UNIVERSITY OF PENNSYLVANIA - AFRICAN STUDIES CENTER
Africa: UN-NADAF NGO Debt Paper
Date Distributed (ymd): 960915
Background Paper Number 1, NGO Forum, UN-NADAF Mid Term Review, September 13-14, 1996
The Unresolved and Deepening African Debt Crisis by Opa Kapijimpanga, African Forum and Network on Debt and Development (AFRODAD) Zimbabwe
Under the United Nations New Agenda for the Development of Africa, launched in 1992 in New York following UN Resolution 46/151, the international community committed itself to resolving the African debt problem. It was recognized that Africa's debt burden was a critical bottleneck constraining the recovery and development of the continent. It was also recognized that despite the implementation of several international initiatives, the situation had not significantly improved.
Servicing the debt accounted for over 30% of the continent's exports. At the G7's London Summit in July 1991, participants had agreed that Africa deserved special attention. They therefore called for relief measures in favour of the poorest, most indebted countries that would go beyond the Toronto Terms. The G7 then also called on the Paris Club to continue its discussion on how these measures could best be implemented promptly.
The New Agenda specifically envisioned the following measures:
a) Cancellation of official ODA debt and debt servic;
b) Write off of private commercial debt and use of debt buy backs or swaps for defined development activities;
c) Support to African countries whose debt was mainly to official creditors or to multilateral institutions;
d) Additional measures for Africa to benefit from new financial flows, particularly ODA;
e) Serious consideration to organisation of an international conference on Africa's external indebtedness.
Since 1992, the African debt crisis has been discussed fairly extensively in many official and other fora. While in some circles the problem has been recognised no comprehensive solution has yet been implemented. In other circles, the problems was just wished away.
We participate in the UN-NADF Review with the expressed belief that this process provides a forum for discussion that will speed up the realisation of commitments made by the international community in resolving Africa's debt crisis.
2.0 The unresolved and deepening debt crisis:
Africa's debt burden continues to make claims on the necessary resources for development. During 1994, Africa's scheduled debt service was 400% of actual debt service; scheduled debt service was more than 80% of foreign exchange earnings. For countries like Tanzania and Madagascar, just to name two, the scheduled debt service was and remains more than 100% of foreign exchange earnings. This indicator reveals that for the severely indebted African countries, the only real solution is a comprehensive debt relief that will close the gap between the scheduled and actual debt service thus reducing the heavy arrears. Clearly, merely rescheduling of loans is not a solution to the problem of African debt.
Moreover, up to US$ 200 million a year in ODA is being diverted from meeting Africa's development needs to refinancing the debt. This matter begs serious discussion as such diversion has only undermined efforts aimed at human development and eradicating poverty in Africa. Unless a comprehensive solution towards an exit of the debt problem is found, Africa will continue to have fewer and fewer resources available for meeting its mounting development needs
Furthermore, as a result of policy changes in the context of adjustment processes, African Governments have had to assume some of the debt held by the private sector, especially the parastatal sector in the wake of privatisation. The country's debt burden has shifted to the Government to a very high extent as shown by the percentage of total debt stock now attributed to the Government in Ghana (72.8%); Guinea-Bissau (91.6%); Madagascar (85.3%), Tanzania (89.5%) and Zambia (68.7) just to name a few. The debt burden has therefore created a great deal of pressure on government budgets. As a result, investments in human development and eradication of poverty have suffered.
2.1 Official Bilateral Debt:
Despite the G7's many declarations for action to reduce the debt stock of the severely indebted African countries, progress at the level of the Paris Club has been extremely slow. At the end of 1994, the Paris Club agreed to go for the Naples Terms which would provide a 67% debt stock reduction for the low income countries meeting their criteria. However, the 67% was to be applied to the pre-cutoff date loans. The cut off date, defined as the time of first rescheduling has, for many African countries, not included the post-cutoff date period during which the economies were troubled and therefore had to apply for rescheduling.
In February 1995, Uganda had been given a 67% debt stock relief for loans after the cut off date of 1981. This offer was supposed to enable Uganda to exit the debt crisis. In reality, the net effect on total Uganda debt was about 3%! It seems inevitable that the cut off date should be redefined to also cover some years after the first rescheduling. That period would then take into account the specific conditions that continue to make it difficult for the African countries to meet their debt repayment obligations.
Furthermore, in order to achieve a meaningful reduction on debt stock that would secure an exit situation, the actual applied percentage would need to be higher than 67%. Up to 90 per cent has been suggested and should be considered seriously. More recently, it has been suggested that the Paris Club could put into place the following sequencing of debt relief measures:
a) After three "successful" years of meeting the applied conditionalities, a debtor country would receive a 67% debt service reduction;
b) After another three years, if its position was still not sustainable, it would then receive a comprehensive debt stock reduction (90%) to secure an exit out of the unsustainable debt situation.
It can be imagined that this kind of sequencing will not bring a solution to the African debt crisis before the end of this century. A minimum exit is needed to bring the total debt of the severely indebted African countries to sustainable levels.
