EXPERT GROUP MEETING ON SOLVING AFRICA’S EXTERNAL DEBT PROBLEM TO FINANCE DEVELOPMENT

OPENING STATEMENT BY HIS EXCELLENCY ABDOULAYE WADE, PRESIDENT OF THE REPUBLIC OF SENEGAL

DAKAR, 17 NOVEMBER 2003

Honourable Ministers,
Your Excellencies Members of the Diplomatic and Consular Services,
Your Excellency K.Y. Amoako, Executive Secretary of the
Economic Commission for Africa (ECA),
Distinguished Representative of Professor Wiseman Nkulu, Chairman of the
NEPAD Steering Committee,
Dear Experts,
Ladies and Gentlemen,

I should like, at the outset, to thank you for coming to Senegal, your country, and in advance for your contribution towards the effort at finding a solution to Africa’s debt problem.

You are all welcome.

Before I get to the heart of the matter, allow me to fill you in on the background to the Seminar on Africa’s External debt.

It all started at the OAU Summit held in Lomé, Togo, when I put forward a proposal for a seminar to be held on Africa’s External debt to discuss the issue in-depth and the Heads of State and Government decided to entrust its organization to me.

My numerous commitments have so far not allowed me to envisage the organization of the seminar but I must say that I was in a hurry to do so, encouraged by some of my colleagues particularly the President of Algeria and the President of Nigeria, but more generally all the Heads of State agreed on the urgency of holding the seminar.

Today’s meeting is a preparatory meeting of Experts invited to prepare a methodology, raise real issues and indicate solutions. I hasten to say that the meeting does not involve narrating what has been done but rather showing imagination in order to be able to find solutions to the nagging problem of the debt which continues to hinder the development of our continent.

Let us now turn to the issue of the debt.

Since the early 1980s, attempts at finding solutions to the external debt problems affecting the developing countries in general and those in Sub-Saharan Africa in particular, have been strong points in the economic programmes of the countries concerned, mainly in collaboration with the Bretton Woods Institutions.

The search for solutions to the crisis has since 1996, called for the implementation of several plans including debt rescheduling within the Paris and London Clubs, debt cancellation within the framework of the Dakar Conference held in 1994 and the Yaoundé Conference held in 2001 as well as the original and enhanced Highly Indebted Poor Countries (HIPC) Initiative, without convincing results.

But what is at the root of the external public debt crisis of the developing countries? What have been the attempts made so far to find a solution to the problem? Why have the solutions failed to help the countries concerned to overcome the crisis? What should be the way forward?

BACKGROUND TO THE CRISIS

The debt crisis has its roots in the economic policies implemented in the early 1970s, the decade during which the good performance of the prices of basic Commodities promoted the implementation of social and economic development policies.

These policies generated public consumption levels that were not commensurate with the capacities of African countries to support them with the required level of investments without having recourse to external indebtedness, often in an ill-considered manner.

This is indeed the case of Senegal. By way of illustration, the Cohen model which helps to estimate the appropriation of external debt, when applied to this country for the period 1997-1999, shows that a significant portion of the debt was used to finance public consumption.

The availability of international Capital promoted systematic recourse to indebtedness often deemed euphoric, to finance actions which often failed to promote the economic and social development of the people on whose behalf the debts were contracted.

This situation created a high increase in the external public debt stock of African countries in the 1970s and the early 1980s.

To illustrate this statement, in the case of Senegal, it has been noted that the country’s external debt stock thus increased three times in fifteen years. The implementation of stabilization, financial and economic adjustment and recovery policies certainly modified the trend but with relatively significant levels.

MEASURES SO FAR TAKEN TO SOLVE THE DEBT PROBLEM

To assist the debtor countries in overcoming their cash flow constraints, deemed temporary, in the face of the short-term financial commitments towards their creditors, countries and the creditor banks had recourse first to the rescheduling mechanism, later combined with partial cancellation. This mechanism enabled the debtor countries to have part or all of their maturity dates falling during the periods covered by the various consolidation agreements extended (conventional rescheduling). In this connection, the sub-Saharan African countries have several times had recourse to the Paris and London Clubs to ask for a readjustment of their public debts. These countries were thus able to benefit from conventional treatments (rescheduling of maturity dates in the case of debts contracted before a maturity date set by mutual agreements) Toronto, London and Naples treatments (combining partial cancellation with debt rescheduling).

