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Africa: Debt Sustainability Update
Africa: Debt Sustainability Update
Date distributed (ymd): 010504
Document reposted by APIC
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 http://www.africapolicy.org
+++++++++++++++++++++Document Profile+++++++++++++++++++++
Region: Continent-Wide
Issue Areas: +economy/development+
SUMMARY CONTENTS:
This posting contains a news release and briefing note from Drop
the Debt, reporting on a new World Bank / International Monetary
Fund study on sustainability of the debts of the countries included
in the two institutions' Heavily Indebted Poor Countries (HIPC)
initiative, and a brief commentary by Africa Action director Salih
Booker.
The April 20 report entitled "The Challenge of Maintaining Longterm
External Debt Sustainability" acknowledged that even the
countries receiving debt reductions under the program remain
extremely vulnerable to adverse economic circumstances including
reductions in export earnings or development assistance from the
optimistic levels projected under HIPC sustainability analyses.
According to the cautious language of the report's executive
summary:
"The paper notes that HIPCs are typically dependent upon a narrow
export base which makes them vulnerable to externally induced
shocks. Projections indicate that most HIPCs are likely to run
negative resource balances for many years to come and will continue
to need financing on concessional terms. Consequently, the paper
examines the sensitivity of long-term debt sustainability to
possible shortfalls in export revenues and less concessional
financing than currently assumed in the debt sustainability
analyses (DSAs). It concludes that while the lower debt service
levels resulting from enhanced HIPC debt relief will provide a
safety margin in the event of shortfalls in export revenues for
these countries, the room for a significant deterioration without
impacting long-term debt sustainability and poverty reduction is
limited."
The posting also includes, at the end, a table of dependence on
major exports for HIPC countries, presented in the World Bank
study.
For additional background see:
http://www.africapolicy.org/action/debt.htm
+++++++++++++++++end profile++++++++++++++++++++++++++++++
AFRICA ACTION COMMENTARY
May 4, 2001
The data reported below by Drop the Debt from World Bank / IMF
sources show that creditors' debt reduction efforts for African
countries fall far short. Even within the restricted terms of
debate within the international financial institutions themselves,
the case for further debt reduction is irrefutable. When one adds
in the broader context of the debt, outside a narrow financial
accounting, it is clear that the balance of debt is from North to
South rather than the reverse. More debt reduction is needed, but
it is far from enough.
Africa Action strongly supports the call for 100% cancellation of
the debts owed by African and other poor countries to the World
Bank and the IMF, as a first step towards reducing the outward flow
of financial resources that are desperately needed within Africa.
The reasons are many, and more than sufficient to make the case:
including the illegitimacy of debts incurred by the apartheid
regime and other despotic governments, the liability of creditors'
themselves for failures of policies that they imposed, and the fact
that paying the debt competes directly with urgent investment in
health, education and physical infrastructure.
Meeting in Abuja from April 25-27, African leaders adopted a target
of devoting 15% of national budgets to HIV/AIDS and other public
health needs, an increase from approximately 5% to 7%. There are
many other prerequisites for reaching such a target and spending it
effectively - including local political will, civil society
pressure, additional international funding, and effective
administration. But stopping the drain of debt payments to the rich
international financial institutions is fundamental. And the need
is for immediate action. The spring meetings of the World Bank and
the IMF saw no such action. The next test will be the Genoa meeting
in July of the G-7 rich countries. - Salih Booker
###############################################################
23 April 2001
Egg on faces of HIPC architects as new report reveals third world
debt package failings
Drop the Debt news release
http://www.dropthedebt.org
PO Box 5555 London, SE1 OWG UK
mail@dropthedebt.org,
Tel: +44(0)20 7922 1111, +44(0)7970 175324
An embarrassing report from the World Bank and International
Monetary Fund released over the weekend casts a dark shadow over
their Heavily Indebted Poor Countries (HIPC) initiative, showing
little confidence that the controversial debt package will provide
an end to the debt crisis for the countries involved.
