The problems of Africa's external trade, debt and resource flows are closely linked. Recent developments have shown clearly that none of the three problems can be resolved effectively without substantial progress on the other. This is the harsh reality confronting African policy makers and their development partners. It sums up the vicious circle that has to be broken if the continent is to accelerate its recovery and resume steady and sustainable growth.

A. External trade

The indicators of Africa's merchandise trade were mixed in 1994. On the one hand, trade performance that year followed the global trend, benefiting from the higher demand and increases in the prices of primary commodities. On the other hand, Africa's share of world merchandise trade in 1994, at 2.4 per cent was the same as in 1993, but slightly lower than the figure of 2.6 per cent attained in 1992. Summary statistics on trade for the region are shown in Table III.1.

According to ECA estimates, the value of merchandise exports increased by 4.2 per cent in 1994, while the volume increased by 2.0 per cent, which implies a 2.1 per cent increase in the unit value of exports. By comparison, the value of exports decreased in 1993 by 7.5 per cent, and export volume increased by 0.1 per cent in the face of a 7.6 per cent decline in the unit value. Import values increased by 6.5 per cent in 1994, made up of a 4.9 per cent increase in volume and a 1.6 per cent rise in unit value. In 1993, the value of imports decreased by 1.4 per cent, because a 1.4 per cent increase in volume was more than offset by a 2.8 per cent fall in the unit value. The increased volume of imports in 1994, though modest, had a positive impact on economic activity in many countries. In addition to providing some respite from balance of payments pressures, it enabled African countries to increase capacity utilization because of greater availability of imported raw materials and spare parts. Increased capacity to import capital goods also revived the level of investment.

Export commodity prices of interest to Africa rose at a foster rate in 1994 than in 1993. The overall ECA Export Price Index showed an increase of 2.1 per cent in 1994 compared to a loss of 7.7 per cent in 1993. Prices of beverages, in particular, rose spectacularly in 1994 on the export market. The Coffee Retention Scheme which was put in place in October 1993, and the unseasonal frost and drought in Brazil, and production decreases in Colombia, Côte d'Ivoire and Indonesia resulted in a tight supply situation for coffee. Consequently, the coffee price index which has been in a persistent downward trend with the suspension of the International Coffee Agreement in July 1989, rose by 99.9 per cent in 1994 compared with 22.9 per cent in 1993. Cocoa prices have also been on the increase, rising by 25.5 per cent in 1994, after a 0.3 per cent rise in 1993 and 7.8 per cent in 1992. Increased speculative activity, encouraged by the view that cocoa prices are now below historical trends, despite production deficits, fuelled the rise in prices. The price index for rubber rose in 1994 by almost 24.7 per cent.

On the other hand, the ECA overall Import Price Index rose to 1.6 per cent in 1994 compared with a decline of 2.8 per cent in 1993. The increase in the value of imports in 1994 was a reflection of moderate movements in the prices of manufactures (0.7 per cent), which have a large weight in African imports. Food import prices, another important element, given the increasing share of imports in the region's food supply, increased by 5.3 per cent in 1994, after falling by 1.1 per cent in 1993.

Although both export and import prices increased, the former increased more than the latter, and the terms of trade price index (base year, 1990=100) improved by 0.5 per cent in 1994, as compared to a fall of 5.0 per cent in 1993. The purchasing power of exports increased by 2.6 per cent in 1994, after falling by 4.8 per cent in 1993. With 1990 as the base year of the export and import price indices, terms of trade losses in 1994 would amount to 16.8 per cent of real exports. Similarly, the first round income effects would amount to a 4.1 per cent decrease in real GDP in 1994. With the steady marginalization of Africa in world trade and its relatively low and declining market shares, it is evident that African economic fortunes and performance still depend a good deal on the price movements of its limited range of commodity exports.

1. Relatively static commodity structure
and limited progress with diversification

Table III.2 summarizes the evolution of the commodity structure of Africa's external trade between 1970 and 1993. The table reflects the striking lack of structural transformation in African economies over the past two and a half decades.

The commodity composition of the region's trade continues to be dominated by exports of primary commodities and imports of manufactured goods. In 1993, 86 per cent of Africa's foreign exchange earnings were derived from primary commodities while imports of manufactured goods accounted for 73 per cent of the total value of imports, a proportion that is not very different from those of two decades ago.
Table III.2

Source: United Nations Monthly Bulletin of Statistics and ECA secretariat estimates.

FIG. Most African countries rely on a few primary commodities for a major part of their export earnings, with a high degree of commodity concentration as, for example, in the case of Burundi and Zambia. Mineral fuels and related materials continue to dominate the region's exports, followed by beverages and tobacco. The doubling of the share of petroleum in the export values of the region after 1970 is essentially a reflection of changes in the price of petroleum relative to those of other major commodities. The price of oil doubled in the early 1970s and again quadrupled in 1979-1980 while the prices of beverages and tobacco have generally been on the decline with the exception of 1976-1977 and 1993-1994.

