Expert Group Meeting on Solving Africa’s External Debt Problem to Finance Development

Statement

by

K.Y. Amoako
Executive Secretary

Dakar, Senegal – 17 November 2003

Your Excellency Abdoulaye Wade, President of the Republic of Senegal
Representative of the Chairperson of the African Union Commission
Honorable Ministers
Distinguished Ambassadors
Ladies and Gentlemen

I am most pleased that you have all joined us today for this important Expert Group Meeting on Africa’s external debt.

President Wade, your personal dedication to this issue is especially notable and greatly appreciated. On behalf of all my colleagues at the Economic Commission for Africa (ECA), I therefore want to begin by thanking you wholeheartedly for the generous support that you, and the government of Senegal, have given us in the preparations for this meeting.

I am sure other visitors will also join us in thanking you and the people of the Senegal for the exceptional warm welcome and hospitality that we have once again received.

The Big Picture/MDGs

We meet in Dakar at a critical juncture on the global development agenda. A little over three years ago, international leaders met at the United Nations Headquarters and agreed on the Millennium Development Goals as a set of clear, and technically achievable, targets to help lift millions of people out of abject poverty. Since then, from Doha to Monterrey to Johannesburg, a robust international consensus has emerged on the critical importance of mutual accountability, harmonization and policy coherence to enhancing development effectiveness and, by extension, to achieving these Goals.

This consensus is also reflected here in Africa in our homegrown development framework, the New Partnership for Africa’s Development (NEPAD), which calls for a new and energized relationship between Africa and its partners based on trust and a shared responsibility.

Now, the time has come for all of us to effectively implement our commitments. Nowhere is this imperative more important than in Africa, where powerful currents are pushing us away from our development targets.

As the United Nations Secretary-General’s recent report on the MDGs made clear, Africa has made little or no progress to date. Between 1990 and 1999, the number of poor people in Africa increased by over 6 million annually. At current trends, Africa will be the only region in the world where the number of poor people in 2015 will be higher than in 1990.

Indeed, in some areas, Africa will not meet the MDGs for many, many years. Take the target of achieving universal primary education. At current trends, only 7 countries in Africa will meet this goal. In fact, in over a third of our countries, every other child is out of school. The stark fact is that, as things now stand, Africa will not meet the universal primary education target until after 2100.

Broader Context of Financing for Development

Clearly, we cannot continue with business as usual. We need to put much greater focus on the domestic and external factors impeding most countries in the region from advancing towards meeting the Goals. Our task at this expert group meeting, therefore, is to situate our deliberations on addressing Africa’s debt problem firmly within the broader context of financing the MDGs.

As some of you may know, ECA’s recent special “Big Table” consultation between African Finance Ministers, OECD Ministers of Development Cooperation, and senior officials from multilateral and bilateral agencies centered on this very issue. In this connection, the meeting considered the importance of African ownership and responsibilities and focused on the policies and lending practices of the World Bank and IMF.

The Big Table reconfirmed that achieving the MDGs in low-income countries will require even more external resources than currently available. Recent country-based estimates of the financing requirements came up with an incremental financing requirement of $30 billion annually for 18 countries, of which 9 are in Africa--clearly out of the range agreed at Monterrey.

It is evident not only that African HIPCs and other low-income countries would require higher ODA flows than is currently available, but that a substantial share will need to be in a form of grants so as to avert further unsustainable debt.

However, even with a better mix of concessional loans and grants, it will undoubtedly take time for HIPC countries to achieve debt sustainability. HIPC countries not only have large financing needs, but also are subject to large exogenous shocks, like drought, conflict or commodity price fluctuations, that severely impair their debt repayment capacities, as demonstrated by the recent experience of Ethiopia, Rwanda, and Uganda.

Lastly, achieving the MDGs will require not only additional financing BUT better policies and improved capacities to more effectively utilize the resources that are made available to these countries.

Debt Relief: Charting a way forward

Having urged that, I now want to zero in on debt relief and offer some perspectives on how we might move forward on this front.

Given growing criticisms that HIPC is not delivering debt sustainability, should we be envisaging a further enhancement? Should we not also think more broadly in terms of a menu of financing mechanisms that recognizes the diversity of Africa and offers different forms of assistance for different groups of countries, including HIPC countries, those unable to take advantage of HIPC debt relief, and those that are grappling with the challenge of post-conflict development?

Among the great attractions of the original and the enhanced HIPC schemes was that they appeared to offer a means by which a large additional amount of grant-like financial transfers would become available to the indebted countries of Africa and elsewhere.

This would be ‘new money’, over and above actual and planned transfers of aid. However a report issued by the World Bank’s Operations Evaluation Department earlier this year draws attention to the fact that HIPC II contained no specific provisions to ensure that additionality was observed. More recent evidence, nonetheless, modifies this, showing substantial net increases in total official external resources to the 27 Decision Point countries.

