Africa Action: Debt Position Paper, 07/14/01

Africa Action: Debt Position Paper, 07/14/01

Africa Action: Debt Position Paper Date distributed (ymd): 010714 APIC Document

Africa Policy Electronic Distribution List: an information service provided by AFRICA ACTION (incorporating the Africa Policy Information Center, The Africa Fund, and the American Committee on Africa). Find more information for action for Africa at

+++++++++++++++++++++Document Profile+++++++++++++++++++++

Region: Continent-Wide Issue Areas: +economy/development+


Despite the overwhelming consensus among African countries, analysts and non-governmental organizations that the debt crisis has not been solved by the creditors' limited debt relief efforts to date, press reports indicate that the G-8 - meeting in Genoa next week - have no plans for any new initiatives. Although the creditors may be tired of talking about it, Africa's debt still cripples efforts to address the AIDS pandemic, the wider health emergency and other development goals. That is why the issue will be not conveniently disappear, and why the spotlight is focusing on the unwillingness of the rich countries to address the largest remaining portion of that debt - that held by international financial institutions.

In this posting you will find excerpts from a new position paper released by Africa Action as part of our campaign for Africa's Right to Health. The full position paper is available at: In a related posting today, you will find a statement by Jubilee South and brief references to other recent reports and on-line discussions on the debt crisis.

For suggested actions in the US at the time of the Genoa meeting, see also

+++++++++++++++++end profile++++++++++++++++++++++++++++++

Africa's Debt - Africa Action Position Paper

July 2001

By: Ann-Louise Colgan, Research Associate, Africa Action.

[Excerpts only: for full text see]

The 48 countries of sub-Saharan Africa spend approximately $13.5 billion every year repaying debts to rich foreign creditors for past loans of questionable legitimacy. These debt repayments divert money directly from basic human needs such as health care and education, and fundamentally undermine African governments' fight against the AIDS pandemic and their efforts to promote sustainable development. The All-Africa Conference of Churches has called Africa's massive foreign debt burden "a new form of slavery, as vicious as the slave trade".

Africa Action calls for the cancellation of Africa's foreign debt, which we consider in large part to be illegitimate, based on its origins and consequences. We consider the present and past attempts to deal with the debt crisis to be absolutely insufficient, and we oppose the existing debt relief framework, developed and controlled by creditors and designed to function only in their interests. Africa Action opposes conditionalities imposed by Northern creditors which perpetuate a global economic system where Africa remains economically controlled by the developed world. We believe that the costs of debt cancellation should be borne by the creditor nations and the International Financial Institutions, and moreover, we believe that the global North owes Africa an historical debt for centuries of exploiting the continent's human and natural resources. We therefore pose the question, "who really owes whom?".

1. Introduction to Africa's Debt Crisis

In the 1960s and 1970s, African countries became indebted to international lenders as they accepted loans for political and economic stabilization in the post-independence era. In the context of the Cold War, and with massive revenue surpluses of oil money in Western banks in the 1970s, loans were made with little thought to their purpose or to their recipients' capacity to repay the debt. Many were made to retain the loyalty of corrupt regimes, and much of the money went into the hands of unrepresentative and repressive governments. In the 1980s, when the shocks of the 1970s oil crisis, rising interest rates and falling global prices for primary commodities began to take a toll, the debt crisis in the developing world began to unfold.

Sub-Saharan Africa's debt crisis worsened during the 1980s, as the ratios of foreign debt to the continent's gross national product (GNP) rose from 51% in 1982 to 100% in 1992, and its debt grew to four times its export income in the early 1990s. In 1998, sub-Saharan Africa's debt stock was estimated at $236 billion, and that of the whole continent was over $300 billion. Africa's debt burden is twice that of any other region in the world -- it carries 11% of the developing world's debt, with only 5% of its income. GNP in sub-Saharan Africa is $308 per capita, while external debt stands at $365 per capita.