Other bilateral and multilateral donors non-members of the above-mentioned Clubs also granted debt readjustments to some African countries.

The debt rescheduling and partial debt cancellation measures applied since the early 1980s were unable to assist the sub-Saharan African countries to overcome their debt crisis. On the contrary, their debts continued to increase despite the increasingly sizable amounts of repayments facing those countries and the efforts made by the donors in the context of debt reduction mainly within the Paris Club.

The debtor countries were thus on the horns of a dilemma, namely that they either had to stop servicing their debts and run the risk of breaking off all relationships with the donors and consequently go without new inflow of fresh money or continue to pay and face a situation where priority public expenditure would be delayed in order to meet their debt service obligations.

In the middle of the 1990s the international financial community and the international public opinion (Jubilee 2000, ATTAC etc.) agreed on the fact that the debt crisis of the poor countries was persistent and attempts at finding solutions made since the early 1980s had reached their actual limit. It became evident that the mechanisms put in place were inappropriate for solving the crisis. It was therefore absolutely necessary to change strategies and methods in order to be able to overcome this constant problem which has, among other things, played a key role in worsening the poverty situation of the countries concerned. It was against this background that the Highly Indebted Poor Countries (HIPC) Initiative came into existence.

It involves partial or total forgiveness of interests on debts, without touching the principal, with the money thus released having to be earmarked, with the agreement of the donors, for financing domestic operations, say in the areas of education, health, agriculture etc. This operation needs to be analysed because it amounts to forcing a country in debt to pay a part of the debt all the same.

The question that arises is therefore as to whether a highly indebted country can utilize the proceeds from the HIPC Initiative in any sector or whether they should be invested in the export sector, which would, to some extent, help meet the remainder of the debt and thus be invested in reducing imports for the same purpose.

Six years after its implementation, there are still doubts concerning its ability to help the Highly Indebted Poor Countries to overcome their external debt crisis. The debt of the first African countries to have benefited from the HIPC Initiative namely Uganda, Burkina Faso and Mozambique, is still confronted with issues related to export performance, macroeconomic performance and the new financing policy. There is nothing to prove that the debt of these countries cannot become unbearable again in the near future to the point where it comes back to square one.

REASONS FOR THE FAILURE OF THE ATTEMPTS MADE AT SOLVING THE PROBLEM

Attempts at solving the problem have not helped to reduce the level of the developing countries debt because of the perception different countries have had of the debt crisis. The crisis was perceived as a cash flow problem and was thus, in essence, a temporary problem while it was becoming evident that the problem facing the debtor countries was rather one related to the solvency of their economies, whose solution called for long-term treatments. The granting of payment moratorium over a short period cannot settle the problem on a sustainable basis and all the more so as the debtor countries bore the additional interests, on the rescheduled amounts which tended to definitively increase the debt service burden.

The HIPC Initiative tried to overcome the problem by granting debt stock and debt flow cancellations. The partial success, not to say relative failure, already perceptible from the HIPC Initiative for countries which have reached their completion points, have to be discovered either in the new financing policy or the low export level of those countries. One of the major challenges facing the highly indebted poor countries thus lies in a policy of successfully reducing the debt combined with development finance strategies capable of guaranteeing their financial viability beyond the implementation of the Initiative and thus breaking with the vicious circle of external indebtedness.

WHAT IS THE WAY FORWARD TO THE AFRICAN COUNTRIES’ DEBT CRISIS?

Can the current attempts at solving the problem being made within the framework of the HIPC Initiative, involving only a category of countries, guarantee a definitive way out of the debt crisis for the countries concerned? Nothing still seems to indicate that. At the current stage, nothing even guarantees that the cancellation of the entire debt of the highly indebted poor countries would help resolve their development problem.

A specific strategy for ensuring a way out of the African countries debt crisis must be devised in view of their specificity and the constraints facing them, such as the conflict situation, the fact of being land locked and formerly colonized countries etc.

