Skip to main content

How international aid is dragging developing countries from one crisis to another

By John P Ruehl* 

On February 1, 2024, Ukraine secured a €50 billion aid package from the European Union (EU), aimed at bolstering its defense capabilities and facilitating the country’s reconstruction. Dozens of other countries, along with Western-dominated multilateral lenders like the International Monetary Foundation (IMF) and the World Bank, as well as private investors, have contributed billions of dollars in aid to Ukraine since Russia’s invasion in 2022. Billions more are pledged.
While international support has been crucial for Ukraine, Kyiv will be expected to pay much of this back. Approximately half the global population now live in countries where debt payments exceed spending on education and healthcare. While wealthier countries can manage debt sustainably, poorer countries face challenges in avoiding the detrimental effects of excessive debt, leading to stunted development.
Ukraine remains in desperate need of foreign financial assistance, humanitarian aid, infrastructure development, military support, and technical capacity building. However, quiet caution has emerged among various international supporters. Ukraine’s capacity to implement Western-backed political, economic, and corruption reforms, expel Russian forces, and repay loans is being questioned. The hesitation underscores the challenges of coordinating a diverse array of donors over time.
The EU has been the primary source of financial assistance for Ukraine, and the recent approval of its latest aid package followed months of debates between member states. The IMF also provided a $15.6 billion loan in 2023, marking the first IMF loan awarded to a country at war. Foreign investors have meanwhile increasingly sought guarantees and insurance for investing in Ukraine, with the Ukrainian government working with the World Bank to implement such policies.
The U.S. has provided the bulk of Ukraine’s foreign military aid, but the most recent $60 billion in military assistance has been stalled for months due to opposition in Congress. Republican support for Ukraine has declined markedly since the early days of the war, leading proponents of the pending military aid package to emphasize its benefits for U.S. companies, job creation, and reducing the maintenance costs of holding or destroying U.S. weapons stockpiles.
However, this line of thinking has ignited pushback from across the political spectrum. Republican politicians have become increasingly critical of providing Ukraine with a “blank check,” while accusations of potential money laundering have been raised. The lack of a long-term, bipartisan strategy toward Ukraine from Washington has left defense contractors hesitant to increase arms production, already under scrutiny for price-gouging during increased demand.
Adding to this reluctance is concern in the U.S. over establishing long-term outlets for defense contractors. For instance, since 1979, the U.S. has given Egypt roughly $50 billion in military aid, including fighter jets, helicopters, tanks, armored personnel carriers, surveillance aircraft, counterterrorism training, and border security assistance. After Congress canceled half of the annual payment of $1.2 billion to Egypt in 2013 following a military-led coup (as well as $250 million in annual economic aid), U.S. officials noted that the U.S. government would have to pay for the missed shipment and the costs of winding down the programs. Aid to Egypt was later fully reinstated in 2015,
Despite the resumption of military aid to Egypt, persistent questions surround the allocation of these funds. It has helped prevent Egypt from becoming adversarial, but Cairo has nevertheless grown closer to China and Russia since 2013. U.S. weapons manufacturers maintain lucrative export opportunities, but this assistance has also helped enrich and strengthen Egypt’s military and has empowered it to absorb other forms of foreign aid. The IMF’s conditions on giving Egypt a $3 billion loan in 2023 hinged on the military government’s commitment to political and economic reform, but this remains unlikely.
Egypt, with a debt of $11 billion, stands as the IMF’s second-largest debtor country, following Argentina ($32 billion) and ahead of Ukraine ($9 billion). The World Bank counts India ($39 billion), Indonesia ($19 billion), and Pakistan ($18 billion) as its top debtors. The combined global debt owed to the IMF and World Bank tops $300 billion, with their global reach having expanded significantly from their original focus on rebuilding Europe after World War II.
These organizations began large-scale crisis intervention in developing countries in the early 1980s to address their foreign debt challenges. As the U.S. raised interest rates to combat inflation, dollar-denominated loans caused significant defaults and debt restructuring, particularly across Latin America.
The IMF and the World Bank advocated for privatization of industries and export-driven industrialization, eliminating trade barriers and granting foreign corporations easier access to raw materials. Beginning in the 1980s, conditions associated with Structural Adjustment Programs (SAPs) saw economic growth return, but aid recipients became more market-dependent and reliant on the IMF and World Bank, while wages remained low through devalued currencies.
The end of the Cold War and the establishment of the modern global financial system saw credit-hungry governments shifting their reliance on countries and multilateral organizations to embrace private lenders, including private equity and venture capital.
The impact of broad lending strategies became evident in Pakistan’s loans in the Private Power Policy in 1994. The World Bank took a dominant role in the project, which provided guarantees, alongside the Asian Development Bank and the Export-Import Bank of Japan. The Benazir Bhutto government in Pakistan offered sovereign guarantees, attracting considerable foreign investment with assured, repatriable dollar-pegged returns.
However, changes in Pakistani governments altered the long-term political direction of the project, while local independent power producers (IPPs) engaged in price-gouging and an oversupply, plunging the country into debt. The World Bank was criticized, alongside Pakistani governments and IPPs, for a lack of oversight and the misappropriation of funds. Today, Pakistan faces acute energy shortages and its debt level has surged.
Pakistan can also rely on other sources of funding. Saudi lending to Pakistan goes back to the 1970s while China entered Pakistan’s debt market in the 2000s. Over the next few years, Pakistan will need to issue major repayments to Saudi Arabia, China, and private investors, which has led to standoffs over the issuing of additional loans and deciding whose, along with Western loans, get repaid first. This has raised concerns about the sustainability and strategic wisdom of Pakistan’s growing reliance on external debt.