The paper "The Challenge of Maintaining Long-Term External Debt
Sustainability" has finally emerged after a number of rewrites, and
confirms debt campaigners' concerns that HIPC does not reduce debt
to a low enough level. It gives a renewed urgency to discussions
on debt by the Group of Seven (G7) finance ministers at the World
Bank and IMF spring meetings in Washington DC on April 29,
especially in light of the spreading HIV/AIDS crisis in Africa.
Debt campaigners have long argued that the 150% debt-to-exports
level underpinning the HIPC initiative is based on precarious
projections of export growth. For the 22 countries to get HIPC
relief so far, the World Bank and IMF use predictions for export
growth of above 6 per cent.
This report admits for the first time that original export growth
predictions were overly optimistic. The report shows how if exports
grow more realistically at an average of 4.2%, in line with 1990 -
1999 levels, debt levels will have risen above the declared
"sustainability threshold" to 160 per cent by 2005, reaching around
180 per cent by 2015.
Three of these countries, Bolivia, Malawi and Niger, will not reach
the 150 per cent threshold in the first place because of export
growth rate volatility.
Three further countries (Burkina Faso, Rwanda and Tanzania) are
not predicted to reach the 150 per cent level until the medium
term, because of anticipated new borrowing.
Even for countries that do reach the 150% level, the World Bank and
IMF acknowledge that the HIV/AIDS emergency in many African HIPCs
will mean that debt levels will soon rise: "Longer-term growth
prospects can be undermined by natural disasters, war, or health
threats such as the AIDS epidemic in such cases, in the absence
of adequate grant financing, external indebtedness may need to
rise to accommodate the financing of reconstruction and
rehabilitation."
Despite the overwhelming evidence presented in the World Bank/IMF
paper that HIPC is not delivering sustainable debt levels, the IMF
and World Bank do not consider the case for further debt
cancellation. Instead they focus only on solutions through
economic growth and policy reform, while also examining the
importance of future financing patterns. While these are crucial to
long term debt sustainability, Drop the Debt emphasizes that the
starting point must be to make debt repayments affordable now.
"The bad news is that the HIPC initiative is yet again failing to
meet its stated objectives. The good news is that the IMF, World
Bank and their shareholders have the resources to cancel 100% of
the debts these institutions are owed by the poorest countries.
HIV/AIDS is compounding the failures of HIPC and making delay more
costly and inexcusable. This week we will see whether the IMF and
the World Bank are more interested in saving cash or saving lives."
In light of this report Drop the Debt calls for the following
urgent steps to be taken at the Spring Meetings:
- The G7 Finance Ministers to agree to direct the IMF and World
Bank to cancel 100% of the outstanding debts owed them by HIPC
nations
- In light of the HIV/AIDS crisis, more countries such as Nigeria
should be considered for deeper multilateral and bilateral debt
cancellation
- Arbitrary debt sustainability ratios need to be replaced by
criteria which put development financing needs first
- Urgent adoption by all creditors of UK Chancellor Gordon Brown's
proposed Trust Fund for countries which have not yet reached
decision point so that debt repayments can be returned in the
future.
The report was launched at a Drop the Debt/Oxfam conference and
discussed by a panel including Adam Lerrick, Carnegie-Mellon
University, Adrian Lovett, Drop the Debt, JoMarie Griesgraber
Oxfam, Edith Ssampala, Ugandan Ambassador to the US,
representatives from the IMF and World Bank ,and Maurice
Fitzpatrick, Chantrey Vellacott.
For more information:
Jamie Drummond/Lucy Matthew +44 (0) 961 346 334
in Washington DC Jamie Shor +1 -202 293 1001
Notes for editors:
- "The Challenge of Maintaining Long-Term External Debt
Sustainability," April 20, 2001, by the World Bank and IMF can be
downloaded from the World Bank website
[http://www.worldbank.org/hipc]
- So far, the HIPC initiative is reducing debt service payments
for 22 countries by just one-quarter on average, leaving the
majority of countries spending more on debt than they currently
spend on health. Only one country, Uganda, has had actual debt
cancellation.
