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Africa: Debt Update Date distributed (ymd): 981213 Document reposted by APIC
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Region: Continent-Wide Issue Areas: +economy/development+ Summary Contents: This posting contains an article from the November 1998 issue of the UN's Africa Recovery magazine, noting the failure in 1998 to achieve faster and deeper debt relief for African countries, and reviewing the continent's current economic status. Other articles in the same issue (available at http://www.un.org/ecosocdev/afrec) cover, among other subjects, a new UN Conference on Trade and Development (UNCTAD) report on "least developed countries," the most recent high-level panel meeting on African development, the impact of HIV/AIDS on African development, and the impact of the Asian financial crisis on African economies.
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African debt hopes disappointed
World Bank and IMF annual meetings focus on Asia
By Patrick Smith in Washington, DC
>From November 1998 issue of Africa Recovery Room S-931, United Nations New York, NY 10017 USA Tel: 212-963-6857; Fax: 212-963-4556 e-mail: africa_recovery@un.org web: http://www.un.org/ecosocdev/geninfo/afrec
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Special Notice: Selected back issues of Africa Recovery, in English and French, are available free of charge (while supplies last). For details of which issues are available and to order individual copies see the Africa Recovery web site (http://www.un.org/econsocdeve/geninfo/afrec/freepubs.htm). Multiple copies are available to schools, libraries and organizations. Fax request to 1-212-963-4556.
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Donor countries' failure to agree on a reformed multilateral debt strategy blocked African calls for faster and deeper debt relief at the 8-10 October annual meeting of the International Monetary Fund and World Bank in Washington. Amid growing fears of a global financial meltdown, African finance ministers and central bankers had to struggle to get their concerns heard. Alongside such core issues as economic reform strategy, African ministers argued for more attention to be paid to the effects on their economies of Asia's financial crisis.
For many African countries, debt relief and post-war reconstruction credits were priority issues. African governments, along with anti-debt campaigners such as the Jubilee 2000 group, Oxfam and the European Network on Debt and Development (Eurodad), argue that the Heavily Indebted Poor Countries Initiative (HIPC) is too slow and limited in scope. Under normal HIPC terms, debts may be cancelled only after a six-year (or more) qualification period.
Regarded by many as groundbreaking when it was introduced two years ago, HIPC has not lived up to the expectations of many African governments. Five African countries are among the total of seven countries that have qualified for HIPC debt relief, out of 41 potential candidates. Calls for reform made by the African caucus of IMF and World Bank governors, along with a communique from the Commonwealth Finance Ministers issued just before the Bank/Fund meetings focused on the following areas:
* Eligibility criteria should be liberalized; the debt-to-export ratios (between 200 and 250 per cent) above which debts are deemed "unsustainable" are too high;
* The time frame is too long; debtor countries must adhere to IMF programmes for a minimum of six years (three years before the "decision point" and another three years to reach "completion point," after which actual debt relief occurs). Only Uganda and Bolivia have so far reached completion point;
* Eligibility is too rigidly linked to an IMF track record; after Ethiopia was declared "off-track" by the Fund in 1997, its debt relief was delayed and the same criteria now threaten Tanzania's chances of debt relief, given its uneven performance under IMF and World Bank programmes;
* Debt relief should be closely linked with poverty reduction. Poverty levels should help determine how much debt relief a country requires. The Bank and the Fund should do more to promote schemes such as Uganda's "poverty action fund," which channels the savings from debt relief into publicly monitored and audited social programmes;
* More flexibility for post-war countries: the Bank and the Fund now allow non-IMF reforms to be counted as part of a country's initial three-year track record, but war-ravaged countries still face long waits for debt relief; Rwanda would not be eligible to enter the HIPC initiative until 2000, and would then wait until 2003 for any debt relief.
While few officials at the annual meetings disputed Africa's moral case over debt, the major arguments were over the cost and structure of the relief mechanism. The IMF Interim Committee and the World Bank Development Committee agreed to extend HIPC until 2000 but did not approve any general liberalization of the eligibility criteria. These latest revisions to HIPC raise its cost by $2.4 bn to a total of $8.2 bn. Such figures are dwarfed by the more than $50 bn of rescue credits the Bank and the Fund have disbursed to East Asian countries this year, or the $4.5 bn disbursed to Russia in July alone.
African Finance Ministers on the Development Committee -- Lesotho's Leketeke Victor Ketso, Cote d'Ivoire's N'Goran Niamien, and Morocco's Fatahallah Oualalou -- all pressed strongly for HIPC reform but met major resistance on the issue of cost. Finance ministers from middle-income countries backed calls for liberalizing HIPC but did not want the Bank and Fund to pay for it from their general resources. Instead, they argued that the Paris Club of rich bilateral creditors should contribute most of the financing.
Rich countries are split about the future of HIPC. The most generous creditors have been the Nordic countries, the Netherlands and Switzerland, all of which have been pushing their fellow OECD members to contribute more to the HIPC Trust Fund to enable a widening of the initiative. Only three of the Group of Seven countries (Japan, Canada and Britain) have contributed to the Trust Fund at all. Japan, however, has since made encouraging noises concerning debt cancellation through grants to African least developed countries. But others (namely Italy, France, Germany and the US) have been reluctant to finance HIPC directly.
Despite these differences, the Bank was able to win enough backing at the meeting to launch another initiative for Africa's most fragile economies: a trust fund -- similar to the HIPC fund -- to help finance reconstruction in post-conflict countries. Current rules prevent the Bank and the Fund from lending to countries in arrears (which most post-conflict countries are).