FIG.The increase in the prices
of oil was also accompanied by an increase in volume. During the decade of the 1980s, the price of oil was on the decline albeit at a slower rate compared to those of other primary commodities.
In spite of the increase in prices of other primary commodities in 1994, oil exports continued to account for nearly 60 per cent of the total foreign exchange earnings of African countries.

Table III.3

Source: IMF, International Financial Statistics; Economist Intelligence Unit; ECA secretariat.

Manufactured goods account for more than 70 per cent of imports. By and large, investment goods in the form of machinery and transport equipments continue to claim a high proportion of imports. While the higher share of capital goods imports is encouraging, it nevertheless reflects two basic weaknesses in the structure of the region's economies. The first is the continued heavy dependence on the import of capital goods, signalling the fact that a major technological transformation is yet to take root in African economies. The second is the failure of the manufacturing sector to make a significant dent in the import of consumer goods which absorbs the same proportion of export earnings as it did in the early 1970s.

The relatively static nature of the commodity structure of exports since independence attests to the absence of substantive economic transformation over the last three decades. In 35 of the 53 African countries, non-oil primary commodities account for more than 50 per cent of annual foreign exchange earnings. In nine countries, non-oil primary commodities account for more than 90 per cent of annual exports while in another 18, the share is no less than 70 per cent. This contrasts sharply with developments in south east Asia where the share of primary commodities fell from 63 per cent to 36 per cent of total exports between 1965 and 1987.

Aware of the dangers of relying on a limited number of primary commodities, African Governments have adopted diversification schemes as an essential element of their development strategies for several decades. Such diversification schemes have taken two forms: vertical and horizontal. The horizontal diversification strategy aims at increasing the number of exportable primary commodities while the vertical option envisages domestic processing of exportable commodities and the export of processed and manufactured goods. In the 1960s and 1970s, vertical integration and diversification were distinct objectives of the import-substitution industrialization strategy. On the whole, in most countries, the strategy failed to achieve its objectives, even though the nascent industries enjoyed a good measure of protection and government patronage. The reasons were both internal and external. On the domestic front, vertical diversification required financial capacity, technical know-how and managerial skills, resources with which many African countries are poorly endowed. To the extent that these domestic constraints were surmounted, there were major obstacles also to overcome in external markets.

The first of these is the marketing problem. In a world dominated by oligopolistic market structures in which multinational corporations and brand names dominate, breaking into developed country markets posed extremely difficult problems that were not easy to surmount. But the more pervasive constraint to the export of processed and manufactured goods was the implacable protectionism of industrial countries through tariff and, in particular, non-tariff barriers. Over the years, the tariffs imposed on primary commodities have been substantially reduced. At the beginning of the Uruguay Round negotiations in 1987, trade- weighted tariffs were 6 per cent in the EU, 4.3 per cent in the USA and 2.9 per cent in Japan. With processed and manufactured goods however, non-tariff barriers remained in place.

While tariff escalation based on the degree of processing was a major obstacle for African exporters of processed goods and manufactured products, the more serious obstacles were of non-tariff nature. These multifaceted barriers, usually considered as domestic policies, have been excluded from the various multilateral trade negotiations, despite their considerable impact on trade.

The SAPs adopted by practically all African countries have not been very helpful to the diversification drive. Devaluation has had a mixed impact. While, on the one hand, it has made exports more competitive, it has, on the other, depressed import-dependent commodity production by increasing the cost of imported inputs. Furthermore, credit restrictions and fiscal retrenchment have all increased the cost of domestic production while trade liberalization has exposed domestic industries prematurely to competition from cheaper imports.

These obstacles notwithstanding, African countries have been making some attempts at diversifying their economies and decreasing their reliance on a limited number of primary commodities. In practically all countries, the number of commodities exported has increased substantially over the last two decades (table III.4), although their weight in total exports remains very small.
Table III.4

Source: UNCTAD, Handbook of International Trade and Development Statistics 1984, 1991 and ECA secretariat calculations.

1 Refers to those commodities whose exports are greater than US$50,000 in 1970 and US$100,000 in 1991 or contribute more than 0.3 per cent to the total export of the country.

2 Share of the two most important commodities in total national export.

3 Hirschmann index normalized to yield values between 0 and 1 (maximum concentration).

How significant are these experiences of diversification, and what lessons can be drawn from them to guide future policy in this sphere? Three observations are pertinent. In some of the oil-exporting countries, notably Gabon and Nigeria, the diversification and concentration indices have increased in tandem with the number of commodities exported. In these countries reliance on one or two export commodities (mainly oil) has increased while non-oil exportables, though growing in variety, have yet to make any significant impact on the structure of exports.

Some of the non-oil developing countries have reduced their dependence on their major export commodity by introducing and successfully cultivating new and non-traditional exports. Particular mention should be made of Morocco and Tunisia in North Africa, Ghana, Senegal and Côte d'Ivoire in West Africa as well as Kenya, the United Republic of Tanzania and Zimbabwe in Eastern and Southern Africa, for the strident progress they have made in diversifying their exports. In all of these countries the most important export commodity now provides less than a third of foreign exchange earnings.

