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Africa: Debt Meeting Consensus

AfricaFocus Bulletin
Nov 25, 2003 (031125)
(Reposted from sources cited below)

Editor's Note

African experts meeting in Dakar under the auspices of the United Nations Economic Commission for Africa (UNECA) deplored the lack of a consolidated African position in response to global policy proposals that have vast economic implications for Africa. They agreed that current debt relief schemes are inadequate, that increased debt relief is the most effective way to provide rapid additional funding for development, and that additional measures were also essential to advance the globally acknowledged goals of ending proverty.

This issue of AfricaFocus Bulletin contains a UN news story and the UNECA press release on the Dakar workshop, and excerpts from one of the papers presented at the workshop.

++++++++++++++++++++++end editor's note+++++++++++++++++++++++

Experts Say African Debt Relief is Important Funding for Development - UN

United Nations (New York)
http://www.un.org/News

November 21, 2003

Experts gathered in Dakar, Senegal, have concluded that the international community's financing of African debt relief is an important way of funding the Millennium Development Goals (MDGs) designed to eliminate extreme poverty by 2015, the United Nations Economic Commission for Africa (ECA) said today.

At the close of the two-day meeting on Tuesday, the 70 experts from the ECA, the New Partnership for Africa's Development (NEPAD), the United Nations system and regional and country authorities, said, however, that debt relief on its own would be woefully insufficient to allow African countries to finance the MDGs.

Since the 1999 Summit of the Group of Eight (G8) industrialized countries in Cologne, Germany, at which the Jubilee 2000 Campaign won a commitment to cancel $100 billion of debt for 42 of the world's poorest nations, only eight African countries had reached their completion points under the enhanced Heavily Indebted Poor Countries (HIPC) initiative, the ECA said.

The Dakar meeting acknowledged that the HIPC initiative had helped some countries, but urged the international community to consider offering some debt relief to "semi-HIPC" countries, like Angola and Kenya, as well as oil-exporting Nigeria and Gabon.

The experts cautioned African governments against getting into further debt to achieve development goals.

As co-host, Senegalese President Abdoulaye Wade said, "It is only through the strength of our arguments that we shall overcome Africa's debt. We must fight an intellectual battle to that end."

Signalling the toughness of the battle, ECA Executive Secretary K.Y. Amoako, in his opening speech on Monday, noted that between 1990 and 1999, the number of poor people in Africa increased by over 6 million annually.

"At current trends, Africa will be the only region in the world where the number of poor people in 2015 will be higher than in 1990," he said. "Indeed, in some areas, Africa will not meet the MDGs for many, many years.

"Take the target of achieving universal primary education. At current trends, only seven countries in Africa will meet this goal. In fact, in over a third of our countries, every other child is out of school. The stark fact is that, as things now stand, Africa will not meet the universal primary education target until after 2100."


Economic Commision for Africa

Press Release No.21 For Immediate Release

Experts Group Meeting in Senegal Concludes That Africa's External Debt Problem Be Put in Wider Context of Financing Development

Addis Ababa, 21 November 2003 (ECA) -- An Expert Group meeting jointly organised by the Economic Commission for Africa (ECA) and the Republic of Senegal on 17-18 November 2003 in Dakar gathered about 70 experts from around the world, including the African Union, New Partnership for Africa's Development (NEPAD), various United Nations organizations, country authorities, the World Bank, International Monetary Fund, Paris Club and NGOs.

They noted that debt relief is more predictable than bilateral aid; has a longer-term horizon; reduces the transactions costs of managing aid and acts as direct budget support therefore increasing recipient ownership. They strongly encouraged the international community to finance further debt relief as an important way to finance the Millennium Development Goals (MDGs) in Africa.

However, the experts unanimously agreed that debt relief on its own will be woefully insufficient to allow African countries to finance the MDGs. They noted with deep concern that at current trends, Africa will be the only region in the world where the number of poor people in 2015 will be higher than in 1998.

The meeting acknowledged that while the enhanced Highly Indebted Poor Country Initiative (HIPC) had delivered tangible benefits to several African countries, much more remained to be done. For instance, the international financial community was urged to rapidly consider the debts of "semi-HIPC" countries like Angola and Kenya, non-IDA countries like Nigeria and severely indebted middle-income countries like Gabon.

A key recommendation of the meeting was that achieving Africa's development goals should be realised without running into future debt problems. This requires a prudent strategy for future borrowing tailored to country specific circumstances, taking into account the quality of its institutions, and its vulnerability to shocks. Experts urged that resource transfers beyond countries' sustainable debt-serving capacities should be in the form of grants, not debt flows that could lead to future debt problems.

The meeting emphasized that a lasting solution to Africa's external debt problem will require good economic governance and management on the part of African countries. In that respect experts commended the efforts of NEPAD and its African Peer Review Mechanism to encourage each African country to enhance and consolidate progress in that regard.

