ECA's Thirty-third session of the Commission/Twenty-fourth meeting of the Conference of Ministers/Seventh Conference of African Ministers of Finance
6 - 8 May 1999 Addis Ababa, Ethiopia

VII. Africa's External Debt

74. In addition to ODA and private foreign and domestic flows, which are conventional sources of development finance, the resolution of Africa’s debt has great potential as a non-conventional source of resources. Most of sub-Saharan, low-income countries’ debt is owed to official creditors. In contrast, 40 per cent of the debt of African middle-income countries, mainly North African, are commercial. Of the five ECA operational subregions, North Africa has the largest share of Africa’s total debt — over one-third of the total in 1996. The subregion is the most current on debt service, accounting for over 40 per cent of the total debt service payments by Africa to creditors in 1996. While debt severity is usually associated with sub-Saharan Africa, at 30 per cent (1994-96) Morocco’s ratio of total debt-service to export revenue is one of the highest in Africa. Even though the severity of debt differs between countries and subregions, Africa’s debts are too high to afford and debt relief on a more inclusive and more effective basis than hitherto remains essential to the continent’s ability to meet minimum development needs. As a proportion of GDP and of export earnings, Africa’s debt of $350 billion in 1998 is the highest of any developing region (see Appendix Table 5).

75. Judged by the debt burden indicators and debt servicing capacity, it is clear that many African countries are still in debt difficulty in spite of previous debt relief extended by creditors. The discrepancy between debt service paid and debt service due has continued to grow. Additionally, the ratio of scheduled external debt service relative to government current expenditure exceeded 50 per cent in a large number of African countries. The extent of the inability to pay is indicated by accumulated arrears which, by 1996, had reached over $64 billion, amounting to more than a quarter of the total debt—and accounting for about two-thirds of the increase in debt in 1998 (UNCTAD, 1998 p. XII).

76. What African countries need is the release of more resources from debt servicing. The large debt implies that vast amounts of resources are allocated to debt service, thereby reducing what is available for financing development. For most countries, it means that inadequate resources are left for national development after debt service. The implication is that the debt has become so large, relative to export earnings and economic size of the countries, that it would be impossible to repay it without imposing an unbearable burden on debtor countries. There is already abundant empirical evidence that Africa's external debt burden is having a severe adverse impact on investment and renewed growth. It impedes public investment in physical and human infrastructure and deters private and foreign investment thereby creating a situation that discourages inflows of new external resources (ECA, 1997 p.27).

77. Given the negative effects of the debt burden on African economies and the need to release resources, the issue of debt should be discussed more fundamentally from a political dimension and the perspectives of Africa’s economic development. While the need to do something about debt appears to be universally accepted, what to do is still being debated, as past initiatives clearly have not been comprehensive enough. The most recent one—the Heavily Indebted Poor Countries (HIPC) Initiative — was born out of the recognition in the 1990s that a significant number of low-income countries had debt burdens that remained above sustainable levels over the medium term. Even strong policy performers that made full use of current debt relief mechanisms were in trouble. The primary objective of the HIPC Initiative is to ensure — for countries with a good track record of adjustment and reform — a robust exit from debt rescheduling and the achievement of debt sustainability.

78. During the first two years of implementation of the HIPC Initiative, 10 countries were reviewed for eligibility. Debt relief in the amount of $6.1 billion was eventually committed to seven countries, five of which are in Africa: Burkina Faso, Côte d'Ivoire, Mali, Mozambique and Uganda. A number of African countries in the pipeline include Ethiopia, Guinea-Bissau and Mauritania. No doubt the HIPC Initiative, spearheaded by the World Bank and the IMF, is the boldest step in the direction of debt relief so far. While some have argued that it is too early to pass judgement on HIPC, doubts have been expressed about its ability to solve once and for all Africa’s seemingly intractable debt problem. Basic concerns have been expressed with regard to eligibility for and the adequacy of debt reduction, the speed at which relief should be granted — the length of the completion period — (UNCTAD, 1998), the performance criteria and the technical basis of the debt sustainability analysis. Also at issue is the role of the Fund and the Bank, both of which are creditors. As creditors to the HIPC Initiative, the Bank and Fund may not be free from possible conflict of interest (UNCTAD, 1998).