Early attempts to address the debt crisis began in the 1980s, with debt swaps by creditors and with the IMF's Structural Adjustment Programmes, which were designed to stabilize and re-structure economies to ensure full payment of the debt stock. From 1989 on, a range of measures were enacted to reschedule and restructure debts through the Paris Club, an informal forum where creditor governments review and reschedule debt payment programs for poor countries. In 1996, the Heavily Indebted Poor Countries (HIPC) Initiative was created as the first comprehensive debt relief framework -- encompassing private and government creditors as well as the World Bank and IMF, for the first time -- and this remains the dominant approach to resolving the debt crisis.

2. Africa's debt is 'illegitimate' debt

In light of the circumstances under which much of the debt of African countries was incurred, and in recognition of the mistakes of both borrowers and lenders, as well as of the harmful effects of Africa's debt on the continent's development, Africa Action considers much of Africa's debt to be illegitimate. The illegitimacy of the debt is based on the following principles:

* Debts contracted by dictatorships or repressive regimes, and used to strengthen the hold of these regimes, are illegitimate, for instance the apartheid-caused debt inherited by South Africa. This has also been termed "odious debt" (an established legal principle).

*Illegitimate apartheid-caused debt also includes the debt incurred by neighboring countries who were destabilized and against whom war was waged by the apartheid regime in South Africa.

* Debt contracted by formally democratic but corrupt governments, which was stolen by leaders or senior officials, is illegitimate. This has also been referred to as "stolen wealth".

* Debts contracted and used for improperly designed projects and programs are illegitimate. There is heavy responsibility on creditors here, particularly on the World Bank for its failed development projects.

* Debt that swelled because of high interest rates and other conditions imposed by creditor governments and banks is illegitimate. This perspective argues that the original debt (the principal) has already been repaid many times over, so the continued existence of a debt burden is illegitimate.

* Debts which cannot be serviced without impoverishing a country's people are illegitimate. This is more often termed "immoral debt". As Julius Nyerere said, "Must we starve our children to pay our debts?".

* All debt owed by the South to the North can be considered illegitimate. The argument here is 'who owes what to whom?". Africa Action and Jubilee South maintain that the countries of the South are in fact creditors of an historical, social and ecological debt which Northern countries refuse to recognize.

Understanding the illegitimacy of the debt reinforces the arguments for debt cancellation, and opens up some new options for accomplishing this.

Odious Debt

The concept of odious debt exists as a doctrine in international law, and this legal precedent (dating back over 100 years to when the US captured Cuba from Spain) could allow for the cancellation of such debts by international agreement. The Doctrine of Odious Debt holds that debt incurred by dictatorships for their own benefit or for the purposes of enforcing the dictatorship is 'odious', and therefore not the responsibility of the population or of subsequent democratic governments. The Doctrine has two main aspects: the legitimacy of the borrower's purpose in seeking the loan and whether the lender was recklessly indifferent to the status of the contracting state. In the case of South Africa, for instance, all apartheid-caused debt should be considered "odious" because of the nature of the regime. More broadly, it may be argued that the debts of developing countries that have arisen as a result of bad lending policies and loan conditions should be declared odious and written off.

Debt Repudiation

Debt repudiation is an option for countries that refuse to acknowledge the legitimacy of their debts. Repudiation involves the unilateral cessation of debt repayment. This is a dramatic move, and has several potential disadvantages, including the possibility of retaliation from commercial banks, creditor governments and multilateral lending institutions, and the possibility of jeopardizing relations with rich countries. One way to minimize this risk might be for a group of debtor nations to act in concert, joining in a "debtors cartel" that would not only be more difficult to "punish", but that would also command greater leverage in negotiations on future credit. The risk of limiting future access to financial flows would still be real, however. One past example of debt repudiation is that of Peru, where President Garcia declared that Peru was unilaterally limiting its debt payments to 10 percent of its export earnings - a de facto repudiation. This move proved detrimental to the Peruvian economy, leaving the country isolated from international financial markets, and eventually leading to a crushing $20 billion foreign debt. In Africa, there is a growing call from civil society for collective repudiation of external debts by African countries. The refusal to pay is increasingly seen as the moral and logical outcome of the illegitimate nature of these debts.

