in debt arrears to the IMF and other international creditors since 1984, when the country was under a previous military ruler, Jaafar Nimeiri. After 1989, al-Bashir’s government initially sought to repay Sudan’s foreign debts. However, the introduction of sanctions starved Sudan of foreign exchange, causing the country to default decisively on its obligations, which continued to compound in creditors’ books.

Following al-Bashir’s downfall, many Sudanese are hopeful that Sudan will be able to re-engage with Western systems of diplomacy, trade and finance. In response, Western governments and financial institutions have made clear that renewed aid and investment are dependent upon Sudan clearing foreign debt arrears, most notably through the HIPC Initiative.

 

The HIPC Initiative

The IMF established the HIPC initiative in 1996 to relieve poor countries of external debt burdens through cancellations agreed with external creditors. Although proponents of the Initiative celebrate how it generously relieves countries of unmanageable debts, Celine Tan points out that a significant motivation for the scheme’s inception was to avoid the collective exit of countries in the Global South from the existing international financial system due to an objective inability to repay compounding debts following fluctuating interest rates and commodity prices over multiple decades.

Crucially, access to HIPC debt relief is contingent, first, upon economic reforms during six months prior to the HIPC ‘Decision Point’ by the IMF; and, second, upon a continuing programme of reforms between the Decision Point and actual debt relief. Typically, much of the debt eventually cancelled will not have been serviced for many years.[2] The same will be true of Sudan, no less than 86% of whose external debts are in arrears. The major incentive for participating countries is renewed perceptions of creditworthiness and access to new forms of financing. As with its routine financing, these conditionalities are key channels through which the IMF institutionalizes economic orthodoxy in the Global South.[3]

 

Clearing arrears

In addition to domestic reforms, the key condition for Sudan’s access to the HIPC Initiative was to clear its arrears to the IMF and other official creditors such as the African Development Bank (AfDB). This condition was demanded to demonstrate Sudan’s creditworthiness and because official multilateral creditors are typically ranked ahead of bilateral and private creditors in sovereign debt repayments. However, Sudan in 2021 is in no position to repay debts that have been compounding for nearly four decades.

The solution has come from ‘donor’ (capital-exporting) countries among Sudan’s international partners during its political transition. These countries have issued grants and bridging loans to repay arrears to the IMF and AfDB. However, this outpouring of generosity invites multiple questions: why make certain debt repayments a condition of wider debt forgiveness? Since these repayments rely on windfall funding from partner countries, they cannot be said to demonstrate Sudan’s own creditworthiness. Furthermore, why did these partner countries – which are among Sudan’s principal creditors[4] – commit resources repaying arrears owed to fellow creditors, rather than directly cancelling debts and spending financial aid on projects within Sudan?

Sudan’s debt chart. Credit: IMF e-Library

Lessons from the past

A comparison from Sudan’s history is instructive.[5] In 1970, President Jaafar Nimeiri nationalized British banks and trading companies in Sudan, which incurred multiple claims for compensation from the appropriated companies.[6] As a result, commercial and capital finance to Sudan from Western countries was greatly reduced.

By 1973, Nimeiri had repented and was seeking reintegration into Western systems of trade and finance. Nimeiri removed left-wing ministers from office and liquidated cadres of Sudan’s powerful Communist Party. However, one problem remained: Sudan lacked the foreign exchange with which to compensate nationalized foreign companies.

Faced with this situation, the UK Foreign Office was keen to re-open Sudan to British trade and finance. However, it was politically difficult to do so while compensation claims remained outstanding. British officials faced calls from private companies, diplomats, and the Sudanese government to issue aid to Sudan that could be used to pay the country’s compensation bill. One internal Foreign Office minute rejected this proposal:

‘It is hard to imagine circumstances in which H[er] M[ajesty’s] G[overnment] would ever be willing to lend another government money specifically for the purpose of compensating UK nationals which it had injured.’

There was a risk of dangerous precedents. However, this strong statement of principle was followed in the same document by an important qualification:

‘in certain circumstances, as part of a political new deal with the government of a country manifestly anxious to reform its ways (or, more likely, those of its predecessors) it may be found desirable to give new capital aid at about the same time as the other government is willing to settle compensation claims on reasonable terms.’[7]

A solution was found such that British officials negotiated in secret with the Sudanese government such that part of a new aid issue in 1973 would indeed be redirected towards compensating British companies with nationalized assets in Sudan. Again, this raises a question: why did the British state not compensate private British companies directly, instead of arranging secretly for such funds to pass through the books of the Sudanese state?

I argue that this reveals the power of appearances in international finance. The international economy is based on norms, which themselves underpin deep-seated power relations. Chief among these norms is the principle that creditors are always repaid. Therefore, even when debtors cannot afford to repay their creditors – as occurred with Sudan in 1973 and again in 2021 – it is made to appear as if they can. So, the reality of sovereign default is concealed, lest this exceptional event risks transform into a new norm in the practice of international political economy.

In 2021, this is the triumph of the HIPC Initiative in the murky world of appearances, norms and power underpinning international finance: debt rescheduling and restructuring, negotiated between sovereign debtors and creditors based on political relationships and assessments of solvency, are transformed into debt ‘forgiveness’, granted as an act of charity by benevolent creditors.

 

Beyond appearances

But this is not merely a question of appearances, and the exercise of power by international finance is arguably much more pernicious in 2021 compared with 1973. The fact that British compensation paid to its own companies was disguised as capital aid to Sudan was largely for appearances’ sake, so that the pretence of financial orthodoxy could be maintained.[8]

In 2021, more than appearances are at stake as creditors’ pretence to financial orthodoxy exact acts of complicity from Sudan’s transitional government to maintain the pretence. To arrive at the HIPC Decision Point, Sudan had to demonstrate a ‘6-month track record of satisfactory performance’ in an IMF staff-monitored programme. This has involved privatising state assets, removing subsidies and severe fiscal deflation – the very policies that were the proximate cause for the uprising against Omer al-Bashir. The route to actual forgiveness will come with similar demands for auto-punitive ‘reform’ in the Sudanese economy. Sudan must decide if economic collapse is a price worth paying for relief from book-entry debts.

Sudan’s only alternative is to re-politicize the question of its debt and articulate a different language and norms with which to challenge its creditors.

 

Endnotes

[1] The US rescinded Sudan’s status as a State Sponsor of Terrorism in December 2020, during Sudan’s political transition, in return for Sudan committing $335 million to compensate ‘US victims of terrorism’.

[2] Or, will take the form of principals that countries are unable to pay down despite being continuously serviced and refinanced.

[3] This orthodoxy includes capital and commercial account liberalization; floating of exchange rates; privatizations; subsidy removals; and fiscal deflation.

[4] Sudan’s most important Paris Club (Western, official) creditors are France, Austria, the United States, Belgium and Italy.

[5] This section is based on my recent research being prepared for publication.

[6] Other foreign companies were also nationalized. However, British companies formed the majority of foreign-owned businesses in Sudan, a legacy of British rule in Sudan which lasted until 1956.

[7] UK Foreign & Commonwealth Office, Internal minute (January 1971). The National Archives, Kew. FCO 39/706.

[8] This is not to deny the many pernicious effects in this period of a power relationship established first by British colonial rule in Sudan, and subsequently by the two countries’ respective positions as exporters and importers of capital in the international economy.

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Source link : https://africanarguments.org/2021/07/sudan-at-the-imf-behind-appearances-of-financial-orthodoxy/

Author : Harry Cross

Publish date : 2021-07-13 09:17:24

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