79. African Finance Ministers at the Sixth Session of their Conference, held in Addis Ababa in 1997, shared the above concerns. The Ministers were of the opinion that the debt sustainability analysis used to determine eligibility for the various stages of the Initiative and the basic assumptions underpinning this analysis were unrealistic. They pointed out that a lot of countries are struggling over the seemingly tough performance criteria under the programme — a situation that could result in assistance for too few countries, too late. It has also been argued that during the interim period of three years, greater cash flow relief should be provided. The Ministers agreed that for the Initiative to be effective in re-establishing conditions for sustained growth, significant adjustments need to be made regarding the eligibility criteria, the adequacy of the debt reduction granted and the speeding up of the implementation of the Initiative. It has been argued that if the international community is genuinely interested in enhancing the impact of the HIPC, it should seriously consider relaxation of the eligibility criteria — including the length of the workout to the completion point — so that more African countries can benefit from it. Of great importance is the need to increase substantially the amount of relief granted under the Initiative so as to restart Africa on the path of sustained growth

80. Additional measures to reduce the debt burden over the short run have been advocated. Some of the options suggested include debt reduction and, more radically, debt cancellation. Some analysts have argued that there are two realistic options for the African debt situation: debt cancellation and conversion into grants of any remaining official bilateral and multilateral debt (UNCTAD, 1998a). Church organizations and NGOs have championed the case for debt cancellation — not the African countries. Debt cancellation for African countries can be based on a number of grounds. The first is that, given the magnitude of the debt and the continent’s growth prospects, particularly in the export sector, African countries cannot realistically pay the debt in the foreseeable future. Second, releasing resources in the form of debt cancellation, or the conversion of debt into grants, will afford the affected countries the opportunity to return to a growth path. No matter what approach is taken, the resolution of external debt problems is a touchy subject because of the underlying and interwoven economic and political issues. Critical to the evolution of the debt debate is the position of the Bretton Woods institutions.

81. The position of the IMF is that the debts are obligations that must be honoured and that calls for their cancellation are therefore unrealistic and raise false expectations. Unconditional cancellation raises the risk that debt relief could be squandered on official corruption, increased military expenditure, or grandiose projects, with little benefit, if any, in terms of sustainable growth or poverty reduction (IMF Survey, 1998). That position is, of course, understandable from the perspective of development institutions to which debts must be paid in order for them to maintain some degree of viability and integrity. The reality of the situation, however, is that a number of African countries are too far gone and payment seems impossible under any plausible, human development-centreed economic growth scenario.

82. Other reasons given against debt cancellation include the "moral hazard" argument. In its crude version, the argument is that any scheme of forgiveness will lead debtor countries to pursue irresponsible policies and lead eventually to a new round of over-borrowing. A variant of the argument goes further to assert that if debts were reduced through any form of relief or forgiveness, debtor countries would be less concerned with pursuing the objective of domestic stability and the promotion of growth. Some have also argued that the African debt crisis in particular cannot be divorced from recent developments in Africa with respect to governance issues, particularly corruption and lack of accountability and transparency, factors that have led to the mismanagement and derailment of progress in Africa. They could similarly undermine the expected benefits of debt cancellation for most ordinary Africans.

83. Many potential benefits of debt reduction can be identified. First, we have seen in Section V that stemming and reversing capital flight would be the single most effective way of financing Africa’s development. Studies have shown that the debt to GNP ratio explains upwards of 40 per cent of capital flight. For Guyana, for example, debt forgiveness under HIPC, which is estimated to reduce indebtedness by 25 per cent, would reduce the proportion of Guyanese private wealth held abroad by 10.1 per cent. Guyanese private wealth holders would repatriate $610 million as a result. Each dollar of public funds benefiting the country from debt reduction is augmented by $2.41 of repatriated funds. Second, debt reduction will go a long way towards reducing the high degree of uncertainty for both domestic and foreign investors. Third, many of the policy makers will be released from protracted and uncertain debt negotiations. Fourth, much-needed resources will be released for Africa’s development by the debt reduction or cancellation. Fifth, the removal of the elements of uncertainty inherent in the huge debt will stimulate private investment. Sixth, as a result of the release of new resources there will be growth in the affected African countries, which will have spill-over effects that will benefit developed countries in terms of the demand for their goods and services. Moreover, as some analysts have pointed out, all the arguments against debt cancellation beg the issue. It is clear that substantial debt reduction must constitute a major element in any serious, internationally supported effort to restart African development. What is needed for the way forward is strong political will. The prospects for a political solution should be brighter, given the fact that a significant proportion of Africa’s debt is owed to governments and official institutions, rather than to private creditors.

