Press Release No. 06/1997

Africa's Finance Policymakers Grapple with Hipcs Debt Plan

Addis Ababa, 1 April 1997: Leading African finance policy makers, including ministers of finance and central bank governors, grappled today with top policy makers from the World Bank, IMF and the African Development Bank (ADB) over the African debt problem at the Headquarters of the United Nations Economic Commission for Africa (UNECA).

The centre-piece of discussion was the debt initiative for Heavily Indebted Poor Countries (HIPCs), launched by the World Bank and IMF in September 1996 in agreement with major bilateral creditors.

The Initiative targets 41 of the world's most highly indebted countries, 33 of which are in Africa, but is by no means the first instrument to address the problem.

While the high-level panel of participants agreed that HIPCs showed a high degree of commitment compared to past efforts aimed at solving the African debt problem, they expressed deep concern at:

• restrictive eligibility conditions at the entry and decision points;
• macroeconomic and financial programme targets, conditionality and performance criteria;
• treatment of market and non-market exogenous factors in policy performance evaluation;
• failure to mainstream the government budget constraint and domestic debt in the policy simulation, debt sustainability studies;
• length of the work-out - six years;
• commitment, adequacy and timing.
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The World Bank and the IMF, in a bid to clarify misperceptions surrounding the Initiative, stressed that -- contrary to what they might have heard in the past -- there is to date no list drawn up of eligible countries. All that exists is a set of criteria for eligibility which is open to review and amendment.

Further, there was no intention on the part of the multilateral institutions to treat African countries as a herd. Well aware of the peculiarities of each, the two would lean backwards to accommodate as many countries as possible.

The issue here was the Ministers' concern that the ranges of debt-to-export (200-250 per cent) and debt-service-to-export (20-25 percent) precluded some deserving African countries from qualifying for the Initiative.

The two multilateral institutions responded that the ranges suggested were not written on stone tablets and were amenable to review taking into consideration the macroeconomic situation of countries including the availability of adequate bilateral financing.

Ministers were particularly vocal on the question of debt-to-export ratios, arguing that their commodity exports were dominated by multinationals to whom accrued a large proportion of export earnings. The World Bank and IMF should therefore desist from considering the market value of exports in their calculations, said the ministers.

The response here was that the World Bank and IMF would consider the following factors:

- fiscal

- export concentration

- fragility of exports, etc.

On the burning question of the debt sustainability analysis (DSA), Ministers were reasonably mollified when the two Bretton Woods representatives disclosed that this was subject to efficacy of multilateral mechanisms that included recipient governments along with the World Bank

and IMF. And it was a given, they added, that all creditors should be fully involved in the consultative process. Above all, the two multilateral institutions insisted, in the final analysis the Initiative belonged to governments.

On the question of financing the two institutions disclosed that to date the World Bank has earmarked US$500 million for the Initiative, and bilateral donors US$ 543 million.

The genesis of the Initiative was the World Bank and Fund's belief that traditional debt relief mechanisms had proved inadequate. Among them:

• Baker Plan of 1985 which envisaged new lending by commercial banks of US$7 billion annually during the plan period (1986-88) basically to refinance interest;
• Brady Initiative of 1989 calling for official support for countries to finance the restructuring of commercial bank debt;
• Brady Plan of 1990 involving just 2.2 per cent, of Sub-Saharan African total outstanding debt of US$280.5 billion
• Toronto and Houston Terms (1988-91) offering partial write-offs of up to 33 per cent in present value terms, longer maturities of 25 years, longer grace periods of up to 14 years. The objective was to reduce the net present value of rescheduled debt by up to one third;

London Terms (Enhanced Toronto - 1991-1994) which incorporated enhanced concessions in rescheduling for low income countries, most of them in Africa: 50 per cent reduction in net present value terms through outright cancellation of 50 per cent of the consolidated non-Official

Development Assistance (ODA) claims, or debt service reduction on the consolidated debt among other concessions.

• Naples of 1995 and Lyons Terms of 1996 in which terms were revised to increase the percentage reduction for eligible non-ODA debt to 67 per cent in net present value terms.
• Multilateral creditors have participated in the international effort to alleviate debt through technical support and in the form of collateral funds to accelerate market-based restructuring transaction such as the ODA Debt Reduction Facility, accelerated concessional financing of poor, debt-burdened countries in the form of SAF, ESAF facilities of the IMC and IDA supplemental credits under the Fifth Dimension Facility (FDF).
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Ministers, aware that scarce foreign exchange resources have to be allocated to service external debt, considered the potential of debt conversions. The region has received only 5 per cent of the 114 billion disbursed between 1985 and 1994.

The discussions crystallized in the perception that debt conversions were flexible and adaptable management tools that could target specific areas and encourage private investment, support export diversification and galvanize international assistance while facilitating research in key areas of interest to Africa.

Those taking part in today's panel discussions on HIPCs included: UN ECA Executive Secretary K.Y. Amoako (who is hosting the conference); Uganda's Finance and Economic Planning minister J. Mayanja-Nkangi; World Bank vice-president (Africa region) Jean-Louis Sarbib; ADB vice-president Ferhat Lounes; and IMF Deputy Director (Africa region) A. Basu. Another panel session deliberated on Emerging Capital Markets in Africa - Challenges and Opportunities (see Press Release No. 7).

The conference ends tomorrow, with a wrap-up of panel discussions, presentation of the rapporteurs' reports, adoption of the report of the meeting of intergovernmental group of experts, and adoption of the conference resolutions and declaration on Africa's Debt, Emerging Capital Markets, Financial Sector Reforms and Growth and Development Finance.