However, the most spectacular diversification success has been achieved by Mauritius where the number of commodities increased from only nine in 1970 to more than 100 in 1990, and the concentration index fell from 93 per cent to 34 per cent. While sugar, the leading export in 1970, accounted for 93 per cent of exports in that year, in 1990, textiles and apparel which had become the leading exports accounted for 34 per cent of exports.

The EPZ in Mauritius was estimated to have generated 33 per cent of salaried employment, accounted for 88 per cent of manufactured employment, contributed close to 60 per cent of gross domestic exports, and 15 per cent of GDP. What makes the experience of Mauritius unique is its extraordinary achievements. At the start of the EPZ period in 1970, Mauritius had literate labour force, a dynamic business community, well-developed infrastructure and political and social stability. These structural prerequisites for a dynamic economy were reinforced by a conducive macroeconomic environment and imaginative incentives structure.

The capacity of EPZ to transform an economy, diversify the production base and increase the number of exportables has not been lost on other African countries. No less than 17 countries from Southern to North Africa are emulating the Mauritian experience. Nigeria's EPZ in Calabar became operational in early 1994 while in Zimbabwe, Botswana and Uganda, preparations are underway.
However, if there is one lesson that comes out very clearly from the Mauritian experience, it is that while the EPZ offers a possible approach to economic diversification, it does not by itself guarantee success. Other policy measures are necessary to create a favourable environment for the diversification process.

2. Declining shares in world trade

Africa's share in world trade has declined steadily since 1980. Between 1980 and 1993, when world trade doubled in value, Africa's external trade remained at more or less the same level in absolute terms. Africa is not only failing to partake in increased world trade, it has been steadily loosing ground to others. In 1980 Africa's share in world trade and in the trade of developing countries were 5 and 4 per cent respectively. Since then the share of the continent in global trade has fallen to just over 2 per cent.

In the early 1970s, Africa supplied 83 per cent of the cocoa, 28 per cent of the coffee, 26 per cent of the copper, 16 per cent of the cotton and 13 per cent of the iron ore in the world market. Two decades later, the shares of these commodities have declined precipitously: to 61 per cent for cocoa, 16 per cent for coffee, 14 per cent for copper, 12 per cent for cotton, and 6 per cent for iron ore (table III.5). The major part of the decline is attributable to new producers in Latin America and south east Asia, and declining demand due to technological evolution and changing consumer tastes.

The loss of market shares has important policy implications. First, it points to the need for African countries to devote more effort to the production of their main export crops, even as they pursue the policy of diversification. Second, it shows that they should not limit their efforts to the production level but should aggressively pursue the marketing end of the trade in primary commodities and processed products. Participation in international trade fares, and strengthening of the commercial wing of their embassies in important markets could contribute to the expansion of their exports while quality improvements and control would ensure customer loyalty.

Efforts to increase market shares in the markets outside the region should be supplemented with export promotion in the regional market as well. Table III.5

Source: Calculated from UNCTAD, Commodity Year Book (Various issues) and United Nations Monthly Bulletin of Statistics (various issues).

3. Marginal improvement in intra-regional trade

There has been little change in the direction of African trade. Developed countries still supply over 70 per cent of Africa's imports and purchase 80 per cent of the exports. For historical reasons, the EU continues to dominate Africa's external trade, accounting for 73 per cent of the region's exports and providing 57 per cent of its imports.

In terms of value, between 1980 and 1992, food and beverages in intra-regional trade rose by 48.4 per cent, and oils and crude materials by 120.3 per cent. Mineral fuels registered an increase of 47.1 per cent, while chemicals increased sharply by 211.5 per cent, machinery by 231 per cent and other manufactures by 95.9 per cent.

Intra-African trade claimed 7.4 per cent of the total trade in 1992; a significant improvement over the previous year. However, as commodity-wise analysis based on table III.6 shows, changes in the composition of intra African trade have been slight. The share of food and beverages, which was 24.4 per cent in 1980 declined to 20.6 per cent in 1992. The share of oils and crude materials increased from 9.1 per cent in 1980 to 11.4 per cent in 1992. The share of mineral fuels decreased from 40.9 per cent in 1980 to 34.3 per cent in 1992. The share of chemicals rose from 4.4 per cent to 7.8 per cent. Machinery which accounted for 2.9 per cent of intra-regional trade in 1980 rose to 5.5 per cent in 1992. The share of other manufactures was 18.2 per cent in 1990 and increased to 20.3 per cent in 1992.

Table III.6

Source: United Nations Monthly Bulletin of Statistics, May 1994.

The integration of South Africa into the African regional economy can be expected to bring about far- reaching changes in both the commodity composition and magnitude of intra-regional trade over the coming years, with increased regional sourcing as the most likely consequence for industrial products. Also, harmonization of SAPs within subregional economic groupings, would facilitate the coordination of macroeconomic policies and thus help to ease currency and payments restrictions which are often more of a hindrance to intra-regional trade than tariffs.

