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Africa: Debt (Continued)

AfricaFocus Bulletin
Oct 4, 2004 (041004)
(Reposted from sources cited below)

Editor's Note

Despite an emerging consensus in favor of complete debt cancellation for the poorest heavily indebted countries, the G-7 group of rich countries failed this weekend to reach agreement on how to cancel the debt. Meanwhile a new UN report noted that between 1970 and 2002, African countries received some $540 billion in loans, paid back close to $550 billion in principal and interest, and still held debt of $295 billion at the end of 2002.

U.S. Treasury Secretary John Snow was quoted as saying "the details [of debt relief] aren't important," while G-7 members promised to continue to study the issue and report on their conclusions by the end of the year.

While the details of the U.S. Treasury proposal are not available, an editorial in the Washington Post for October 1 said that under the proposal new resources from the World Bank for the affected country would be reduced by the amount of debt cancelled. If this report is correct, the Treasury plan would be in violation of the generally agreed principle of "additionality," that is, that debt relief should provide net additional resources for the affected countries.

This AfricaFocus Bulletin contains the press release and selected excerpts from the new UNCTAD report, "Debt Sustainability: Oasis or Mirage?" For previous issues of AfricaFocus Bulletin on debt and related topics, visit http://www.africafocus.org/econexp.php

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New UNCTAD Study Makes Case for African Debt Write-Off

UNCTAD Press Release

http://www.unctad.org

September 30, 2004

Debt servicing at any level is incompatible with attaining the UN Millennium Development Goals (MDGs) in many African countries, according to Debt Sustainability: Oasis or Mirage?, released today by UNCTAD. The report concludes that any lasting solution to the debt overhang hinges as much on political will as on financial rectitude.

Squeezing the poor?

Between 1970 and 2002, Africa received some $540 billion in loans; but despite paying back close to $550 billion in principal and interest, it still had a debt stock of $295 billion as at the end of 2002. And the figures are even more disconcerting for sub-Saharan Africa (SSA), which received $294 billion in disbursements, paid out $268 billion in debt service and yet remained straddled with a debt stock of some $210 billion. The Report concludes that this amounts to a reverse transfer of resources from the world s poorest continent.

The Report also contests the popular impression that Africa s debt overhang is simply the legacy of irresponsible and corrupt African governments. While certainly part of the story, particularly under the cloak of cold war politics, exogenous shocks, commodity dependence, poorly designed reform programmes and the actions of creditors have all played a decisive part in the debt crisis.

And a more nuanced picture shows that the debt profile moved from "sustainability" in the 1970s to "crisis" in the first half of the 1980s, with much of the debt being contracted between 1985 and 1995 under the guidance of structural adjustment programmes and close scrutiny by the Bretton Woods institutions (BWIs).

Make or break time

The Report argues a robust economic case for a total cancellation of Africa s debt:

  • Low levels of savings and investment leading to high poverty and adverse social conditions are among the biggest constraints on growth in low-income African countries;
  • Continuing debt servicing by African countries would nominally constitute a reverse transfer of resources to creditors by a group of countries that by all indications could least afford this; and
  • In order to ensure that Africa will be able to reduce poverty by half by 2015, in line with the MDGs, at the very least growth levels will have to double to some 7%-to-8% per annum for the next decade, the financial requirements of which are incompatible with present and projected levels of debt servicing.

And this economic case is reinforced by a moral imperative for a shared responsibility, particularly considering that the BWIs have had the greatest influence on the development policies on the continent through structural adjustment programmes and related lending, which have not had the expected outcomes in ensuring growth and development. Moreover, official lending was in large part also predicated on the implementation of such programmes, and much of the debt of countries with profligate regimes that were of geopolitical/strategic interest is considered "odious".

Over the past two decades, examples have abounded of major bailout operations both domestically and internationally where financial markets were seen to be at risk. While Africa s external debt represents a huge burden to the indebted countries, it has not yet galvanized the political will required by its creditors to undertake similar action.

In the absence of such political will, the Report calls for placing a moratorium on debt servicing (without additional interest being accrued) pending the institution of an independent panel of experts to assess the sustainability of debt based on a realistic and comprehensive set of criteria, including those of meeting the MDGs. The Report recommends that such an assessment should include all public debt. This is particularly so because the Heavily Indebted Poor Countries (HIPC) Initiative fails to take account of domestic debt, which in recent years has become an important factor in the total indebtedness of African countries.

However, even a full debt write-off would be only a first step towards restoring growth and meeting the MDGs. UNCTAD estimates that such a write-off would represent less than half those countires resource requirements, with the gap filled by increased official development assistance (ODA) grants as a prelude to Africa increasing the level of domestic savings and investment required for robust and sustainable growth.

Meeting the MDGs

It is in this context that the Report concludes that under present conditions, the MDGs will remain elusive for the African continent. As UK Chancellor of the Exchequer Gordon Brown insisted earlier this year, "On current progress, we will fail to meet each Millennium Development Goal in Africa not just for 10 years but for 100 years". That failure can in part be traced to the "unaffordable" debt burden that has strangled the continent s growth prospects for the past two decades, according to Jeffrey Sachs, Special Economic Advisor to UN Secretary-General Kofi Annan. And African leaders, including Ethiopian Prime Minister Meles Zanawi, have begun to ask whether the HIPC Initiative has the capacity to provide adequate debt relief to its beneficiaries.