What remains true, though, is that this has only been achieved through a substantial redistribution of assistance away from low-income non-Decision Point countries. According to the original OED data, the share of non-HIPC low-income countries in total net resource transfers was more than halved -- from 56% to 24% -- between 1998 and 2000, with a corresponding rise in the share going to HIPCs. This raises issues of equity with respect to low-income countries that are currently unable to take advantage of the HIPC II scheme, such as Kenya and Nigeria.

HIPC Pros

Perhaps the unfortunate effect that I have just mentioned is compensated for by a superior efficiency of aid provided in the form of debt relief? There is certainly a case to be made here.

First, debt relief is effectively grant aid. Unlike the position in the 1980s, debt relief under HIPC is not compounding the debt overhang. Moreover, the relief is, in effect, direct budget support without the huge transactions costs associated with project assistance -- a major attraction. Furthermore, it reduces the threat of a never-ending treadmill of debt renegotiations, which tie up, and exhaust, scarce skills within the administrations of poor countries. HIPC II has also been closely associated with an improved model of aid objectives and relationships, centred around the pursuit of poverty reduction and the MDGs.

HIPC Cons

These are real advantages and substantial ones. But not all the entries are on the credit side of the ledger.

One disadvantage of debt relief as an aid modality is its special reliance on policy conditionality. While research now casts doubt on the efficacy of conditionality as a way of achieving policy change, I doubt whether HIPC governments are today any less hemmed-in by policy stipulations from outside than they were during the apparent hey-day of conditionality in the 1990s.

A further problem is the slow pace at which countries move through the HIPC process. Only seven African countries have reached completion point -- most recently Mali and Benin in 2003. Fourteen African countries have reached decision point and nine African countries are yet to be considered at all.

In addition, increasing the participation of non-Paris Club official and commercial creditors remains a challenge for the successful implementation of the HIPC Initiative. The Bank and the Fund's decision on the HIPC Initiative are not legally binding on other creditors, the Paris Club's Agreed Minutes create no obligations on the part of non-Paris Club creditors, and the provision of HIPC relief by official creditors is not dependent on the participation of private/commercial debt.

What do these considerations mean?

They do not mean that debt relief has no place in an efficient scheme for the distribution of a finite volume of assistance. But it does mean that in our discussions with donors and creditors we have to be aware of its limitations, remembering in particular those left out. It does mean that we should explore innovative ways of speeding up the process such as the recent Big Table recommendation to establish an eminent panel of ministers from completion point countries to share lessons and experiences. Above all, as I have already stressed, it means that we need to view debt relief in the context of the total volume of assistance that is needed in order to achieve the MDGs.

Focus on the Fundamentals

Looking at the papers for this meeting, I am struck by how technical the discussion on debt relief has become. Concerning the crucial question of debt sustainability, the debates centre around the way debt burdens should be measured; how payment capacity should be judged; and where the threshold levels should be set, etc.

These are all important topics deserving your attention but I hope the technicalities will not induce you to lose sight of the truism that no debt relief scheme can ensure future debt servicing capacities—and that quite different kinds of action are needed if future creditworthiness is to be rebuilt. I hope that you will emerge from your deliberations with recommendations for an African position to be presented to our ministers as technical input to NEPAD and African Union efforts for a lasting solution to Africa’s debt problem.

In the end, debt sustainability is about the fundamental capacity of African economies to play a full role in the world economy: to boost, in a sustained way, their export performance; to strengthen their domestic saving record -- which entails also further bolstering budget performance -- and to improve both the level and productivity of investment.

It is also about protecting ourselves against the worst effects of exogenous shocks. In turn, achieving such improvements requires actions to redress the structural weaknesses of our economies, for example by substantial investments in the physical and institutional infrastructure.

The heightened priority under HIPC being given to the delivery of public services to poor people is to be applauded. Social spending has increased in those HIPC countries that reached the decision point by between 20 and 50 percent. Many of them have also managed to abolish user fees for primary education, provide free immunization programs, and increase spending on HIV/AIDS and other epidemics.

But what concerns me is the extent to which this preoccupation with the lifting of social services may have led us to neglect the centrality of strengthening the fundamentals I referred to a moment ago. For example, according to the OED report on HIPC II, while 65% of all resources released by debt relief have been devoted to the social services, only 7% has gone to infrastructure and a mere 1% on structural reforms. There has been a sharp reduction in the share of aid going to productive sectors as well.

In other words, what I am suggesting to you is that the HIPC II scheme may have enshrined a set of policy priorities, which does not fully reflect Africa’s most urgent needs. There is clearly a necessity to direct HIPC savings beyond the social sectors.

Let me stress that this would not represent a turning away from the poor. For what I think everyone would agree is that poverty in Africa can never be conquered except on the basis of improved and faster economic growth.

I look forward to discussing all these issues with you in greater detail during the meeting.

Thank you for your attention.