China’s assistance to countries often serves as a solution for its surplus labor, savings, and the industrial capabilities of its state-owned enterprises. Chinese steel, cement, coal, and other sectors accumulated enormous capacity, and China’s Belt and Road Initiative (BRI) enables China to export these resources. However, this often results in contracts for projects being awarded to Chinese companies, marginalizing local industry and intensifying dependency, while minerals and natural resources are extracted and exported to China. Despite debates over the outcome of some projects, they have proven effective in enhancing Chinese influence and garnering favor from foreign governments and populations.
Diverse sources of lending have also converged in the 21st century in what were labeled “frontier markets.” In the 2010s, investor interest surged in frontier bonds, where developing countries issued debt in their own currency, diverging from the commonly used “Eurobonds,” often denominated in U.S. dollars. Frontier bonds shielded developing countries from volatile currency swings, allowing them to adjust payment terms beyond the jurisdiction of London and New York courts, and provided the option to manage debt through currency printing.
With enticing low debt-to-GDP ratios and the allure of high-yield securities, Wall Street encouraged these countries to borrow. The debt of African countries surged as their governments issued sovereign bonds in prominent global financial hubs like London and New York, coupled with a rise in lending from Chinese state-owned banks. Despite their self-assumed roles as global financial watchdogs, the IMF and World Bank also encouraged these loans and failed to sound the alarm over this growing source of debt, focusing more on foreign currency-issued debt. By 2015, African governments received $32 billion in loans but were paying $18 billion in interest per year, with debt continuing to rise.
Mozambique’s 2016 default unfolded as substantial amounts of previously undisclosed debt were exposed, highlighting the foreign links of the country’s declining financial situation and a lack of oversight in dealings with private investors. In a prominent case from 2013 and 2014, a senior Credit Suisse banker signed an $850 million loan agreement with French Lebanese businessman Iskandar Safa. The loan was designated for the construction of a coastal patrol force and tuna fishing fleet in Mozambique. A total of $17 million in fees were granted to banks, and the remaining $836 million was funneled to Abu Dhabi Mar, a company linked to the Safa family and based in the United Arab Emirates. The Credit Suisse banker left the bank shortly after the deals, and found employment under Safa.
This controversy left Mozambique burdened with incomplete economic projects and outstanding loans. Following the takeover of Credit Suisse by UBS, the institution has paid hundreds of millions of dollars in settlements and debt forgiveness. Two hedge funds, VR Capital Group and Farallon Capital Partners, also initiated lawsuits against both Credit Suisse and the Mozambican government for their roles in the scheme. Furthermore, the Russian investment bank TVB Capital paid over $6 million to the Securities and Exchange Commission for its involvement, while Mozambique continues to seek $3 billion in compensation from Safa.
The effects of COVID-19 on supply chains and spending had already weakened Africa’s financial stability, and the Russian invasion of Ukraine in 2022 further exacerbated the situation. The U.S. quickly raised interest rates, prompting international investors to begin divesting from local-currency debt in favor of dollar-denominated bonds. This led to the depreciation of local currencies and escalated debt repayment costs as inflation soared.
These effects have been felt across Africa. A 2023 meeting in New York between Nigeria’s top financial officials and Western lenders highlighted Nigeria’s financial challenges. In 2022, the country’s debt repayments surpassed its revenue by almost $1 billion, necessitating further borrowing to meet existing payment obligations for Africa’s largest economy.
IMF funding has been partially reliant on the Nigerian government’s commitment to removing 50-year fuel subsidies in favor of spending on energy and transportation infrastructure, education, and healthcare. The measures have put further pressure on inflation and a soaring cost of living, leading to significant nationwide protests. Historically, local corruption, coupled with that of Western energy firms such as Halliburton, the involvement of politicians like Dick Cheney, and complicity of banks like HSBC, alongside the expanding influence of China, has led to the concentration of much of Nigeria’s resource wealth flowing to a select few beneficiaries.
Multilateral lenders like the IMF have had successful interventions in the past, including South Korea (1997), Mexico (1995), and working with the World Bank, the Inter-American Development Bank, and the Development Bank of Latin America (CAF) in Colombia from 1999-2001. China has also successfully bailed out several countries in recent years.
But it is crucial to note that in these instances, the beneficiary countries were already established allies and trade partners, enjoying privileged access to markets and previous subsidies that bolstered their industries. Additionally, criticism has been levied at the conditionality of the assistance, which increased the influence of lending countries and institutions on local economies.
The overall effectiveness of assistance to Ukraine will be difficult to determine so long as its conflict remains ongoing, and reconstruction is delayed. But attention has been brought to Ukraine’s rising debt being used as leverage by investors to increase privatization and liberalization across the economy. Ukraine’s increasing difficulty in securing funding and assistance only highlights the lack of a long-term strategy by lenders and the fragility of the country’s situation.
Developing countries are now contending with a new debt crisis exacerbated by multi-level corruption involving competing and profit-maximizing parties. Without coordinated and comprehensive efforts, international assistance risks continuing the cycle of dragging some countries from one crisis to the next.
---
*Australian-American journalist living in Washington, D.C.; world affairs correspondent for the Independent Media Institute; contributing editor to Strategic Policy and contributor to several other foreign affairs publications. Book: Budget Superpower: How Russia Challenges the West With an Economy Smaller Than Texas’  (December 2022). This article was produced by Economy for All, a project of the Independent Media Institute