B. Balance of payments

Although there was a modest increase in export prices in 1994, the deficit on the balance of trade increased to US$8.2 billion compared with deficits of US$2.4 billion and US$5.6 billion in 1992 and 1993 respectively.

The net balance on the services account for Africa has been consistently negative and is estimated at US$6.9 billion in 1994, and US$6.2 billion in 1993, reflecting the increasing payments for insurance, freight and other non-factor services payable to non-African suppliers. Net factor income, which has been consistently negative, amounted to US$15.5 billion in 1994. Official transfers stood at US$10 billion in 1994 from a level of US$9.7 billion in 1993. Private transfers stood at US$10.1 billion in 1994, after reaching US$9.5 billion in 1993. The balance on current account recorded a deficit of US$10.5 billion in 1994 as compared to a deficit of US$7.8 billion in 1993.

The most promising component to turn around the consistently negative service balance is "travel and other transportation". This item, which mainly constitutes earnings from tourism, has not only been making positive contributions to the service balance, but has been on the increase, with an even more promising future. Travel receipts increased their share in "income from services" from 25 per cent in 1985 to 33 per cent in 1992. Consequently, over the same period, the net contribution of this subsector increased from 12 per cent (US$85 million) to 18 per cent (US$2.6 billion) in the balance on the service account.

Table III.7

Source: International Monetary Fund (IMF), World Economic Outlook and International Financial Statistics; Economist Intelligence Unit; National Sources; ECA secretariat.

Payments for shipment costs are much in excess of their receipts. This reflects the dominance of developed countries in the areas of shipping and insurance, as well as the effect of increased imports, rising freight rates, and discriminating rates charged to offset the cost of idle time that ships are forced to spend at the ports of developing countries because of poor facilities. About 95 per cent of Africa's foreign trade is seaborne. However, Africa's own fleet is small and shipping costs are a higher proportion of import costs in Africa as compared to other regions. Bulk transport accounts for 40 per cent of African shipping, but, in the past, African countries have concentrated on regular lines that move only 20 per cent of their traffic. Insurance charges are usually aggregated with freight, and the insurance and reinsurance business are dominated by non-African firms. Furthermore, even where insurance is done with African insurance companies, the re-insurance would still have to be done abroad. A review of the statistics on services between 1985 and 1992 reveals that in the case of shipment, inflows on account of freight and insurance accounted for 10.6 per cent of inflows for services in 1985, while in 1992, it accounted for only 6.4 per cent of inflows for services. In 1985, outflows on account of shipping and freight accounted for 33.8 per cent of outflows on account of services while 30.2 per cent of all outflows were on account of shipping and insurance in 1992. Net outflows for shipment, which were US$6446 million in 1985 rose to US$7331 million in 1992.

Other transportation in the services account, which refers to handling, anchorage, pilotage, towage, aircraft landing, provision of ships stores and bunkers, make a positive contribution to the services account of Egypt and Tunisia because of their well- developed port infrastructure and facilities. In the case of sub-Saharan Africa, they resulted in net, albeit declining, outflows during the period 1990-1992, totalling US$572 million in 1990, US$336 million in 1991, before falling to US$96 million in 1992.

Other official services reflect the high foreign expenses of foreign missions in Africa. On a net basis, the services have made a declining negative contribution to Africa's service sector. In 1985, they accounted for 9.5 per cent of the inflows to the service sector, while in 1992, they accounted for 9.3 per cent of inflows. In the case of outflows, in 1985, they accounted for 9.5 per cent of outflows, while in 1992, they accounted for 8.7 per cent.

As already pointed out, the deficit on the services account is made up largely of payments for banking, insurance and freight, emanating from the disproportionate dependence of African countries on foreign banks and insurers, and foreign carriers, and is positively correlated with the volume of trade. Therefore, it can be expected that the services deficit will grow with an expansion in the volume of trade, unless African countries redouble their efforts to provide more and more of these services themselves. This is likely to be an uphill task, considering that the liberalization of services under the Uruguay Round Agreement will expose African suppliers to even keener competition from more efficient producers of such services. This is the more reason why the development of banking, insurance and transport and communication facilities to cater for the needs of external trade deserve to be given more attention than has so far been the case. Indeed, these crucial components of international transactions should occupy a prominent place in the development agenda of African Governments.

Since 1990, there has been an improvement in the case of other private services like non-merchandise insurance, reinsurance and banking related outflows, which reflect some revival of the banking and insurance industry on the continent, and the establishment of the African Reinsurance Corporation in 1991. Other private services accounted for 22.9 per cent of inflows in 1985, while in 1992, they accounted for 24.6 per cent. In the case of outflows, other private services accounted for 32.9 per cent in 1985, and 31.1 per cent in 1992. On a net basis, outflows on account of other private services fell from its US$4,761 million in 1985 to US$3,377 million in 1992.

Given the small size of their economies and the huge amount of capital required for establishing viable and competitive enterprises in the services sector, cooperative arrangements among African countries is indispensable to success. There have been several proposals and some attempts at subregional levels to establish shipping lines, insurance and banking institutions, air lines, communication facilities, etc.