84. The debate on the African debt problem has to be conducted within the context of African development. Thus, the impact of debt on the performance of African economies has to be linked to their capacity to alleviate, reduce or totally eliminate poverty. The World Bank’s Board, while acknowledging the role of the HIPC Initiative in providing debt relief to poor countries, has called for a fundamental review of the Initiative. Supporting the review, creditors have called for a reconsideration of debt sustainability analysis as well as the impact of the Initiative on poverty reduction. They also acknowledge the political dimensions of the African debt problem and its impact on economic and social development. According to the IMF (1998), the Boards discussed the link between debt relief and social development and concluded that this link should be viewed from the perspective of overall poverty alleviation. Although the HIPC framework has always emphasized the need to link debt reduction with effective long-term policies for economic and social development and poverty alleviation, its debt relief is primarily aimed at lowering external debt to sustainable levels with benefits accruing over time, and not in the short run. The HIPC Initiative was not intended for the total elimination of debt.

85. What is needed for a solution to the African debt crisis is political will on the part of creditors, as was called for at the Sixth Conference of African Ministers of Finance in 1997. It is encouraging to point out that a number of creditor governments, e.g. the U.K., have already unilaterally cancelled portions of debts owed them by the poorest countries, most of which are African. New initiatives by key G-7 creditors — Germany, UK, USA, France and Canada — have now been put forward for consideration at the G-7 meeting in Cologne, Germany, in June 1999. The proposals aim at enabling as many countries as possible to make the necessary adjustments and receive debt relief quickly and comprehensively. Included in the proposals are certain quid pro quo provisions on governance and other issues related to the use of resources released from cancelled debt obligations, as a response to the concerns raised against total debt cancellation. While the current HIPC framework is the point of departure for these proposals, they in a way represent a shift in the official position of the industrialized creditor countries, which hitherto rallied behind the existing mechanisms and terms of the HIPC Initiative, without entertaining pleas for their revision.

86. The key elements of the German initiative are: shortening the "work out" period up to debt relief from six years to three years so that the countries qualifying for inclusion can benefit from debt cancellation as early as possible. The proposal stipulates that all countries entitled to participate in the debt relief process will be able to ascertain the extent and date of their debt relief by the year 2000. Tacked to the eligibility criteria is the clause that such countries should observe the principles of the welfare state (a proviso targeted at poverty and inequality reduction) and the rule of law. As in the HIPC Initiative, eligible countries should also be carrying out reform programmes in collaboration with the IMF and World Bank. For some countries confronted with particularly difficult problems (as determined in the Bank/Fund macroeconomic framework), the initiative proposes that the Paris Club consider total cancellation of commercial credits and loans. Applying multilaterally coordinated procedures, the initiative further proposes binding and complete cancellation of development assistance-related debts by the Paris Club for countries that qualify for HIPC treatment. However, it qualifies this with the provision that debtor countries use funds released by this action for projects that foster sustainable development and reduction of poverty and inequality, and that fulfill basic legal and economic principles of good governance. Recognizing that no improvement in the living standards of the poor can be sustained by any amount of debt relief in a situation of a poor political environment and conflict, the initiative stipulates that every debt relief initiative be embedded in a comprehensive strategy for conflict prevention. Unlike some other proposals, the German initiative does not call for a commitment now to sell additional stocks of IMF gold. Germany has committed itself to meeting its share of the financing of the HIPC Trust Fund and replenishment of the IMF’s ESAF.

87. The US initiative proposes coordinated action, which could result in forgiving $70 billion in global debt relief by making significant improvements to the HIPC Initiative. It proposes a shorter "work out" period, the complete forgiveness of all bilateral concessional loans to the poorest countries and deeper and broader reduction of other bilateral debts raising the percentage from 80 to 90. It also proposes to provide at least 90 per cent of future development assistance to HIPC-eligible countries on a grant basis, the sale of additional IMF gold and further contributions by G-7 countries to HIPC Trust Fund resources.