A major constraint facing the highly indebted poor countries is the issue of additional aid and debt relief. In other words, will the donors be ready to grant debt cancellation while maintaining an appropriate level of support for new development financing? Similarly, can the developing countries ask for new financing in parallel with their debt cancellation requests, be it in the form of subsidies or borrowings? This is a situation that can be embarrassing for the highly indebted poor countries and compels them to find an alternative to their debt. The most appropriate option seems to be the financing of a major proportion of investments from domestic resources and the attraction of substantial volumes of direct foreign investments. It is in this way that the financing aspect of the New Partnership for Africa’s Development (NEPAD) will seem to be an Africa’s alternative answer to the debt crisis.

The debt problem does not affect only the highly indebted countries but also all countries in general.

A study of the debt problem runs the risk of leaving aside what, I might call the real issues.

It could be argued that Africa went through an uncontrolled period of indebtedness during which countries utilized loans anyhow even though loans were granted under painful conditions.

We cannot conceal the background to the debt, hence the need for a legal review of the origins of the debt, particularly the commercial debt.

I have discovered the most unlikely thing in the amounts being claimed in the commercial debts, i.e. individual’s private loans being included in countries debts, debts from the colonial period being retained as an independent country’s debt such as in the case of Sudan, etc.

The second fact we cannot conceal is the issue of interest.

The Catholic Church has condemned usury since the advent of the Bible. The Catholic Church had to wait until Calvin wrote his letter on usury to restore profit.

This led to operations incompatible with moral doctrine and even the republican ethic. It was for this reason that the Republic, in its positive law, condemned usury as being an unreasonable interest rate.

However, that was not enough, at least in France, because the accumulation of interests and interests on interests, led debtors into impossible situations capable of increasing bankruptcies, while the lending agency, the bank, did not, for all that, sustain a loss equivalent to the sums claimed. Theoretically the loss should not be higher than the expected profitability rate if the principal is not paid.

This is why in French Commercial Law, it is possible to claim interest on interests, over a period of more than three months, if the creditor i.e. the bank notes during the period that the debtor had carried out no transactions in his/her account.

All these historical initiatives should compel us to try to adopt a position on interest on interest other than debt rescheduling or simply HIPC.

However, before doing so, we must, first of all, prepare the principal Column and the interest Column opposite it, followed by the interest on interest Column. We shall thus see very clearly to be able to appreciate debt cancellation.

The official creditors, banks in particular, who apply a civil code measure in France are beginning to charge payment on interests and not on the principal.

All these solutions are only of relative importance and still compel us once more, at the end of a long multiform historical development of debt and interest to look for a solution.

The outcome of such a research would be profitable for the indebted countries which would first understand why they are so indebted, something African countries are, at any rate, not yet aware of.

A lesson learnt from this experience would help avoid borrowing anything at all to finance any operation at all. This lesson makes a good debtor. An enterprise must not accept any credit at all but a credit that is useful for its business.

It seems to me that at some stage in a country’s development, it would be more necessary to provide it with loans to build its repayment capacity and not to increase its indebtedness. This means, as noted earlier, increasing exports on a sustainable basis and reducing imports through a selective policy. This is very difficult to achieve in a liberal economy but liberalism does not rule out persuasion and information policy.

For all the above reasons, an in-depth analysis of the debt cannot exclude diagnosis, i.e. a comprehensive review of a significant debt sample.

It is possible:

- to determine significant periods in the evolution of Africa’s debt, for example from 1960 to 1979, date on which Senegal embarked upon its structural adjustment programme and a second period from 1980 to 1999. The number of periods can be increased to refine the analysis.
- To select, over each period, a significant debt sample and carry out its diagnosis such as legal basis, payments and repayments, economic impact etc.

There is no doubt whatsoever that the diagnosis of the debt will be full of lessons. In this connection, you may refer to the documents I have submitted to the experts.

Ladies and Gentlemen,

I am convinced that you are already aware Africa is looking at you and is expecting from you not mere statements that reflect what has been achieved but appropriate solutions from your imagination.

Finally, the actual problem is neither debt rescheduling nor debt cancellation which is, of course necessary but rather how to formulate a policy for reducing Africa’s debt on a sustainable basis. The tragedy is that today no one has the appropriate means to extinguish the debt, meaning that it could last indefinitely.

Thank you.