Panel: Review of the African Debt Situation and Domestic Resource Mobilization in Africa

Before addressing the theme under discussion, a major paradox of our time will help us place it in the right context of the contradictory reality where we live. A couple of weeks ago the World Bank report reminded us that official development assistance was at its lowest levels in 18 years, since 1981, allegedly because of budgetary constraints in major donor countries. At the same time we were witnessing the first chapter of a war which, according to some estimates might well end up costing 22 billion dollars or more, including the ressettlement of refugees, but without considering the cost of reconstruction of destroyed infrastructure (the total cost of the Gulf war was 102 billion dollars). So, once more, although there are no resources to build, to develop, there is apparently no scarcity of money for war, and for destruction. When and where are we going to find the "moral equivalent of war" in terms of mobilizing people's energies and resources for debt relief and for growth and investment in Africa.

There are two ways of dealing with the first element of the theme of this Panel: either one accepts the current framework and strive to improve it or one challenges it and try to come up with something new. Perhaps this situation could be better described as the dilemma between realism and boldness.

I will later explore whether this is the right choice of words. For the time being, let us settle for it and try to follow the two alternatives. A comprehensive review of the African debt situation would have to go beyond the HIPCs initiative as can be shown by the case of Uganda, one of the very few countries that have benefitted so far but is now back in a difficult debt situation.

There is no denying, however, that we should start by the HIPCs initiative, by far the most important framework of reference. On the eve of the Cologne Summit, G-7 countries appear to engage in what some observers have described as true "beauty contest" in advancing proposals that raise hopes that a breakthrough of sorts may be reached. The competition has become so fierce as to pose another dilemma to international organizations or even NGOs: by trying to stay within the reasonable bounds of what seems feasible or "fundable", we run the risk of appearing too timid in comparison with some G-7 governments, or of being largely by-passed and marginalized by events.

In order to agree on what we are discussing, it would be useful to remember a few important facts about the African debt. Over 93 percent of that debt is public or publicly guaranteed, 80 percent is owed to official creditors and over 40 percent to multilateral financial institutions. There is a continuous growth of arrears which is perhaps the best indicator of the extent of debt overhang in Africa. Accumulated arrears of interest and principal payments reached 64 billion dollars in 1996, i.e. Some 27½ per cent of total debt. More worrying is the fact that two-thirds of the increase in debt since 1988 has been due to arrears. Despite the HIPCs initiative, outstanding long-term debt rose by 4.8 billion dollars for the HIPCs countries as a whole last year to 169.5 billion dollars. With commodities prices in decline, a further accumulation of arrears seems probable.

It is no secret that debt-servicing for HIPC eligible countries absorbs on average 40 per cent of revenues. Tanzania, for example, spends 9 times as much on debt payment as on health care (despite the AIDS pandemic), and 4 times more than on education. In short, debt servicing is crowding out national investment in human and capital infrastructure.

Confronted with this critical situation, an author who is no longer fashionable, Vladimir Lenin, would ask: «What is to be done?»

As the focal point for debt in the UN-system, UNCTAD has recently put forth a set of proposals that we hope may become the basis for a common position for debt policy advocacy by the United Nations as a whole. They could be summarized in the following seven points:

1. Review the list of HIPCs in order to ensure that all poor countries facing debt servicing difficulties will be considered under the initiative. About half a dozen LDCs are not currently covered. The sunset clause extended to the end of the year 2000 must be open for review. Although the initiative should not be considered a permanent mechanism it should not be closed before all poor countries with debt servicing difficulties are given a chance to be included. Other debtor countries, such as low-income countries which have not been granted Paris Club concessional re-schedulings or are assumed to have exited from such re-schedulings, could eventually also need HIPC assistance.
2. Shorten the time frame for implementation to 3 years, so that final debt relief can be provided after the first track record of a single instead of two ESAF programme, which would be sufficient to ensure that relief goes to countries with reasonably sound macroeconomic policies. There is much merit in establishing a link between debt relief and poverty reduction. However, any such link should not take the form of additional conditionality, even of a benign nature, that could have the effect of further slowing down the HIPC process. Social policies are already monitored under ESAF programmes. Further actions to reduce poverty should perhaps be left to the initiative of debtor countries themselves, in order to ensure that such actions are demand-driven and correspond to national priorities.
3. Apply less restrictive eligibility criteria, notably by reducing the thresholds of exports and debt-service-to export ratios. For certain countries facing very severe Apply less restrictive eligibility criteria, notably by reducing the thresholds of debt-to-foreign exchange constraints, the thresholds could be lower than the general eligibility level. The additional two criteria on export-to-GDP and fiscal revenue-to-GDP ratios should be dropped. The aim should be to provide a real exit from debt re-scheduling.

 

4. Set a ceiling for the share of fiscal revenue allocated to external debt service, and provide additional debt reduction if necessary to meet this benchmark; 25% of fiscal revenue allocated to external debt service is an excessive burden for HIPCs.

 

5. Cancel HIPCs' ODA debts, and extend at least 90% reduction on other official bilateral debts to all HIPCs, consider full cancellation of bilateral official debts for post-conflict countries, countries affected by serious natural disasters and countries with very low social and human development indicators. Paris Club debt eligible for reduction should also include post cut off date debt.

