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African countries pay higher interest rates with the IMF than advanced economies

In a recent interview given to France 24 and its iconic journalist Marc Perelman, Kenyan President William Ruto expressed his annoyance over the difference in treatment of the loans granted by the International Monetary Fund.

The Kenyan chief of the executive branch lamented that Kenya and African countries, in general, pay eight times more in interest than advanced countries for the same amount borrowed. In other words, the IMF is more lenient with advanced countries than with African countries, and the Kenyan head of state finds this condition unfair towards African governments.

The reality is that poverty is expensive. The IMF is certainly an international institution, but it remains fundamentally a bank. And banks don’t like lending funds to underwater borrowers. In financial literature, underwater borrowers are individuals, households, or organizations that do not qualify for loan approval on standard requirements.

Banks find underwater borrowers risky because they are more likely to default on their loans. When a borrower's home is underwater, they may be tempted to walk away from the loan. This is because they would be underwater even if they sold the property, so they may not see any point in making the payments.

Moreover, underwater borrowers are less likely to be able to refinance their loans. If a borrower's home is underwater, they may not be able to refinance their loan. This is because the bank may not be willing to lend them more money, or because the borrower's credit score may have decreased.

As a result of these risks, banks are generally less willing to lend to underwater borrowers. This can make it difficult for underwater borrowers to refinance their loans or to get a new loan.The IMF sees African governments the same way. It perceives African governments as underwater borrowers. Thus, to ensure that the IMF makes profit on its investment by lending to African governments, it imposes on these governments very high-interest rates since it expects most of them to default.

There are a few reasons why African countries pay higher interest rates with the IMF than advanced economies.

First, creditworthiness. African countries are generally considered to be riskier borrowers than advanced economies. This is due to a number of factors, including their lower credit ratings, their history of debt defaults, and their exposure to political instability. As a result, the IMF charges them higher interest rates in order to compensate for the increased risk.

Second, concessional lending. Indeed, the IMF offers two types of lending: non-concessional loans and concessional loans. Concessional loans are provided to low-income countries on more favorable terms, including lower interest rates. However, not all African countries qualify for concessional loans. As a result, those that do not must pay higher interest rates on non-concessional loans.

Third, market conditions. The interest rates that the IMF charges are also influenced by market conditions. For example, if interest rates are rising in the global economy, the IMF will likely charge higher interest rates on its loans. This is because the IMF needs to ensure that it can recoup its costs and make a profit.

In addition to these factors, it is also important to note that the IMF's interest rates are not set in stone. They can be adjusted up or down depending on the circumstances. For example, the IMF may lower interest rates if it believes that an African country is taking steps to improve its creditworthiness.


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