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Africa: Debt (Continued)
Oct 4, 2004 (041004)
(Reposted from sources cited below)
Despite an emerging consensus in favor of complete debt
cancellation for the poorest heavily indebted countries, the G-7
group of rich countries failed this weekend to reach agreement on
how to cancel the debt. Meanwhile a new UN report noted that
between 1970 and 2002, African countries received some $540 billion
in loans, paid back close to $550 billion in principal and
interest, and still held debt of $295 billion at the end of 2002.
U.S. Treasury Secretary John Snow was quoted as saying "the details
[of debt relief] aren't important," while G-7 members promised to
continue to study the issue and report on their conclusions by the
end of the year.
While the details of the U.S. Treasury proposal are not available,
an editorial in the Washington Post for October 1 said that under
the proposal new resources from the World Bank for the affected
country would be reduced by the amount of debt cancelled. If this
report is correct, the Treasury plan would be in violation of
the generally agreed principle of "additionality," that is, that
debt relief should provide net additional resources for the
This AfricaFocus Bulletin contains the press release and selected
excerpts from the new UNCTAD report, "Debt Sustainability: Oasis or Mirage?"
For previous issues of AfricaFocus Bulletin on debt and related topics, visit
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++++++++++++++++++++++end editor's note+++++++++++++++++++++++
New UNCTAD Study Makes Case for African Debt Write-Off
UNCTAD Press Release
September 30, 2004
Debt servicing at any level is incompatible with attaining the UN
Millennium Development Goals (MDGs) in many African countries,
according to Debt Sustainability: Oasis or Mirage?, released today
by UNCTAD. The report concludes that any lasting solution to the
debt overhang hinges as much on political will as on financial
Squeezing the poor?
Between 1970 and 2002, Africa received some $540 billion in loans;
but despite paying back close to $550 billion in principal and
interest, it still had a debt stock of $295 billion as at the end
of 2002. And the figures are even more disconcerting for
sub-Saharan Africa (SSA), which received $294 billion in
disbursements, paid out $268 billion in debt service and yet
remained straddled with a debt stock of some $210 billion. The
Report concludes that this amounts to a reverse transfer of
resources from the world s poorest continent.
The Report also contests the popular impression that Africa s debt
overhang is simply the legacy of irresponsible and corrupt African
governments. While certainly part of the story, particularly under
the cloak of cold war politics, exogenous shocks, commodity
dependence, poorly designed reform programmes and the actions of
creditors have all played a decisive part in the debt crisis.
And a more nuanced picture shows that the debt profile moved from
"sustainability" in the 1970s to "crisis" in the first half of the
1980s, with much of the debt being contracted between 1985 and 1995
under the guidance of structural adjustment programmes and close
scrutiny by the Bretton Woods institutions (BWIs).
Make or break time
The Report argues a robust economic case for a total cancellation
of Africa s debt:
- Low levels of savings and investment leading to high poverty and
adverse social conditions are among the biggest constraints on
growth in low-income African countries;
- Continuing debt servicing by African countries would nominally
constitute a reverse transfer of resources to creditors by a group
of countries that by all indications could least afford this; and
- In order to ensure that Africa will be able to reduce poverty by
half by 2015, in line with the MDGs, at the very least growth
levels will have to double to some 7%-to-8% per annum for the next
decade, the financial requirements of which are incompatible with
present and projected levels of debt servicing.
And this economic case is reinforced by a moral imperative for a
shared responsibility, particularly considering that the BWIs have
had the greatest influence on the development policies on the
continent through structural adjustment programmes and related
lending, which have not had the expected outcomes in ensuring
growth and development. Moreover, official lending was in large
part also predicated on the implementation of such programmes, and
much of the debt of countries with profligate regimes that were of
geopolitical/strategic interest is considered "odious".
Over the past two decades, examples have abounded of major bailout
operations both domestically and internationally where financial
markets were seen to be at risk. While Africa s external debt
represents a huge burden to the indebted countries, it has not yet
galvanized the political will required by its creditors to
undertake similar action.
In the absence of such political will, the Report calls for placing
a moratorium on debt servicing (without additional interest being
accrued) pending the institution of an independent panel of experts
to assess the sustainability of debt based on a realistic and
comprehensive set of criteria, including those of meeting the MDGs.
The Report recommends that such an assessment should include all
public debt. This is particularly so because the Heavily Indebted
Poor Countries (HIPC) Initiative fails to take account of domestic
debt, which in recent years has become an important factor in the
total indebtedness of African countries.
However, even a full debt write-off would be only a first step
towards restoring growth and meeting the MDGs. UNCTAD estimates
that such a write-off would represent less than half those
countires resource requirements, with the gap filled by increased
official development assistance (ODA) grants as a prelude to Africa
increasing the level of domestic savings and investment required
for robust and sustainable growth.