Comments

TRENDING

Loktantra Bachao Abhiyan raises concerns over Jharkhand Adivasis' plight in Assam, BJP policies

By Our Representative  The Loktantra Bachao Abhiyan (Save Democracy Campaign) has issued a pressing call to protect Adivasi rights in Jharkhand, highlighting serious concerns over the treatment of Jharkhandi Adivasis in Assam. During a press conference in Ranchi on November 9, representatives from Assam, Chhattisgarh, and Madhya Pradesh criticized the current approach of BJP-led governments in these states, arguing it has exacerbated Adivasi struggles for rights, land, and cultural preservation.

Promoting love or instilling hate and fear: Why is RSS seeking a meeting with Rahul Gandhi?

By Ram Puniyani*  India's anti-colonial struggle was marked by a diverse range of social movements, one of the most significant being Hindu-Muslim unity and the emergence of a unified Indian identity among people of all religions. The nationalist, anti-colonial movement championed this unity, best embodied by Mahatma Gandhi, who ultimately gave his life for this cause. Gandhi once wrote, “The union that we want is not a patched-up thing but a union of hearts... Swaraj (self-rule) for India must be an impossible dream without an indissoluble union between the Hindus and Muslims of India. It must not be a mere truce... It must be a partnership between equals, each respecting the religion of the other.”