1. Deficits on factor income reflect high cost of debt servicing

The deficit on investment income is a reflection of the capital dependency of African countries on the rest of the world and is unlikely to improve significantly in the foreseeable future. Payments for investment comprise interest payments on external debt and repatriation of dividends on foreign direct and indirect (portfolio) investments. While both of these liabilities would continue to generate resource outflow until the region turns a net creditor, preference should be accorded to foreign investments. In addition to being a vehicle for the transfer of technology, managerial and marketing skills, this kind of resource flow would lessen the burden of mandatory debt servicing since the subsequent outflow of payments is conditional on, and derive from the productivity and profitability of the investment inflows.

In the case of income flows, direct investment income has always been negative for Africa. Interest and dividend payments for foreign private investment represent a sizable component of the deficit in the invisible account. Net receipts from portfolio investments have likewise always been negative for Africa. In the case of income-related flows in 1985, inflows due to investment were 69.1 per cent of income flows, and, in 1992, it was 69.9 per cent. Likewise, outflows due to investment were 93.1 per cent of the income related outflows in 1985 and 93 per cent of the total in 1992. On a net basis, outflows on account of investment rose from US$11935 million in 1985 to US$17360 million in 1992.

The share of inflows on account of labour income fell from 30.3 per cent in 1985 to 28.9 per cent in 1992, while the share of outflows on account of labour income, which was 6 per cent in 1985, stood at 5.9 per cent in 1992. The recession-induced unemployment in Europe and South Africa reduced the demand for migrant labour. The decline would have been even higher but for the oil-rich labour-poor Middle Eastern countries where employment picked up following normalization of the Persian Gulf war. Property income outflows have, however, been negative, but labour income has made a positive contribution to income flows. The share of inflows due to property income, which was 0.6 per cent in 1985 rose to 1.2 per cent in 1992, while the share of outflows due to property income rose from 0.9 per cent in 1985 to 1.2 per cent in 1992.

2. Trends in capital account and foreign investment

Net foreign resource inflow in 1994 was US$19.2 billion, an increase of 32 per cent over the 1993 level. The major sources were external borrowing, although non-debt creating flows in the form of foreign investment are on the rise.

Inflows of foreign investment in 1994 were 7 per cent higher than their 1993 level and accounted for 39 per cent of the net foreign resource inflows. Although the country destinations of such investment tend to favour the oil-exporting and mineral-rich countries, others may also attract foreign capital, given the drive towards privatization of public enterprises, the emergence of stock markets and the generally favourable foreign investment climate now fostered by African Governments.

In the capital account, direct investment has shown an irregular pattern across countries. Foreign direct and equity investment is directly linked to productive investment, and facilitates the transfer of technology, managerial and marketing skills. In the capital account, outflows related to direct investment increased by 35.1 per cent between 1985 and 1992, amounting to US$3,253 million in the latter year. Portfolio investment has been negative in recent years. Outflows on this account increased from US$165 million in 1985 to US$2,470 million in 1992. With amortization payments and capital flight, net capital outflows from Africa have been persistently negative. Outflows on account of long-term capital increased from US$377 million in 1985 to US$7,894 million in 1992, while outflows on account of short-term capital increased by 37.9 per cent from US$2,794 million in 1985 to US$3,853 million in 1992. The ratio of reserves to imports for Africa is low but improving. Reserves were worth 0.2 months in 1985, 1989 and 1990, 0.3 months in 1991, and 0.4 months in 1992 and 1993.

In all, Africa's balance-of-payments problems are a reflection of the lack of structural transformation in African economies, and consequently, in African trade, during the past three decades. The long-term solution to persistent deficits is structural change and diversification, which will increase the capacity of African economies to minimize the impact of adverse developments and take advantage of the opportunities in the world market. There is need also for rigorous export promotion and a programme to support domestic industries by improved infrastructure, and a vigorous training programme for skilled labour. Regional cooperation and intra-African trade would make a major contribution to export diversification, food security, export promotion, and the development of banking, insurance and shipping services. All this will have a favourable impact on Africa's balance of payments in the long term, and protect African countries from getting bogged down again with an intractable debt burden.

C. External debt

According to the World Bank, developing countries debt may have reached US$1,945 billion by the end of 1994. This is a continuation of the fast growth in debt commitments which started in 1990, and has since accelerated, increasing by 7.3 per cent in 1994, compared to 6.8 per cent in 1993, an average of 5 per cent in 1990-1992 (table III.8).

Table III.8 External debt of developing countries by region, 1990-1994
(US$ billion)

Source: World Bank, World Debt Tables 1994-1995, December 1994.

a including unspecified debtors
p projections

This development is essentially due to the increase of new debt commitments, and particularly of private capital investments in the "new emerging economies" of South East Asia and Latin America. According to the IMF (World Outlook, October 1994), the average value of net foreign direct investment (FDI) in developing countries was US$34.2 billion per year in 1990-1993, compared to US$13.3 billion only in 1983-1989. Thus, a very important change has occurred which, unfortunately, however, has bypassed the African region, where the same type of flows averaged a mere US$1.8 billion in 1990-1993, hardly more than the US$1.4 billion registered in 1983-1989.