- Under the original HIPC initiative announced in 1996, the main
sustainability threshold reduced debt-to-exports to 200 - 250 per
cent. An internal World Bank paper in 1998 showed that the
fluctuation in coffee prices had offset any gains from HIPC debt
relief in Uganda. After pressure from debt campaigners, the G7
announced the 'enhanced' HIPC which reduced the threshold to 150
per cent of debt-to-exports on the grounds that exogenous shocks
could potentially undermine the impact of HIPC, and that more
resources were needed for poverty reduction. No logical or
intellectual argument was given for choosing 150 per cent.
- Drop the Debt is calling for a New Deal on Debt for the poorest
countries, including 100 per cent cancellation from the World Bank
and IMF. A new report "Reality Check: the need for deeper debt
cancellation and the fight against HIV/AIDS" contains an
independent audit of World Bank and IMF accounts which show they
can afford to cover the costs without damaging their ability to
function. See the full report [http://www.dropthedebt.org].
23 April 2001
HIPC INITIATIVE OFFERS "NO GUARANTEE AGAINST FUTURE DEBT
PROBLEMS", WORLD BANK & IMF ADMIT
A Drop the Debt briefing note
On April 10, 2001, Drop the Debt launched a new report, Reality
Check, focusing on the impact of the Heavily Indebted Poor
Countries (HIPC) initiative to date and calling for a New Deal on
Debt, including the cancellation by the World Bank and IMF of 100
per cent of the debts owed to them by the poorest countries. Part
of the case for deeper cancellation set out in the report was that
the debt reduction delivered by the HIPC initiative does not
reduce debts to a genuinely sustainable level, raising fears that
the old problems of unsustainable debt will quickly recur. Now,
days before the World Bank & IMF Spring meetings in Washington, DC
(April 26-30), the two institutions have released an internal
paper, "The Challenge of Maintaining Long-Term External Debt
Sustainability," which raises deep concerns about debt
sustainability after the HIPC initiative and demolishes the notion
that the HIPC initiative adequately deals with the problem.
This briefing note sets out the key relevant points in the paper.
HIPC does not deliver a lasting exit from debt problems, contrary
to its stated intention
The paper describes the HIPC initiative process of bringing the
value of outstanding debt down to a particular level and admits
that "reducing debt to that level at a single point in time is no
guarantee against future debt problems. To assess long-term debt
sustainability, the focus of attention must shift away from this
single debt indicator to a more complex and comprehensive view of
the development process in which policies, institutions, exogenous
factors and debt management play an integral role over time." (9)
It reiterates later: "HIPC debt relief alone does not ensure
long-term debt sustainability" (24), offering only that "the HIPC
initiative provides a good basis for these countries to exit from
rescheduling." (2) This stands in marked contrast to earlier claims
by creditors that the HIPC initiative would itself provide a
"lasting exit" from debt problems.
The debts of three countries (Bolivia, Malawi and Niger) fail even
to reach the 150 per cent debt-to-exports ratio required under the
HIPC initiative. (51)
The future sustainability of debt is highly vulnerable to
over-optimistic projections, external 'shocks' and changing
circumstances, including the HIV/AIDS emergency
The paper acknowledges that the HIV/AIDS emergency is likely to
increase debt levels in the most affected African countries:
"longer-term growth prospects can be undermined by natural
disasters, war, or health threats such as the AIDS epidemic
affecting many of the HIPCs, particularly several decision point
cases such as Malawi, Rwanda, and Zambia. In such cases, in the
absence of adequate grant financing, external indebtedness (and the
NPV-of-debt to exports ratio) may need to rise to accommodate the
financing of reconstruction and rehabilitation." (20)
The paper states: "The susceptibility of a country to external
shocks, although not a separate factor, has important implications
for disruptions in repayment capacity." (13)
"Debt repayment capacity of HIPCs is projected to strengthen only
gradually even after HIPC debt relief." (39)
The narrow range of exports of most HIPCs, a feature of these
countries' economies under the IMF-driven programs of the last two
decades, leaves them "exceptionally vulnerable to external shocks"
