The Declining efficacy of Paris and London clubs: making the African case for a hybrid framework for sovereign debt restructuring
Areri, Doreen Belinda
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For a variety of reasons, such as enhancing economic growth, nations incur debts. For historical reasons, this is particularly true for African countries. Unfortunately, owing to a myriad of reasons like global financial crises, currency volatility and shortfall in revenue, at times these countries fall into difficulties in servicing their debts. During such times, the regime of insolvency provides a scenario where such debt may be rescheduled, or restructured, by altering the terms and periods of payment. Such debt restructuring mechanisms exist. The objective of the study was to investigate whether the existing mechanisms for sovereign debt restructuring are efficient. It also sought to evaluate whether debt held by African countries is distinguishable from that of other countries, and if so, whether the existing mechanisms for debt restructuring ought to take this into account when restructuring debt. The research was centered on desk research with sources of information including books, as well as journal articles, reports and working papers, documents issued by the government of African countries and international financial institutions such as the World Bank and the IMF. The study explored the questions raised through two conceptual frameworks: the creditor bargain theory, and the value based theory. It undertook an examination of the debt situation in Africa by examining the historical context within which African economies evolved, as well as current continent specific concerns, and found that indeed, the debt held by African countries, as well as the overall debt situation, is distinguishable from that of other regions. It also considered the current debt restructuring mechanisms and concluded that they are indeed inefficient for debt restructuring, and even more so, in restructuring debt held by African countries. While appreciating that there are reforms underway to correct the insufficiencies of the current mechanisms, the study concluded that these reforms were fundamentally inefficient for their purpose. It considered the creation of a framework that incorporates existing and proposed reforms, to come up with a system that is comprehensive for debt restructuring. It concluded that such a system was a suitable replacement for the existing mechanisms, especially for African countries. The study drew to a close by recommending that a multilateral effort be put into creating such a mechanism. It further recommended that debt sustainability measures be undertaken to curb incidences of debt distress in African countries.