External debt, which is estimated to have increased by 3.2 per cent to reach US$312.2 billion by the end of 1994 (table III.9), therefore has grown at a slower pace than in other developing areas: East Asia and the Pacific (12.9 per cent), the Middle East (15 per cent), South Asia (6.6 per cent), and Latin America and the Caribbean (4.0 per cent). Africa's debt is also the least important, in volume terms, estimated at 16.0 per cent of the total of developing countries' debt; but it is the heaviest in per capita terms and in terms of African countries'capacity to service.

When indicators such as debt/GDP, debt/goods and services exports, and debt service/goods and services exports ratios, are taken into account, the situation for Africa is not only the worst; it has gotten worse rather than improved with time (See Table III.9).
Table III.9 Africa's external debt and debt service, 1991-1994

Sources: ECA secretariat calculations based on the World Bank's World Debt Tables, 1994- 1995 and various sources.

* Preliminary estimates
a including the Sudan
b including South Africa
... Not available

While debt-servicing payments remained very high, the persistent negative net transfers on debt over the entire period 1990-1993 is attributable to the low level of fresh disbursements. Furthermore, despite various rescheduling efforts, arrears were accumulating, compounding the problems of repayment and adding to the overall debt stock. It is noteworthy that the value of short-term debt rose from US$37.6 billion in 1990 to US$45.3 billion in 1993 while that of long- and medium-term official debt decreased over the period 1991-1993, and levelled off at US$240 billion. The share of interest arrears in short-term debt rose from 33 per cent in 1990 to 37 per cent in 1992 and virtually reached 41 per cent in 1993.

The overall tendency depicted above conceals important differences among regions and countries. The external debt stock for the six countries of North Africa, the Sudan inclusive, rose only slightly in 1994, by 0.5 per cent, whereas there was a record 5.4 per cent increase in the external debt stock for sub-Saharan Africa. The debt and debt-service ratios for sub-Saharan Africa were 76 and 12 per cent compared to 65.4 per cent and 31.1 per cent for North Africa. In North Africa, net transfers on debt fell from US$-3.5 billion in 1992 to US$-5.4 billion in 1993, indicating that debt service payments far out-stripped fresh disbursements. In sub-Saharan Africa, there was a slight improvement in net transfers on debt over the period 1992-1993 and a significant development in 1994 when, for the first time since 1991, a positive balance of about US$2 billion emerged from the disbursements and payments made for the year. But the improvement in net transfers to sub-Saharan Africa, significant as it is, cannot be interpreted as an indication of a larger resource inflow in 1994. Rather, it conceals the difficulty facing sub-Saharan Africa in servicing its debt, with arrears increasing by US$3 billion, from US$37 billion in 1993 to about US$40 billion in 1994.

It is well known that the African debt crisis has been fuelled, in part, by a global financial crisis. It is therefore not a temporary liquidity crisis that could be resolved by the rescheduling agreements designed by the Paris Club or London Club creditors. Furthermore, Africa's socio-economic problems have greatly intensified in the past four years. During this period, many African countries have not enjoyed the stable domestic conditions and supportive international environment which are prerequisites for sustainable growth. Among the domestic problems were more vocal social claims, even as resources became more scarce, and disorganized and weakening national mechanisms and institutions. The unfavourable terms of trade for Africa's major exports in the world market for most of this period made matters worse, by reducing the capacity of governments to cope with domestic pressures.

Given the poor results obtained in Africa under the various debt relief schemes, it is necessary to reconsider the debt issue and its effects on the prospects for African economic recovery and growth. The current debt-relief schemes are more of palliatives, suited to countries whose payment defaults result from temporary liquidity crisis rather than from serious solvency crisis and structural economic problems requiring long-term remedial measures. The majority of African countries, more particularly those whose crisis can be resolved only by raising and maintaining export revenues at a level compatible with their debt servicing, have all undertaken comprehensive programmes of economic reform over the past 10 years. However, such reforms in themselves have not been sufficient to restore private investor confidence or bring the debt-service burden down to manageable proportions.

While the efforts deployed so far by the bilateral creditors have provided partial relief for the official debt burden of very few countries, most of the heavily and severely indebted countries are still facing enormous payment difficulties. Of the 36 developing countries whose debt overhang ratio (that is, ratio of present value of debt to goods and services exports) and liquidity burden ratio (that is, ratio of debt service due to goods and services exports) were, respectively, higher than 200 per cent and 15 per cent in 1994, 28 are in sub-Saharan Africa. Such a situation calls for radical and exceptional measures if these countries are to emerge from the debt crisis trap. Most of the efforts have focused mainly on official debt, but the complexity of Africa's debt problems requires that other components of debt, in particular commercial and multilateral debts, need to be taken into account, lest they undermine the efforts made on official debt. Indeed, only a coordination of all debt relief initiatives, within a global framework, would make it possible to break once and for all the vicious circle of the debt crisis.