and the consequent impact on debt sustainability. (26)
The paper states: " projected NPV debt-to-export ratios are only
useful insofar as the assumptions underlying them are reasonably
realistic and prudent." (Appendix I) If export performance is only
slightly more modest than assumed under HIPC, the impact on debt
levels will be significant. If exports continue to grow at the 4.2
per cent per annum rate experience in the 1990s, rather than the
growth rates projected in the HIPC calculations (over 6 per cent),
countries will on average fail ever to reach the 150 per cent
debt-to-exports ratio targeted under HIPC - in fact, their debts
will steadily rise to around 180 per cent by 2017. (57)
Debt sustainability may need to be reviewed for individual
countries as early as 'completion point' under the HIPC
initiative: "The current framework allows for the consideration of
additional assistance at the completion point if a broad
assessment of a country's debt sustainability shows that exogenous
elements have caused a fundamental change in a country's economic
circumstances. It is envisaged that this provision would only need
to be invoked in exceptional circumstances." (65)
The scale of debt reduction under the HIPC initiative has nothing
to do with an assessment how much is needed to fight poverty
The paper ends the claim that the amount of HIPC debt relief is
linked to funds needed to reduce poverty. It admits that the
definition of debt sustainability under the initiative is "quite
narrow from a development perspective", and does not "measure the
adequacy of public resources to address priority development
programs". (12)
Drop the Debt's view
Despite the overwhelming evidence presented in the paper that HIPC
is not delivering sustainable debt levels, the IMF and World Bank
do not consider the case for further debt cancellation. Instead
they focus only on solutions through economic growth and policy
while also examining the importance of future financing patterns.
While these are crucial to long term debt sustainability, the
starting point must be to make debt repayments affordable now.
Adrian Lovett, Director of Drop the Debt, said: "We take no
satisfaction from the revelation that World Bank assessment shows
campaigners were right all along. The HIPC initiative does not
deliver a sustainable level of debt.
"Their internal report fails to draw the logical conclusion,
however: that the first step to real debt sustainability lies in
getting existing debt down to a truly affordable level. That means
the World Bank and IMF must do what the G7 have done and cancel
100 per cent of the debts they are owed by the poorest countries.
Independent research has shown that they can afford to do this
without jeopardizing their ability to function. The G7 finance
ministers must give deeper debt cancellation for the poorest
countries their urgent attention at the IMF and World Bank
meetings this week."
HIPC Country Dependence on main exports
Table from World Bank
http://www.worldbank.org/hipc
Country** GNP/Capita (US $) ** Main product ** % of exports (main
product) ** % of exports three main products
Benin ** 380 ** Cotton ** 84 ** 94
Bolivia ** 1010 ** Soybeans ** 12 ** 33
Burkina Faso ** 240 ** Cotton ** 39 ** 55
Cameroon ** 580 ** Oil ** 27 ** 47
Gambia, The ** 340 ** Groundnuts ** 10 ** 13
Guinea ** 510 ** Bauxite ** 37 ** 58
Guinea-Bissau ** 160 ** Cashew ** 69 ** 79
Guyana ** 760 ** Sugar ** 21 ** 49
Honduras ** 760 ** Coffee ** 22 ** 46
Madagascar ** 250 ** Coffee ** 12 ** 26
Malawi ** 190 ** Tobacco ** 61 ** 75
Mali ** 240 ** Cotton ** 47 ** 75
Mauritania ** 380 ** Fish ** 54 ** 94
Mozambique ** 230 ** Prawns ** 15 ** 24
Nicaragua ** 430 ** Coffee ** 14 ** 27
Niger ** 190 ** Uranium ** 51 ** 69
Rwanda ** 250 ** Coffee ** 43 ** 72
Sao Tome &
Principe ** 270 ** Cocoa ** 78 ** 79
Senegal ** 510 ** Fish ** 27 ** 51
Tanzania ** 240 ** Coffee ** 20 ** 40
Uganda ** 320 ** Coffee ** 56 ** 63
Zambia ** 320 ** Copper ** 48 ** 67
Simple average ** 389 ** ** 39 ** 56
Weighted average ** ** 30 ** 50
This material is being reposted for wider distribution by
Africa Action (incorporating the Africa Policy Information
Center, The Africa Fund, and the American Committee on Africa).
Africa Action's information services provide accessible
information and analysis in order to promote U.S. and
international policies toward Africa that advance economic,
political and social justice and the full spectrum of human rights.
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