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Brazil’s ‘debt cancellation’ for Africa leaves more questions than it answers

Added 13/Jun/13

On 25 May Brazil announced the “cancellation or restructuring" of up to $900 million of debt owed by 12 African countries though the details remain extremely unclear, including what this may actually be worth to African countries, and crucially what Brazil expects in return.

The debt relief, announced by Brazilian president Dilma Rousseff on the occasion of the 50th Anniversary of the African Union, reflects Brazil’s growing prominence in the global political scene, and the increasing relevance of its relations with African countries.

According to news reports, Congo-Brazzaville will be the main beneficiary and will receive $352 million of debt relief, followed by Tanzania with $237 million and Zambia with $113.4 million. The other countries that are included in the initiative are Democratic Republic of Congo, Gabon, Ghana, Guinea Bissau, Ivory Coast, Mauritania, Sao Tome and Principe, Senegal and Sudan.  However the Brazilian government has released no concrete details, so key questions remain unanswered about the true value of this initiative, including: what form is this debt relief is going to take, cancellation or restructuring? Will be strings attached to the deal, such as commitments by the debtors to sign trade treaties or to commission new infrastructure projects with Brazilian contractors? On what basis and through what negotiations has this been agreed? Is Brazil going to treat each creditor the same way or it will reserve ‘special treatment’ for countries according to economic interest or negotiation power? This questions might be relevant for other countries following the example of Brazil, such as Algeria.

Brazil’s motivation to cancel African debt seems to be at least two-fold. On one hand Brazil is aiming to improve the economic and political relations with a region that has become an increasingly important economic partner for the Latin American power. On the other hand, Brazil is signalling to Western creditors that it is serious about taking part in international efforts by taking action on previous commitments to international debt relief.  At the same time, Brazil is also a debtor government, and citizens across the country are joining forces to carry out an audit of Brazil’s external debt with the aim of assessing the legitimacy of lenders’ claims.

Fuelling South-South relations

According to the Financial Times, under Brazilian law, Brasília cannot offer new loans and long-term financial assistance to countries with outstanding debts. Brazil has therefore a strong incentive to cancel debt to potential trading partners and investment markets in order to better position itself in a very competitive South-South trading environment that includes other emerging powers such as India and China that are increasingly engaged in Africa.

Brazil’s investment interests in Africa are strong.

Brazil's trade with Africa jumped from $5 billion in 2002 to $26.5 billion in 2012.  Brazil's partly state-owned oil company Petrobras has invested hundreds of millions of euros in Nigeria's coal, oil, natural gas and alternative energy sectors, and the country’s mining giant Vale, the world's biggest iron ore producer, has investments of  $7.7 billion in nine African countries. Finally, the state-owned BNDES development bank allocated $682 million dollars in 2012 for Brazilian companies operating in Africa, an increase of 46 per cent compared to 2011. The debt cancellation comes shortly after Brazil received criticism for a Mozambique mine operated by Vale, based on claims that the resettlement deal it offered was strongly opposed by local communities.

Brazil is planning to promote co-operation and trade further: Thomas Traumann, Brazil’s presidential spokesman told reporters at the AU meeting that “Almost all (aid) is cancellation" probably referring to debt and that “most of Brazil's future assistance would target infrastructure, agricultural and social programmes”. He also mentioned that his country will attempt to export agricultural expertise in ‘tropicalising European crops’, transferring this technology from Brazil to other African countries. Projected Brazil-funded development projects, possibly connected to this debt relief include a $1 billion railway in Ethiopia and a drinking water dam in Mozambique.

Repeating the ‘old creditors’ mistakes?  

Brazil’s debt relief may free up resources that poor countries could use for more important things than servicing debts. However, it remains to be seen how far the emerging Latin American power will walk the same path as the ‘old’ creditors, whose debt relief has often been motivated by geostrategic and economic reasons, with harmful conditionality attached. Eurodad research showed that, between 2005 to 2009, 85% of the bilateral debts cancelled by Western creditors were debt resulting from export credit guarantees that did not have a development objective in the first place. Yet the debt cancellation has been counted as development aid, and falsely driven up aid figures. Moreover, it would be important to know what the origins of African countries debt to Brazil is, to allow an assessment of the legitimacy of the debt. According to the Financial Times, most of the debt origins in loans from the 1970s, but Brazil has not supplied further details, following bad practices of lack of transparency that often bedevils debt discussions.

While geostrategic and commercial reasons appear to be behind this current initiative, Brazil has should take this opportunity to show that it can do better, adhering to fair and transparent debt work-out principles, and not resort to ad hoc, creditor driven workouts towards its current and future debtors.