The Bank's Post-Conflict Research Unit, under Mr. Nat Colletta, reports that six African countries in (or just out of) conflict -- Central African Republic, Republic of Congo, Democratic Republic of Congo, Liberia, Somalia, and Sudan -- were $4.3 bn in arrears to the multilateral financial institutions. In cases where the post-war government had demonstrated a "commitment to reform" without necessarily going through a formal IMF programme, the Bank proposes that the country's reconstruction efforts should be supported by grants from its net income and its soft-loan affiliate, the International Development Association.
In an internal paper on the initiative, the Bank suggests that the IMF could allow higher levels of emergency assistance than currently permitted. The Bank also asks the African Development Bank to help support the initiative, which would have to be approved at board level in all three institutions. While Bank officials say such approval would probably be obtained, the bigger difficulty would be to raise finance to implement it from bilateral and multilateral donors.
Echoes of the Asian crisis
Views differed on the impact of the Asian crisis on
Africa. While several African ministers said that
lower commodity prices would severely damage Africa's
growth prospects, World Bank President James Wolfensohn
said on 1 October that the direct effects would be
limited because: "...you don't have huge amounts
of capital flowing in and flowing out of Africa."
The IMF World Economic Outlook argues that the restricted
access of most African countries to international financial
markets "has in turn limited the impact of the
past year's market turbulence: the crisis in emerging
markets has affected Africa mainly through commodity
prices and trade." While some African countries
will benefit more from lower oil prices than they lose
from lower commodity prices, the Fund expects Africa
as a whole, and about one-third of the countries "to
be net losers." one-third of the countries "to
be net losers."
However, some Fund and Bank officials worry that Asia's
financial crisis will make economic nationalist arguments
look more attractive in Africa, adding that although
South Africa is the only African country to abandon
capital controls, the Asian crisis could disrupt financial
liberalization in Africa. But so far the policy reaction
has been muted.
Ms. Maria Ramos, South Africa's Director-General at the finance ministry, told the Bank and Fund meeting that the country would continue with its programme of gradual financial liberalization. "We are getting confirmation that our policy course is on track," Ms. Ramos said after announcing that two rating agencies -- Moody's Investors Service, and Duff & Phelps -- had confirmed South Africa's rating as triple B and that Moody's had withdrawn its "negative outlook" caution on the country.
The government is on track for its target of cutting the fiscal deficit to 3.5 per cent of gross domestic product, despite the inflationary effects of the 20 per cent depreciation of the rand this year. While consumer price inflation may rise slightly to 7.5 per cent from the government's 5 per cent target, reserves have increased sharply to $9 bn, or 4 months' import cover.
Better news from South Africa and hopes that Africa's second biggest economy, Nigeria, would grow faster under the government of General Abdulsalami Abubakar have steadied some nerves in Africa. Both the South African and the Nigerian delegations arrived in Washington with substantial teams of commercial bankers and business executives banging the drum for foreign investment in the face of market jitters about Asia, and most other emerging markets.
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Africa the fastest growing world region, IMF says
Amid the stampede of bankers and investors fleeing emerging markets in Asia and Latin America, Africa's economies were generally cushioned from the early effects of the international economic slowdown and credit crunch. But the current global financial crisis, widely considered as the worst in 50 years, is cutting more deeply into projected demand for commodities and hopes of African growth.
The International Monetary Fund's World Economic Outlook projects African gross domestic product (GDP) growth at 3.7 per cent this year, making Africa the fastest growing region in the world. The IMF projects growth in Asia at 1.8 per cent this year, while the Americas are forecast to grow at 2.8 per cent.
The Fund's downward revision of earlier projections suggests that commodity price increases, rather than successful changes in economic policy powered much of Africa's higher growth performance over the past five years. Nevertheless, IMF and World Bank economists insist that the growth has been stronger in "reforming" countries than "non-reform" countries and that the subsequent dips in GDP growth will be less severe among the reformers.
Overall, the IMF projects average consumer price inflation in Africa at 7.7 per cent this year, less than a fifth of the rate in 1994. Reflecting the global credit crunch, the IMF projects that net private capital flows to Africa this year will slump from last year's recorded level of $14 bn to $6.4 bn, before bouncing back to a projected $13.4 bn in 1999. This would push Africa's share of private capital flows to all developing regions from 9.7 per cent this year to 11.5 per cent in 1999. Bank and Fund officials say this reflects perceptions that compared to other emerging markets, Africa has become "relatively less risky."
The Fund's aggregate statistics emphasize a few major areas of concern, including the need for Africa's two largest economies, Nigeria and South Africa, to grow faster. Both of them face formidable obstacles: Nigeria has to counter the downward pressure of weaker oil prices and South Africa has to combat the effects of capital outflows, currency depreciation and lower commodity demand.
Another key concern is the African franc zone, where growth remains robust. After 1 January 1999, the CFA franc will be pegged to the single European currency -- the Euro -- rather than just the French franc. While IMF economists are still upbeat about franc zone countries maintaining their current pace of GDP growth under the new arrangements, several commercial banks forecast difficulties resulting from the CFA link to a "hard" Euro.
With France's GDP growth projected at 4 per cent and the French franc appreciating against the dollar in the current business cycle, some banks think the CFA franc may be linked at too high an exchange rate with the new Euro. The effects of this could put a brake on growth in Africa, as rival commodity producers in Asia benefit from more flexible exchange rate policies. While the CFA's linkage to the Euro may promote low inflation and fiscal rectitude in the zone's countries, this cannot compensate for the lack of exchange rate flexibility and constraints on economic growth, as world commodity demand remains weak.
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Date: Mon, 14 Dec 1998 12:45:14 +0300 (EAT) From: IRIN - Central and Eastern Africa <irin@ocha.unon.org> Subject: AFRICA: Debt Hopes Disappointed 1998.12.14