The overall range of eligibility criteria, the instruments and the conditionalities should be a matter of negotiation in a forum that would be made up of creditors (both the Paris Club and non-Paris Club members) on the one hand and African debtors, the UN-Economic Commission for Africa (UN-ECA) and the Organisation for African Unity (OAU) on the other. This suggests a change in the institutional framework in which Africa's debt crisis should be discussed if a meaningful solution should be found.
2.2 Commercial Bank Debt:
Contrary to the ordinary view that commercial debt is no longer a problem for sub-Saharan Africa, commercial debt still accounts for a reasonable size of arrears due (some US$ 11,818 billion in 1994). Mechanisms which facilitate buy backs at reasonable costs are in place and could be further implemented to reduce the debt overhang. The debtor countries need to pursue these options more rigorously.
2.3 Multilateral Debt:
In July 1995, a World Bank Task Force had called for a mechanism to resolve the multilateral debt problem of the Severely Indebted Low Income Countries. This acknowledged that multilateral debt has emerged to be the most problematic for Africa today. This has largely been because the multilateral institutions have been rigid and unable to take measures comparable to those undertaken on official bilateral debt such as rescheduling and outright write-offs. For Africa, the "preferred creditor status" of the international financial institutions has meant that even when a country is with drought, the obligation to repay is paramount. Failure to do so earns the country a negative mark which then affects access to financial resources, even from official bilateral donors.
Little progress has been made since July 1995. Major reasons have been:
a) The institutions would like to continue to shield themselves from the responsibility of the large multilateral debt overhang by transferring the responsibility to official bilateral donors. The case has been made conclusively for the ability of the IFIs to contribute to a Multilateral Debt Fund and to use their own resources to write off some of the bad debt. It would simply not undermine the integrity of either the IMF to sell some of its gold or the World Bank to use IBRD net income, interest subsidy account and gradual use of reserves to address the debt issue. However, the Bretton Woods institutions have opted for large refinancing of their loans through official bilateral funds. The IMF, for example, would abdicate its collective responsibility by establishing its own permanent ESAF. In our opinion, this will not help resolve the African multilateral debt problem at all. It is our belief that the Bretton Woods institutions are not adequately accountable as was envisaged by the UN Security Council in 1945.
b) There is no agreement yet on the criteria that determine which countries qualify and therefore the number of countries. The IMF, in particular, assumes unrealistic export growth to show that only a handful of countries really have a debt crisis. To get over these problems, the Bretton Woods institutions should negotiate eligibility, level of debt sustainability and conditionalities and the UN-ECA and the OAU. This would make the negotiating forum more transparent and politically acceptable.
Furthermore, the European Union could convert a larger part of the African debt into grants and meet some of the balance through using part of the STABEX funds as well as through adjustment funds. The African Development Bank and Fund require special attention and support. New mechanisms for realising this should be put into place taking into account the reorganisation efforts going on at the Bank and Fund.
3.0 The Need for a Comprehensive Solution
The commitments made at the start of UN-NADAF should be honoured before the end of this century. As has been shown by experts in the field, there are no longer any technical reasons why the African debt crisis cannot be resolved. It remains a political issue requiring the political will to deal with the crisis by way of both short term and long term measures.
In the short term, a total and comprehensive debt stock reduction to sustainable levels should be found through the actions of the various actors themselves. This would mean that the bilateral donors, the World Bank and IMF must contribute to resolving the debt crisis in their own right before looking to others. Special attention should be paid to the African Development Bank and the African Development Fund which would require an appropriate mechanism to enable them to play their institutional role in the development of the continent.
Beyond the short-term, sustainable measures should be put into place by both debtors and creditors to ensure the problem does not recur in the future. In this regard, the following issues should be considered:
a) Resources need to be allocated so that they enhance the capacity of the severely indebted African countries. On going evaluation should be essential.
b) Current loans should not have a negative effect on the debt overhang. i.e. refinancing of loans should be reconsidered and discussed.
c) Adjustment loans which include balance of payments support, technical assistance and general government budget support should be analysed for their impact on enhancing productive capacity in the African countries and for future impact on debt burden.
It is our sincere hope and expectation that this Mid Term Review provides for the international community to reaffirm Africa's desire to achieve meaningful development during the 21st. century. The major prerequisite to this is removing some of the major constraints that the African continent is faced with; that of a severe debt overhang and the limited space in which the African people can define the policies and sequencing of policy measures necessary for the transformation of their economies. We also call for serious consideration to be given to organising an international conference on Africa's external indebtedness before the end of this century as envisioned in the commitments under this programme.
African Forum and Network on Debt and Development (AFRODAD), P.O. Box MR 38, Marlborough, Harare Zimbabwe Tel: 263-75-2481 Fax: 263-4-722363 E-mail: firstname.lastname@example.org
Message-Id: <199609151505.IAA24670@igc3.igc.apc.org> From: email@example.com Date: Sun, 15 Sep 1996 11:01:57 -0500 Subject: Africa: UN-NADAF NGO Debt Paper
Editor: Ali B. Ali-Dinar
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