The lack of a consolidated African position and an effective and unified voice to engage in constructive dialogue with Africa's development partners with regard to debt relief was identified as one of the factors delaying an early resolution to Africa's debt problems. The experts expressed a sense of urgency to end the time when African countries reacted too late to global policy proposals that have vast economic implications for Africa.

To address the present void it was recommended that an ad hoc Technical Committee be established to facilitate timely and competent African responses to emerging global policy proposals on debt relief and financing for development. The recommendations of the proposed Technical Committee should be presented to the African Ministers of Finance, Planning and Economic Development at their next meeting in May 2004 and thereafter to the African Union Heads of State Summit in July 2004.

The President of Senegal, His Excellency Abdoulaye Wade commended the experts for their bold and creative proposals to resolve Africa's debt problem and declared that "it is only through the strength of our arguments that we shall overcome Africa's debt. We must fight an intellectual battle to that end."

For more information, please contact: Essodeina Petchezi, tel.: 251-1 44 32 41, email: epetchezi@uneca.org

More information about the meeting is available at http://www.uneca.org/debtforum

Issued by the ECA Communication Team P.O. Box 3001 Addis Ababa Tel: +251-1-51 58 26 Fax: +251-1-51 03 65
E-mail: ecainfo@uneca.org Web: http://www.uneca.org


An Alternative Approach to Debt Cancellation and New Borrowing for Africa

Paper for Expert Group Meeting on External Debt
Dakar Senegal November 17-18 2003

Henry Northover, CAFOD [http://www.cafod.org.uk]

October 2003

[Abstract and brief excerpts only. For this full paper and other resources see the workshop website at
http://www.uneca.org/debtforum]

Abstract

The World Bank and IMF's debt relief framework, the Heavily Indebted Poor Country (HIPC) Initiative is increasingly criticised for not providing sufficient debt relief to enable low-income countries to achieve short term, let alone medium term, debt sustainability. This paper argues that the key weaknesses of the HIPC Initiative stem from its use of an inappropriate analytical criterion when making debt sustainability analyses. The paper, therefore, proposes an alternative approach more suited to countries that are highly vulnerable to economic shocks and beset by widespread and deeply entrenched levels of poverty.

This alternative human development approach should be used not only for determining appropriate levels of debt service, but also as the basis for a comprehensive financing strategy for low-income countries that encompasses aid and new borrowing. It argues that debt relief in support of domestically-owned poverty reduction strategies is the most efficient and effective form of resource transfer. In the last section, the paper responds to creditors' resistance to going further with debt relief by addressing creditor objections and urging the wider adoption of some existing African proposals as a way forward.

1. The HIPC Initiative a flawed approach to debt relief ...

We argue here that there is one overriding flaw in the HIPC framework that gives rise to its failure to meet its objectives on debt sustainability and poverty reduction. The central weakness of the HIPC Initiative stems from its over-reliance on the export criterion (150% NPV-to-exports) used to make assessments of debt sustainability.

The experience of Uganda, as the first graduate of the HIPC Initiative, is evidence of this difficulty. Uganda currently has debts that take it over 200% of the debts-to- exports ratio. This will be the third time that Uganda has exceeded its debt sustainability threshold after reaching completion point. Its status as a debt sustainability "drop-out" has been reinforced by plunging coffee prices that have dramatically reduced its foreign exchange earnings.

Clearly the export criterion is an unreliable predictor and measure of debt sustainability for a group of countries characterised by an extreme vulnerability to shock and steep fluctuations in export earnings. HIPCs are characterised by a high concentration of exports in one or two commodities. As a result, they are highly vulnerable to the vagaries of rain-fed agricultural production and slumps in commodity prices.

For Africa in 2001, after adjustments for inflation, prices of non-fuel commodities are one half their annual average value for the period 1979-81. The World Bank and IMF estimate that by completion point 8-10 of the HIPC countries most affected by the slump in commodity prices will have debt-to-export ratios higher than the 150% target set by HIPC itself. ...

2 Alternative human development approach to debt sustainability

We argue here that debt sustainability analyses for LICs require the integration of a wider set of human development indicators. It is, however, important for any country servicing its debts denominated in foreign currencies that debt sustainability analyses should some measure of its capacity to earn foreign exchange through its exports. But for low-income countries' (LICs') challenged by widespread and deep levels of poverty, a crucial part of the analytical framework must be the feasible revenue available to governments and the trade-off between maintaining their debt-servicing obligations and financing their poverty reduction goals ...

The argument runs like this: if human development imperatives and the achievement of the MDGs (millennium development goals) are accorded the priority they deserve; if, as is the case, LICs do not have the fiscal revenue principally income from taxes needed to make the necessary poverty reducing expenditures and investments; and if they cannot count on sufficient foreign aid to fill their revenue gap, then the only available source of finance is further debt reduction.