The restructuring exercises which followed the Toronto and Trinidad summits of the G.7 certainly set the stage for a new approach to the problem of debt burden alleviation, because arrangements for reductions of debt stock and debt service were for the first time introduced into the mechanisms for renegotiating official loans and officially guaranteed credits. Nevertheless, because of the restrictions attached to the scope of coverage, certain types of loans and certain categories of debtor countries were left out. For example, for the low-income countries, ODA debts were not cancelled. Also, the measures had very limited impact on the financial situation of countries such as Côte d'Ivoire, the Niger and Nigeria, whose debt structure is dominated by bank loans. Moreover, the issue of lending by the multilateral financial institutions remained unaddressed. Indeed, the fact that loans contracted from those institutions could not be renegotiated - and even more, that arrears could not be tolerated - meant that some of the resources obtained from bilateral creditors were transferred to those institutions. The direct consequence was that liquidity did not improve as much as it should, while failure to reduce the risk of payment defaults made the chances of mobilizing funds from private donors rather slim.

In December 1991, the Paris Club instituted the Enhanced Toronto Terms containing for the first time provisions paving the way for a partial reduction in some categories of official debt and debt service and publicly guaranteed commercial debt of the poorest countries eligible to the IDA. This measure was accompanied by other unilateral initiatives taken individually by bilateral creditors to reduce the debt related to their ODA programme. Along with such initiatives, the World Bank decided to offer heavily indebted countries a series of debt relief options, like the IDA Debt Reduction Facility or exceptional IDA allocations which would enable such African countries like the Congo, Mozambique, Niger, Sao Tome and Principle, Uganda and Zambia to pay up their commercial debt arrears or arrears owed the Bank itself. More recently, at the prodding of the December 1994 G.7 Summit, the Paris Club creditors are now willing to grant up to 67 per cent of debt or debt service to low income countries with acute debt overhang provided they implement SAPs for three consecutive years.

Efforts by the African countries to improve their external competitiveness are not by themselves enough to provide a solution for their debt crisis, even on a medium-term basis. Therefore, an effective solution to the African debt crisis requires - among other macroeconomic policy orientations - meaningful and multidimensional measures, involving specific commitments by both creditors and debtors. If the lending community were to adopt multifaceted radical measures that went beyond the limited framework of financing payment arrears, to include immediate and massive concessional flows in conjunction with debt relief, the countries would be able to emerge from the vicious circle of the debt trap and of repeated rescheduling. The African Common Position on External Debt adopted in 1987 at Addis Ababa by the Heads of State and Government of the Organization of African Unity remains still topical in that respect.

Admittedly, African countries, themselves have a major role to play in taking appropriate measures to restructure their economies and to create an enabling environment for domestic and foreign investment. However, there are two factors which are far from being controlled by African policy-makers: the dependence of African economies on the industrialized countries, and the high degree of exposure of African countries to external shocks. Reducing their external dependence, and developing the capacity to cope with changes in the external environment, require long-term restructuring and adjustment which would require a good deal of international support to accomplish.

The external debt crisis of Africa must be placed within the global context of Africa's relations with the rest of the world and seen as a central element in the economic crisis of the continent. Hence, the formulation of a specific strategy to deal with the African debt crisis must be built around two major integrated policy measures: the first is immediate action to relieve the pressure of debt so as to avoid a disintegration of the present fragile economic and social structures; the second is to restore the external viability of African economies and create favourable conditions that would attract the financing necessary to achieve economic recovery and promote sustainable growth - the only feasible way to emerge from the present economic and financial crisis.

D. Resource flows

At 1991 prices, net resource flows to the region were US$23.2 billion in 1992, compared to US$27.7 billion in 1990 and US$34.0 billion in 1985 (table III.10). The indications from figures of net ODA flows from the Development Assistance Committee (DAC) countries, multilateral institutions and Arab countries to Africa are that ODA to the region has been falling in current and constant terms since 1990.

Table III.10 Total net resource flows to Africa, 1985 and 1990-1992
(Billion US$)

Source: OECD, Financing and external debt of developing countries, 1992 Survey, Paris 1993.

In 1993, net ODA flows to the region amounted to US$21.4 billion compared to US$24.7 billion in 1992 and US$25.1 billion in 1990. At 1992 prices, however, net ODA flows declined by 11.4 per cent in 1993 to US$21.9 billion, and were only 79.4 per cent of their 1990 levels - an average fall of 5.6 per cent a year in real terms (table III.11).

Table III.11 Net official development assistance to African subregions, 1990-1993
(US$ million)

Source: OECD, Development Cooperation Report 1994, Paris 1994.

The steady decline in resource flows to the region in the past 8 years is in contrast with the growth and financing requirements of developing Africa, particularly the low income African countries. These countries, because they are faced either with a sharp contraction in private flows or are unable to borrow from international money markets, have the bulk of their external resources currently provided by bilateral and multilateral donors. Those countries face various internal and external difficulties: macroeconomic instability, social turmoil, civil strife, weak and disjointed institutions, heavy debt burden, unfavourable international economic environment and deteriorating terms of trade. Their poor performance has deepened the distrust of investors, accentuated the withdrawal of private donors and increased their dependence on official development finance (ODA).