The HIPC Initiative was launched in 1996 by the BWIs with the aim of reducing the external public debt of the 42 poorest countries (of which 34 are in Africa) to sustainable levels. Calls for "deeper, broader and faster" debt relief led to the introduction of an enhanced version in 1999, which was to make it easier for poor countries to find a permanent exit solution to their debt crisis.

But eight years on, the Report argues, despite some initial progress following the adoption of the enhanced Initiative, heavily indebted poor African countries are still far from achieving sustainable debt levels.

In a forward-looking evaluation, the Report findings include:

  • Post-HIPC debt service payments are projected to increase from about $2.4 billion in 2003 to $2.6 billion in 2005.
  • Based on historical growth rates, the 23 African HIPCs that reached their decision points by the end of 2003 have only a 40% chance of attaining debt sustainability by 2020.
  • While some completion point countries have debt ratios exceeding sustainable levels as defined by the Initiative, a number of equally poor debt-distressed African countries find themselves left out of the Initiative altogether.
  • Interim relief (between decision and completion points) is inadequate and falls short of the proportion of the total debt relief that creditors had promised to deliver during this critical period.
  • Bias in the debt sustainability analysis - and in particular, persistently over-optimistic assumptions about economic and export growth -- means that calculations of debt sustainability thresholds based on debt-to-export and debt-to-revenue ratios are inadequate indicators of the poverty-indebtedness nexus.
  • There is uncertainty surrounding the funding of debt relief, particularly for conflict and post-conflict HIPCs;
  • The jury is still out on whether HIPC debt relief is additional to ODA flows. New initiatives are needed to attain a clear and significant level of additionality and to prevent an unfair reallocation of future aid to HIPC debt relief.

In a nutshell, "it is becoming increasingly doubtful whether HIPC beneficiaries can attain sustainable debt levels, based on export and revenue criteria, after completion point, and maintain these in the long term", observes the UNCTAD Report.

Policy space critical

For any debt relief framework to deliver tangible results, Africa needs actively to pursue policies for prudent debt management, economic diversification and sustained economic growth. But doing so calls for better access to markets, much increased investment in human and physical infrastructure and a considerable widening of the policy space narrowed by adjustment programmes, including in the context of poverty reduction strategies.

For more information:
UNCTAD Press Office T: +41 22 917 5828 E: press@unctad.org or K. Kousari T: +41 22 917 5800 E: kamran.kousari@unctad.org


Debt Sustainability: Oasis or Mirage?

UNCTAD/GDS/AFRICA/2004/1

[brief excerpts only; full report available at
http://www.unctad.org/Templates/WebFlyer.asp?intItemID=3246]

Introduction

In the context of the Millennium Development Goals (MDGs), the international community has set itself a target of reducing poverty by half by the year 2015. Many observers have now come to the conclusion that, on present trends, there is very little likelihood that this objective can be achieved at any time close to that date in the poorer countries, including in Africa.

In its report on Capital Flows and Growth in Africa (UNCTAD, 2000), as in subsequent reports on economic development in Africa, UNCTAD has argued that the current levels of GDP growth would have to be raised to seven or eight per cent per annum and sustained if poverty reduction targets were to be met. This would imply doubling the current amount of aid to the continent and maintaining it at that level at least for a decade if the continent was to break the vicious circle of low growth and poverty. Such an action, within the context of an appropriate mix of domestic policies and supportive international measures, would generate sufficient investment and savings to reduce aid dependency in the longer term and place Africa on a sustainable growth path.

The continent's debt problems and its resource requirements are inextricably linked to the capacity of African countries to generate capital accumulation and growth. Among the policy measures that UNCTAD has advanced (UNCTAD, 1998) is the need for an independent assessment of debt sustainability in African countries by a high-level panel of experts on finance and development, selected jointly by debtors and creditors, with an undertaking by creditors to implement fully and swiftly any recommendations that might be made. While this recommendation did not find favour in the donor community, it was contended that the Heavily Indebted Poor Countries (HIPCs) Initiative, and later its enhanced version, would ensure a permanent exit solution to Africa's debt problems. There now seems to be an emerging consensus, however, that many African countries continue to suffer from a debt overhang despite the HIPC Initiative and various actions in the context of the Paris Club.

The fact that even those countries that have reached (or are about to reach) the so-called completion point will soon find themselves in an unsustainable debt situation gives credence to the arguments advanced by critics with respect to the inappropriateness of the criteria applied in the debt sustainability analysis. And the fact that several more debt-distressed African countries are not eligible for HIPC debt relief reflects the lack of objectivity in the eligibility criteria.

Debt sustainability is basically a relative concept. The questions that beg for a response are: what level of debt is sustainable for countries in which the vast majority of the population lives on under $1 a day per person? Have debt sustainability criteria been based on internationally recognized benchmarks such as those of the MDGs, or on objectively and theoretically verifiable criteria? What is the relationship between Africa's total external debt stocks and the actual amount of debt serviced? Is complete debt write-off a moral hazard or a "moral imperative"?