 

6. Raise funds for debt relief through partial sales of IMF gold and a prompt and substantial general allocation of SDRs, industrialised countries and others in a position to do so being invited to earmark their allocations for relief to the HIPCs.
7. Debt relief should be financed by resources that are additional to previously envisaged budgetary allocations. It is imperative to avoid any trade-off between debt relief and new ODA. Resources earmarked to reduce the debt burden of HIPCs should not come from the aid budget, implying, therefore, a sheer accounting exercice and resulting in a net loss of new aid to poor countries. This set of proposals goes beyond what has been suggested by 6-7 countries and could eventually become a more or less common denominator, if one wishes to stay within the context of the current framework. Will it prove sufficient to eliminate the adverse effects of the debt overhang on investment and growth in Africa? I hesitate in giving a positive answer, even if the proposals are fully implemented.

I feel that what one needs here is to seek inspiration from what President Frank D. Rooseveld said at the beginning of the New Deal when many of his policies had been condemned by the Supreme Court: "What this country needs" - he stated - "is bold experimentation". If we fail the first time, then we have to try a second approach and a third if necessary; we have to try again and again until we solve the problem."

Boldness or a fresh appraoch would require a new way of evaluating whether the debt is sustainable, payable or not. In UNCTAD's opinion, this is a question that should be considered by an independent body composed of high-level personalities, knowledgeable with regard to financial, development and social questions, chosen in agreement among creditors and debtors with an undertaking by creditors to write off debt which is be found to be unpayable. This proposal would eliminate a conflict of interest as it would not be solely the creditors who would be deciding the criteria to be applied and we know that all these criteria open to scrutiny and debate. This is very much in live with chapter II of the US Bankruptcy Code (chapter 9 deals with public debtors). Under the notion of insolvency, debtors are able to benefit from arrangements such as debt standstill, debtor-in-possession financing and debt reduction and, it is not necessary to have unanimity among creditors as regards the deal.

Despite its central importance, debt relief falls short of providing us with a full picture of how to mobilize domestic resources, the second element of our subject. The main problem here is of course the fact that the savings rate in Africa - around 16 to 17 percent of GDP, only half of the more than 33 percent in Asia, is extremely insufficient to generate the necessary resources for investment at a self-sustaining pace. Besides debt reduction, this problem can only be solved by what the Prime Minister suggested yesterday in an important speech whose main message was that the road to development is self-reliance, sound stable political and economic policies supplemented by a large array of mutually-reinforcing means from abroad that should encompass: 1) official aid (in 1998 concessional official finance represented about two thirds of total net resource flows to Sub-Saharan Africa); 2) Foreign Direct Investment where the current unjustifiable low levels provide substantial room for improvement; 3) Capital market Development as a relevant medium and long-term goal to create a diversity of financial instruments and tap the potential for venture capital funds, bond markets and other possibilities. Stock exchanges have been developing in cases like South Africa, Egypt, Mauritius and others. Given the relatively small economic size of many African countries, the promotion of capital market development on a regional or subregional basis may also represent a realistic option. There is no reason here to adopt an attitude of passivity or excessive pessimism. As modest examples of what can be achievable I would like to mention the Global African Development Fund, a private investment fund created as a direct result of a pilot seminar co-sponsored in June 1997 by UNCTAD and UNIDO for the promotion of private investment flows to LDCs. And the African Capital Market Forum, the Economic Commission for Africa and UNCTAD are currently making preparations for launching a major project on capital market development in Africa.

In conclusion, let us go back to the point where we started. Is this really a dilemma between realism and boldness? What is realism? Is it to passively accept what appears as the limits of what is possible now even if it is "too little, too late" or to recognize the difficulties but fight to remove them? Realism too often is synonimous with resigning ourselves to the unwillingness of the powerful to do what it takes to solve the problem. We all know that, just a few months ago, the previous German government had particular views on this matter that were substantially altered in a more progressive way after the elections. So, realism before the elections was something different from realism after them. This is to show that the history of debt has been a continuous evolution from one position to another as each of them proved in turn to be inadequate. Take for instance the Paris Club application of concessionary terms since 1987, the so-called Venice terms. They became, two years later, the Toronto terms (33% debt reduction), the London terms (50%), the Naples terms (67%) and recently the Lyons terms (80%). Each time realism seemed to be the acceptance of the previous terms only until they were changed. This is enough to show that on this issue there are no God-given limits, limitations imposed by natural phenomena like in the planetary system or by the iron law of economic logics. In other words, this is not a case of technical determinism but of political will. Debt has always had a strong political and human component and the wiping out of the debts of countries defeated in the two world wars should remind us of this truth. Neither should we accept at face value the allegation that the financial resources for a lasting solution do not exist. How could we reconcile this argument with the fact that a country facing serious difficulties, the Russian Federation, was able to reduce up to 90% of the debt owed to the former Soviet Union by some HIPCs?

The recent competitive proposals of G-7 countries are further evidence that they are responding to two factors: the obvious inefficiency of policies so far and the growing pressure of public opinion. Next year, Pope John Paul II and an alliance of all the major religious groups will launch a massive campaign to mark the Jubille year with an effective solution to the debt problem. Should we sit down comfortably and wait for the results of that campaign or should we do our part to help bringing about those results? Debt is a subject where more perhaps than in other fields delay is frequently the worst form of denial. This is why we do not face a dilemma between realism and boldness, but one between the "status quo" and its defenders and change. As the Italian philosopher Norberto Bobbio said, nowadays when there is no longer a choice between black and white, between idiological extremes, the line of separation is between those who tend to accept injustice and excessive inequality as unchangeable characteristics of social organizations and those who believe in the possibility of changing that situation in a progressive way through concerted human efforts. I believe that we should clearly place ourselves in the second group, the one of people who react against passivity, resignation, defeat and firmly believe in the viability of progress in Africa.