Since 1990, there has been a marked change in the structure of resource flows: the relative increase of ODF, estimated at US$3.1 billion for the first three years of the 1990s, was not enough to compensate for the dwindling receipt of private resource flows. The share of bilateral donor disbursements has decreased steadily over the years since 1985. While it accounted for 70 per cent of ODA in 1985, it fell to 68 per cent in 1991 and to 66 per cent in 1992. While multilateral disbursement has increased over the period, the trend has been irregular. What is more, the volume of multilateral lending has been modest when compared to the financing needs of the poorest developing countries as a group.

In the case of bilateral official lending, the concessional element fell by half from 1989 to 1993. In the case of multilateral lending on concessional terms, which accounted for 45 per cent of official loans in 1985, the proportion has exceeded 70 per cent since 1990. In contrast, technical assistance grants expanded by nearly 20 per cent between 1990 and 1993. The trend of the latter component of ODA would seem to suggest that part of the bilateral inflows has been diverted to technical assistance, whose cost and effectiveness are increasingly being called into question.

With regard to private financial flows, there has been a slight recovery in foreign direct financial and portfolio investment but it has been confined to a few countries where economic reforms, in particular the privatization of public enterprises and parastatals, created opportunities for equity participation or where the best opportunities for profit exist on account of a stable and expanding economic environment. On the other hand, net transfers on private lending has worsened to a net outflow of US$1.7 billion in 1992 and confirming the persistence of negative transfers by commercial banks from the low-income countries of sub-Saharan Africa. Thus, the fact that private capital resources are currently more abundant in the world does not guarantee that they will be an automatic substitute for concessional flows to African countries.

In order to be able to double average per capita income in Africa and reduce poverty over a period of 20-25 years, substantially, a large increase in external financing would be required, in addition to increased domestic resources, which would require the gross domestic savings rate to be raised to 25- 35 per cent of GDP. While the rebuilding of domestic financing capacity in Africa would depend primarily on the outcome of ongoing reforms, massive support by Africa's development partners would be indispensable to support those efforts in the short and medium term. It will be recalled that, at the beginning of this decade, the United Nations obtained in the New Agenda for the Development of Africa in the 1990s (UN-NADAF), the renewed commitment of the international community to support development efforts in Africa. Since Africa's external debt constituted one of the major constraints to the financing of growth recovery, specific measures were recommended towards reducing the debt-service burden. It was agreed that the achievement by the African economies of an average annual growth rate of 6 per cent - the critical threshold to curb absolute poverty - during the decade of the 1990s would require raising ODA to US$30 billion in 1992 and maintaining its growth rate, in real terms, at an annual average of 4 per cent until the end of the decade. These resources would supplement debt- relief measures and others aimed at revitalizing export capacity in such a way as to make development self-sustaining.

Much would depend on whether donors' response to Africa's needs becomes more positive in the future. Predictions are now difficult to make because the post-cold war period has given a new dimension to the policy orientation of ODA. First, the collapse of the Soviet Union and the socialist bloc has deprived some developing countries of the financial and technical assistance previously provided to them within the framework of their relations with that bloc. Second, assistance from the oil- producing Arab countries which was at the level of US$8 billion at the beginning of the 1980s decreased to US$2 billion during these last years. With the recent peace agreement and prospects of stability in the Middle East, the region is in greater need of its available resources for its own development, since reconstruction will be among the main priorities. Third, most of the Development Assistance Committee (DAC) members - the most important source of official development assistance in the world - are only just emerging from a long-lasting recession. As one of the consequences of the austerity programmes dictated by recession, the perception of budgetary allocations to development assistance by some political groups in the donor countries is changing profoundly, reflecting their opposition to the spirit of solidarity which characterized actions in the past in favour of development in the poorest countries.

The outcome of all the developments mentioned above has been stagnation or decline of ODA funds which has led to the adoption by the donor countries of more constraining eligibility criteria and specific efficiency ratings. A set of targets and performance criteria, among them poverty reduction, children's health, demography, anti-AIDS campaigns, environment, women participation in development, good governance, democracy, human rights, popular participation, promotion of the private sector, will determine the allocation of public resources to the demanding countries. There will undoubtedly be more competition among the increasing number of requesting countries for the limited funds available. As targets are set on the basis of global priorities, countries considered marginal might be penalized.

It is in that context that the response of donors to Africa's aid requirement should be made. The initial signs leave little room for optimism. Apart from Japan, which decided in 1993 to raise by 50 per cent its contribution to world development, the member countries of the OECD Development Assistance Committee have levelled off their contributions at 0.35 per cent of GNP over the last 30 years. The 0.7 per cent target set by the United Nations may not be achieved, because of the ever- decreasing number of countries even trying to meet it. In order to expand the possibilities for mobilizing development finance resources for Africa in the coming years, the measures accompanying development assistance must include debt relief, stabilization of commodity prices and encouragement of private flows.

Editor: Dr. Ali B. Ali-Dinar, Ph.D
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