International Debtors' Court

Another possible approach for addressing the problem of illegitimate and unpayable debt is the notion of an international debtors' court, as a full insolvency procedure where debtor governments could present their case rather than leaving all control in the hands of creditors, as is currently the case. Jubilee 2000 and others have endorsed the idea of such an international, independent court, appointed to arbitrate between creditors and debtors. This would be a mechanism for drawing a line under the unpayable debts of a sovereign state, similar to bankruptcy laws for individuals. In this forum, creditors and debtors would argue their separate cases, with the final decision resting with independent arbitrators, who would only endorse an agreement that was fairly and openly reached.

Disclosure and Classification of Debts

In order to expose the illegitimate nature of much of Africa's debt, a process of disclosure and classification of all outstanding debts has been proposed by Jubilee South, to examine the circumstances under which the debts were incurred and to encourage future government accountability and transparency. An immediate and thorough information disclosure on existing debts would permit the investigation and classification of these debts in order to establish their legitimacy, and therefore would allow a fair determination on the appropriate policy on servicing these debts. Making public the purpose and use of loans and investigating their legitimacy should not only help determine which debts should canceled as a matter of principle, but should also encourage greater transparency and responsibility on the part of both lenders and borrowers in future lending.

3. The Current Debt Relief Framework

The IFIs consider the HIPC Initiative to be meeting its objective of relieving the debt burden of the world's most impoverished countries. They quote figures of "significant" debt reduction for HIPC recipients. ..

Africa Action disagrees.

The IFIs' estimates of the savings countries will make under the debt relief plan are grossly unrealistic, as are the extremely optimistic growth projections they make for HIPC countries (8- 12% per annum).

4. Conditionality Tied to Debt Relief

The issue of conditionality is central to any discussion of debt relief or debt cancellation. The IFIs argue that conditions, such as economic reforms and supervision by the World Bank and IMF, are necessary to ensure that debt relief proceeds are used wisely, and to prevent 'reindebtedness' (a recurrence of the debt crisis) caused by economic mismanagement by irresponsible or unrepresentative governments. They use the "moral hazard" argument to reject calls for debt cancellation, maintaining that writing off outstanding debts would "reward" bad practices and would encourage, rather than discourage, future financial irresponsibility by debtors. Not only is this argument flawed in its failure to acknowledge the illegitimate nature of much of Africa's debt, it also fails to recognize the responsibility of creditors in the lending process, and the role of creditors in the origins of the debt crisis.

The latest form of conditionality imposed by the World Bank and IMF is the requirement for HIPC countries to develop a Poverty Reduction Strategy Paper (PRSP), as described above. This approach, devised by the World Bank and IMF, is portrayed as a means to link debt relief more firmly with the goal of poverty reduction. While the notion of a national plan for poverty reduction and social and economic development, designed through collaboration between governments and civil society, undoubtedly has some merit in the abstract, the PRSP process is highly problematic. The fact that this approach is dictated and supervised by external creditors and is a precondition for receipt of debt relief raises serious questions as to its legitimacy as a natural expression of democracy in a HIPC country. ...

The PRSP requirement is a weak attempt to make the HIPC Initiative seem more concerned with the eradication of poverty. In reality, the current debt relief framework does not allow for sufficient savings for the roots of poverty to be tackled, and the PRSP is therefore just one more structural adjustment program to which developing countries must conform.