A Marxist intellectual who dwelt into complex areas of the Indian socio-political landscape

By Harsh Thakor*  Professor Manoranjan Mohanty has been a dedicated advocate for human rights over five decades. His work as a scholar and activist has supported revolutionary democratic movements, navigating complex areas of the Indian socio-political landscape. His balanced, non-partisan approach to human rights and social justice has made his books essential resources for advocates of democracy.

Four J&K MLAs visit Wular lake, pledge support to fisher community, environmental conservation

By Shamim Ahmed*   In a historic meeting that highlighted both environmental and social concerns, four Members of the Legislative Assembly (MLAs) visited Wular Lake to meet with the fisherfolk community, signaling a significant step in addressing their longstanding issues. This gathering, organized with the support of dedicated advocates, marks a strengthening of efforts to both safeguard the lake’s ecosystem and support the community’s welfare.

Supreme Court’s dismissal of PIL on Covid vaccine safety is counter to known science and mathematics

By Bhaskaran Raman*  On 14 Oct 2024, the Supreme Court of India dismissed a Public Interest Litigation (PIL) on the side-effects of the Covid vaccine. In 2021, the world saw the rollout of various Covid vaccine candidates. In India, Bharat Biotech’s Covaxin and Serum Institute of India’s Covishield were rolled out. Covishield was nothing but Oxford’s AstraZeneca relabelled in India. The importance of open-minded and scientific probe of Covid vaccine safety In 2020/2021, all Covid vaccines were authorized for emergency use, which meant that the necessary efficacy and safety follow-up was incomplete at that time. The originally approved trials – called randomised controlled trials (RCT) had a “vaccine” group and a “placebo” group for comparison. Such experimental comparison/control is the cornerstone of the scientific method – which even children learn in photosynthesis experiments in class-1. The vaccine trials were scheduled to conclude in late 2022/early 2023. For instance, Covax...

Swami Vivekananda's views on caste and sexuality were 'painfully' regressive

By Bhaskar Sur* Swami Vivekananda now belongs more to the modern Hindu mythology than reality. It makes a daunting job to discover the real human being who knew unemployment, humiliation of losing a teaching job for 'incompetence', longed in vain for the bliss of a happy conjugal life only to suffer the consequent frustration.

A Hindu alternative to Valentine's Day? 'Shiv-Parvati was first love marriage in Universe'

By Rajiv Shah  The other day, I was searching on Google a quote on Maha Shivratri which I wanted to send to someone, a confirmed Shiv Bhakt, quite close to me -- with an underlying message to act positively instead of being negative. On top of the search, I chanced upon an article in, imagine!, a Nashik Corporation site which offered me something very unusual. 

Right-arm fast bowler who helped West Indies shape arguably greatest Test team in cricket history

By Harsh Thakor*  Malcolm Marshall redefined what it meant to be a right-arm fast bowler, challenging the traditional laws of biomechanics with his unique skill. As we remember his 25th death anniversary on November 4th, we reflect on the legacy he left behind after his untimely death from colon cancer. For a significant part of his career, Marshall was considered one of the fastest and most formidable bowlers in the world, helping to shape the West Indies into arguably the greatest Test team in cricket history.

Buddhist shrines were 'massively destroyed' by Brahmanical rulers: Historian DN Jha

Nalanda mahavihara By Our Representative Prominent historian DN Jha, an expert in India's ancient and medieval past, in his new book , "Against the Grain: Notes on Identity, Intolerance and History", in a sharp critique of "Hindutva ideologues", who look at the ancient period of Indian history as "a golden age marked by social harmony, devoid of any religious violence", has said, "Demolition and desecration of rival religious establishments, and the appropriation of their idols, was not uncommon in India before the advent of Islam".

Will Left victory in Sri Lanka deliver economic sovereignty plan, go beyond 'tired' IMF agenda?

By Atul Chandra, Vijay Prashad*  On September 22, 2024, the Sri Lankan election authority announced that Anura Kumara Dissanayake of the Janatha Vimukthi Peramuna (JVP)-led National People’s Power (NPP) alliance won the presidential election. Dissanayake, who has been the leader of the left-wing JVP since 2014, defeated 37 other candidates, including the incumbent president Ranil Wickremesinghe of the United National Party (UNP) and his closest challenger Sajith Premadasa of the Samagi Jana Balawegaya.