88. The British Chancellor of the Exchequer proposes that by the end of the year 2000, all highly indebted poor countries be on a systematic programme of debt reduction — and wipe out $50 billion of debt over the subsequent years. He also calls for a reduction in the length of the debt "work-out period" before countries qualify for debt relief, in line with the German and US proposals. He further proposes the sale of more IMF gold (in addition to the 5 million ounces currently proposed) to fund the HIPC Trust Fund, in line with the US proposal. The French and Canadian governments too have put forward a proposal for the Cologne Summit, essentially along similar principles. In sum, these proposals seem to resonate together, except on the matter of additional sale of IMF gold, where Germany would like to keep the matter open. These proposals could significantly reduce the waiting period before effective debt relief is granted. They could also result in significantly more countries becoming eligible for debt relief, in contrast with the current HIPC process.

89. A related proposal is by UNCTAD. Drawing on established national insolvency procedures, UNCTAD has emphasized the need for "independent assessment" and "immediate write-off of all unpayable debt" as possible elements of a strategy for a lasting solution to the problem. UNCTAD, however, recognizes that there may be serious difficulties in applying the insolvency procedures to sovereign or private international debt through an international bankruptcy court. Nevertheless, it maintains that it is possible to establish key insolvency principles which, when applied within the existing international framework, would dictate an immediate write-off of all sub-Saharan Africa’s debt as unpayable. UNCTAD advocates an independent assessment of debt sustainability in the future, arguing that experience has demonstrated that the approaches to debt reduction have fallen short of addressing the problem. This has perpetuated aid dependency and undermined the application of "sound policies" and commitment to and ownership of reform programmes, among other problems (UNCTAD, 1998-a, pp.127-130).

90. For middle-income countries, mainly in North Africa, the standard Houston Terms of rescheduling official Paris Club debt at market rates apply. The arrangements also allow debt swaps and conversions. All ODA and 20 per cent of non-ODA debt may be converted. Commercial debt, which is relevant for middle-income countries, is restructured under the London Club and its Coordination Committee constituted of the main creditor banks. Since 1980, restructuring for middle-income countries has been in the context of the Brady Plan, whereby commercial debt can be restructured in the form of debt conversion, using the reduction facilities offered by the secondary debt market through partial discounting. The facilities can be a vehicle for attracting additional investment towards priority sectors and for privatizing public assets. Creditors can choose between securitization with old-debt swaps against fresh guaranteed loans at discounted rates; debt repurchasing at substantial discounts; debt swaps against new par value securities at lower interest rates; or debt swaps against equity investment in private and privatized public companies. A number of middle-income African countries have benefited from debt and debt service reduction by the Paris Club and through the Brady Plan. Egypt’s debt stock declined from $44.2 billion in 1988 to $31.4 billion in 1996 after debt reductions by the Paris Club. Nevertheless, for most middle-income African countries, the reductions obtained on the debt stock and debt service are generally low. The impact of debt-service reduction on the balance of payments has been estimated at a maximum 5 per cent of exports. Moreover, the decline in external debt has usually been accompanied by a rise in domestic debt, negating most of the expected tax-reduction benefits.

91. While debt conversions — debt/equity swaps and debt/development bonds swaps — between 1985 and 1995 amounted to $141 billion for all developing countries, Africa accounted for less than 5 per cent of this amount. The question is whether the potential exists for Africa to take further advantage of debt conversion; i.e. swaps of external debt against local currency, financial instruments or shares. Comprehensive use of this option is constrained by the low ceiling of eligible non-ODA debt, weakness of the secondary market, the poor interest shown by creditors and the likelihood of the rise in domestic debt, which can unravel the macroeconomic framework under adjustment.

92. The above initiatives present opportunities that Africa must be fully aware of and issues on which to speak with one voice before decisions are taken by creditors. This is even more critical in view of the fact that the impact of the HIPC Initiative has been insignificant, and not all middle-income African countries seem to have benefited from debt conversion and other debt-reduction instruments to reduce their debt to manageable levels. The critical importance of African countries speaking with one voice on these issues was recently emphasized by the President of Mozambique on 20 September 1998, when he urged developing countries to fight together to seek not reduction but the total scrapping of the debt. Similarly, UNCTAD has emphasized that the "absence of a consistent debtors' strategy" for effectively dealing with the debt problem is a significant factor contributing to the slow progress towards a lasting solution. A follow-up strategy on this issue is an important expected outcome of the Joint Conference of African Ministers of Finance and those responsible for Social and Economic Planning.