A more immediate approach to linking debt relief with poverty reduction was developed in Uganda, where the Poverty Action Fund (PAF) is often held up by creditors and NGOs alike as a model to emulate in the management of debt relief resources. Early in the HIPC process, the Ugandan government created this Fund, which is transparently managed and audited, and which has been used to channel debt relief resources to funding human development goals. Uganda's PAF has allowed for increased expenditures in education, in clean water supply and in infrastructure. While this approach has proved successful to date, and might be one short-term way to deal with the proceeds of debt relief in a transparent and productive manner, this is not a substitute for a broader poverty reduction strategy ... It is also worth noting that even after debt relief, Uganda still pays out roughly 18% of its government revenues to cover its remaining debt.

While many NGOs consider debt cancellation tied to World Bank and IMF conditionalities to be fundamentally inappropriate, particularly in the case of illegitimate debts, it is important to acknowledge that the desire for conditionality in the debt relief process does not merely come from the creditors' side. There are groups in African civil society, as well as NGOs elsewhere, who consider some form of conditionality to be a useful safeguard against the misuse of freed up resources and the possibility of reindebtedness by an irresponsible and authoritarian government. In cases where there is no democratic government, the establishment of an international monitoring body to oversee the use of debt relief proceeds is one approach which has been suggested by the Eurodad Network. This would work through the creation and management by this independent body of a "poverty fund" into which debt service savings would be diverted, and to which civil society would apply directly to finance specific sustainable human development opportunities. Bypassing a country's government in this way seems difficult as well as inappropriate in encouraging citizens to move outside the framework of their own state to seek guidance and economic direction from an external body. It is also unlikely that a country's civil society would have sufficient capacity to function independently of an undemocratic government.

Some argue that a basic precondition for debt cancellation is the existence of a democratic government, that can be relied upon to practice transparency and to include civil society participation in determining how resources are spent to ensure that they are re-channeled into programs that promote sustainable development. A democratic system should also allow for transparency and consultation on future loan transactions, and thus minimize the risk of reindebtedness. It is our view, however, that illegitimate debts should be written off regardless. It is new loans and grants that are most appropriately used as incentives to support civil society and other internal campaigns for democratic reform.

5. Principal Creditors and the Costs of Cancellation

The cost of canceling these outstanding debts is actually far less than it might appear. ...

The Treasury Department admits that the cost to the US of bilateral debt cancellation is small, yet it emphasizes that the costs of multilateral debt relief are great, and that some of these will also fall on the US. A recent Drop The Debt report stated that after HIPC debt reduction, the 22 countries will owe more to the World Bank and IMF than to the next 17 largest creditors combined. Achieving cancellation of this huge multilateral debt is therefore crucial.

On the basis of recent studies and analyses, it has become clear that the wealth of resources that the major IFIs hold on their own balance sheets is sufficient for them to use internal funding to absorb the costs of multilateral debt cancellation. ...

Any proposal for debt cancellation must also consider how development in future countries will be financed after the debts have been canceled. The very idea of loans being more appropriate than grants has been seriously called into question by the current crisis. ...

What is certain is that the staggering cost of poverty eradication means that debt cancellation cannot be used as an alternative to development assistance. The need for "additionality", for substantial new grants and capital contributions by donor governments and multilateral institutions, over and above the cancellation of the debt burden, cannot be stressed enough. Development Assistance has been steadily decreasing over the past decade. Despite repeated promises from rich countries to provide 0.7 % of their gross national product for overall official development assistance for poorer countries, not one of the G-7 members reaches even half that figure. The U.S. ranks at the bottom with only 0.1 percent of GNP going to development assistance, and only 1/100th of 1% of the U.S. budget is currently spent on aid to sub-Saharan Africa.

6. Conclusion

In light of the questionable legitimacy of much of Africa's outstanding debt, the enormous social and economic costs associated with servicing this debts, and the failure of debt relief efforts to date, Africa Action calls for the cancellation of Africa's massive foreign debt burden.


Message-Id: <> From: "APIC" <> Date: Sat, 14 Jul 2001 11:20:22 -0500 Subject: Africa Action: Debt Position Paper

Editor: Ali B. Ali-Dinar

Previous Menu Home Page What's New Search Country Specific