According to preliminary calculations, many HIPCs will require a total cancellation, and some will require further aid flows on top of this, if their revenues are realistically to be expected to meet the objective of financing the MDGs. We propose that future calculations of debt sustainability must include an assessment of the feasible net revenue* available to recipient/debtor governments. Feasible revenue is counted here as the maximum tax income available to a given government given the poverty of the majority of the population and capable of being raised without giving rise to excessive distortions in the macroeconomy. ...

3 Debt relief as development finance

While the HIPC Initiative is clearly failing to deliver the objective of providing a permanent exit from unsustainable debts, preliminary analyses do show that debt relief, where it is additional and not limited to clearing built up arrears, is an efficient and effective form of delivering development finance.

Analysis of the HIPC Initiative's achievements shows that in some eligible countries debt relief has resulted in demonstrable social and economic gains. ...

Where countries have had resources freed up from debt servicing, the proceeds have resulted in some new development programmes and economic progress:

  • Social spending has increased in Decision Point HIPCs by between 20 and 50 percent.
  • Mozambique has introduced a free immunisation programme for children;
  • User fees for primary education have been abolished in Uganda, Malawi and Tanzania, as have user fees in rural areas of Benin;
  • Mali, Mozambique and Senegal are due to increase spending on HIV/AIDS prevention;
  • Uganda and Mozambique, among the early beneficiaries of debt relief and enhanced aid flows, have consistently sustained annual growth rates over 5%.

The requirement to engage in a consultation with civil society in designing Poverty Reduction Strategies has helped to increase the potential for poor people to influence national resource allocation processes. But the advantages of debt relief go beyond the additional finance it provides to thinly resourced low-income country governments. Debt relief acting as de facto budget support is an efficient and effective form of financial transfer with many indirect benefits for the macro economy, growth prospects, the prudential management of public resources, and development policy as a whole.

  • Debt relief minimises the unpredictability of aid flows. Many bilateral aid programmes are still bedeviled by problems of low stability and low predictability and high pro-cyclicality. Moreover the granting or withholding of aid tends to aggravate economic cycles. ...
  • Debt relief is anti-inflationary. A recent IMF paper points to a correlation between higher levels of indebtedness and increased inflationary pressures.
  • Debt relief spurs economic growth. There is a positive correlation between debt relief and domestic private savings and investment, as well as FDI.. ...
  • Debt relief acts as de facto budget support. By enhancing central government spending capacity, debt relief supports the development of locally owned government expenditure priorities and monitoring systems. ...
  • Debt relief cuts down on transaction costs. Aid can tie up recipient governments' meagre administrative staff in endless negotiations, report writing and separate auditing procedures with an array of official donors. ...
  • Debt relief improves local accountability and good governance. Debt relief within the context of locally developed and owned Poverty Reduction Strategies has the added benefit of increasing, and sometimes even kick- starting, political participation in decision-making over the management and distribution of public resources. ...

To sum up, the donor-recipient country relationship is characterised by continued reliance on ear-marking finance for projects and programmes, detailed conditionality and institutional controls undermining the accountability of recipient governments to their own public and civil society agents.

Conditional aid weakens incentives of recipient governments to be transparent and accountable to their own citizens and undermines their capacity to improve public resource allocation for the intended beneficiaries poor people. Debt relief by contrast can enhance ownership and accountability; it can improve the prudential management of public resources, increase macroeconomic stability and economic growth. The challenge is to transpose some of these pro-development outcomes and principles on to new forward financing or borrowing strategies. ...

This paper does not attempt to propose detailed measures of debt sustainability for future borrowing. However, there are a number of key human development principles that should form the basis of new forward financing strategies. Principles for forward financing strategies

1) There is the broad question of the analytical and decision-making framework that would determine country-specific debt sustainability thresholds. Who is making these analyses? To whom are they accountable? Whose interests do they represent? How are the results of their analyses to be monitored and assessed?

There is a prima facie conflict of interests when major creditors such as the IMF and World Bank act as creditors and retain their monopoly of analytical functions in assessments of country-specific debt sustainability thresholds. We would argue that in the interests of equity and transparency, a more independent institutional arrangement is required....

2) Currently the IMF separates the HIPC initiative's debt sustainability criterion, seen as a mechanism for clearing unsustainable debts acquired in the past, from new sustainability analyses that deal with forward financing strategies, that is, future borrowing and aid flows. We argue that this is an artificial distinction. The IMF and World Bank should be developing new sustainability criteria for determining flows of new borrowing based on the recognition that current debt stocks have an impact on future external financing requirements. ...

3) The over-arching objective of debt relief and new financing must be support for the global effort to mobilise the finances needed to achieve the MDGs by means of costed poverty reduction strategies. ... all poverty reduction strategies to achieve the MDGs must be financed, in HIPCs and non-HIPC low-income countries. All countries, including all donor countries, have endorsed the Millennium Declaration that launched the MDGs. As a result, commensurate new aid flows must be offered to non-indebted LICs. ...


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