2. The genesis and nature of the African debt crisis

...

Africa's external debt burden increased significantly between 1970 and 1999. From just over $11 billion in 1970, Africa had accumulated over $120 billion of external debt in the midst of the external shocks of the early 1980s. Total external debt then worsened significantly during the period of structural adjustment in the 1980s and early 1990s, reaching a peak of about $340 billion in 1995, the year immediately preceding the launch of the original HIPC. Overall, Africa's external debt averaged $39 billion during the 1970s, before ballooning to just over $317 billion in the late 1990s. ...

A significant factor in the debt crisis of African countries was the two oil price shocks of 1973 1974 and 1979 1980, the latter leading to a deterioration in the external environment that lasted until 1982. The rise in oil prices not only had an adverse impact on the trade balance of oil-importing countries, but also caused fiscal crises in most of these countries, thereby undermining domestic investment. The second shock occurred at a most inauspicious period, as it coincided with sharp rises in real interest rates. Within the context of the global recession of 1981 1982, which depressed demand for developing countries' exports, and deteriorating terms of trade, the balance of payments crisis that afflicted developing countries was exacerbated, not only for oil importers but also for oil exporters. ,,,

Lending to low-income countries, particularly those in Africa, by bilateral and multilateral creditors was predicated on economic reforms being undertaken in the context of structural adjustment programmes, and total longterm outstanding debt increased by about 200 per cent between 1980 and 1995, the year before the HIPC Initiative was launched. The multilateral and official debt components increased by more than 500 per cent and 300 per cent respectively over the same period. The fact that these programmes failed to deliver on the promise of growth and development meant that the debt situation of many African countries continued to deteriorate. ...

A cursory glance at Africa's debt profile shows that the continent received some $540 billion in loans and paid back some $550 billion in principal and interest between 1970 and 2002. Yet Africa remained with a debt stock of $295 billion. For its part, SSA received $294 billion in disbursements and paid $268 billion in debt service, but remains with a debt stock of some $210 billion. Discounting interest and interest on arrears, further payment of outstanding debt would represent a reverse transfer of resources.

...

3. Is HIPC debt relief additional to traditional aid?

The official breakdown of the costs and benefits of the HIPC Initiative may be highly misleading, as it does not take into account the "true" allocation of costs and benefits. For example, if all creditors deducted the costs of HIPC debt relief from their traditional aid budgets for HIPCs, this would imply that the HIPCs were paying for the debt relief in terms of reduced traditional aid. The final costs to creditors would be zero, as would be the net benefits to HIPCs. Hence, in determining the true costs and benefits of the HIPC Initiative, it is necessary to make some decisions on how to allocate the costs of bilateral and especially of multilateral creditors to individual countries. This raises two important issues. First, is HIPC debt relief additional? And, second, will creditors make reallocations in their traditional aid budgets among the recipients of traditional aid due to the provision of HIPC debt relief?

Comparing data for the three years before the adoption of the HIPC Initiative (1994 1996) with data for the three years after the adoption of the HIPC Initiative (1997 1999), Gunter (2001) showed that there has been close to zero additionality, even for HIPCs that had reached their completion point. The World Bank's OED Review (Gautam, 2003) concluded that, even though there has been close to zero overall additionality, the most recent trends in aid flows indicate some aid reallocations towards eligible HIPCs.

...

In any case, given that the real costs of debt relief can be spread over the lifetime of the remaining loans, which for multilateral loans is around 30 to 40 years, the annual cost of 100 per cent debt relief, at least for those HIPCs at the decision/completion point as at September 2003, remains relatively small in comparison to the resource requirements for meeting the MDGs. It has often been argued that a 100 per cent debt write-off will send the wrong signals to debtor countries and others, set a bad precedent and thereby create a moral hazard for the IFIs. However, there is no greater moral hazard than the one entailed in constant restructuring and partial debt forgiveness based on creditors' perspectives and interests, as is the case under terms agreed with the Paris Club. On the contrary, moral hazard will be limited by dealing decisively with the recurring debt crisis of poor African countries through a truly permanent exit from constant rescheduling that establishes a basis for long-term debt sustainability for debtors within an appropriate framework of national and international policy measures. A complete debt write-off, therefore, becomes a "moral imperative", as it will guarantee resources to help meet the MDGs in Africa and assure an exit from the debt crisis for the continent. ...

The analysis illustrates the weaknesses of the HIPC approach with respect to finding a permanent exit solution to the debt crisis of African HIPCs, and highlights the fact that several other equally poor African countries have been left out of the process. On the question of the level of debt deemed to be sustainable for countries the majority of whose population lives on less than one or two dollars a day per person, the answer is self-evident: considering the seriousness with which the international community is addressing the attainment of the MDGs, these targets should be used as a major benchmark for debt sustainability. This in turn implies that virtually all of the outstanding debt would need to be written off, as the resources needed to attain these goals are substantial.

...


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