Meeting the MDGs
It is in this context that the Report concludes that under present
conditions, the MDGs will remain elusive for the African continent.
As UK Chancellor of the Exchequer Gordon Brown insisted earlier
this year, "On current progress, we will fail to meet each
Millennium Development Goal in Africa not just for 10 years but for
100 years". That failure can in part be traced to the
"unaffordable" debt burden that has strangled the continent s
growth prospects for the past two decades, according to Jeffrey
Sachs, Special Economic Advisor to UN Secretary-General Kofi Annan.
And African leaders, including Ethiopian Prime Minister Meles
Zanawi, have begun to ask whether the HIPC Initiative has the
capacity to provide adequate debt relief to its beneficiaries.
The HIPC Initiative was launched in 1996 by the BWIs with the aim
of reducing the external public debt of the 42 poorest countries
(of which 34 are in Africa) to sustainable levels. Calls for
"deeper, broader and faster" debt relief led to the introduction of
an enhanced version in 1999, which was to make it easier for poor
countries to find a permanent exit solution to their debt crisis.
But eight years on, the Report argues, despite some initial
progress following the adoption of the enhanced Initiative, heavily
indebted poor African countries are still far from achieving
sustainable debt levels.
In a forward-looking evaluation, the Report findings include:
- Post-HIPC debt service payments are projected to increase from
about $2.4 billion in 2003 to $2.6 billion in 2005.
- Based on historical growth rates, the 23 African HIPCs that
reached their decision points by the end of 2003 have only a 40%
chance of attaining debt sustainability by 2020.
- While some completion point countries have debt ratios exceeding
sustainable levels as defined by the Initiative, a number of
equally poor debt-distressed African countries find themselves left
out of the Initiative altogether.
- Interim relief (between decision and completion points) is
inadequate and falls short of the proportion of the total debt
relief that creditors had promised to deliver during this critical
- Bias in the debt sustainability analysis - and in particular,
persistently over-optimistic assumptions about economic and export
growth -- means that calculations of debt sustainability thresholds
based on debt-to-export and debt-to-revenue ratios are inadequate
indicators of the poverty-indebtedness nexus.
- There is uncertainty surrounding the funding of debt relief,
particularly for conflict and post-conflict HIPCs;
- The jury is still out on whether HIPC debt relief is additional
to ODA flows. New initiatives are needed to attain a clear and
significant level of additionality and to prevent an unfair
reallocation of future aid to HIPC debt relief.
In a nutshell, "it is becoming increasingly doubtful whether HIPC
beneficiaries can attain sustainable debt levels, based on export
and revenue criteria, after completion point, and maintain these in
the long term", observes the UNCTAD Report.
Policy space critical
For any debt relief framework to deliver tangible results, Africa
needs actively to pursue policies for prudent debt management,
economic diversification and sustained economic growth. But doing
so calls for better access to markets, much increased investment in
human and physical infrastructure and a considerable widening of
the policy space narrowed by adjustment programmes, including in
the context of poverty reduction strategies.
For more information:
UNCTAD Press Office T: +41 22 917 5828 E: firstname.lastname@example.org or
K. Kousari T: +41 22 917 5800 E: email@example.com
Debt Sustainability: Oasis or Mirage?
[brief excerpts only; full report available at
In the context of the Millennium Development Goals (MDGs), the
international community has set itself a target of reducing poverty
by half by the year 2015. Many observers have now come to the
conclusion that, on present trends, there is very little likelihood
that this objective can be achieved at any time close to that date
in the poorer countries, including in Africa.
In its report on Capital Flows and Growth in Africa (UNCTAD, 2000),
as in subsequent reports on economic development in Africa, UNCTAD
has argued that the current levels of GDP growth would have to be
raised to seven or eight per cent per annum and sustained if
poverty reduction targets were to be met. This would imply doubling
the current amount of aid to the continent and maintaining it at
that level at least for a decade if the continent was to break the
vicious circle of low growth and poverty. Such an action, within
the context of an appropriate mix of domestic policies and
supportive international measures, would generate sufficient
investment and savings to reduce aid dependency in the longer term
and place Africa on a sustainable growth path.
The continent's debt problems and its resource requirements are
inextricably linked to the capacity of African countries to
generate capital accumulation and growth. Among the policy measures
that UNCTAD has advanced (UNCTAD, 1998) is the need for an
independent assessment of debt sustainability in African countries
by a high-level panel of experts on finance and development,
selected jointly by debtors and creditors, with an undertaking by
creditors to implement fully and swiftly any recommendations that
might be made. While this recommendation did not find favour in the
donor community, it was contended that the Heavily Indebted Poor
Countries (HIPCs) Initiative, and later its enhanced version, would
ensure a permanent exit solution to Africa's debt problems. There
now seems to be an emerging consensus, however, that many African
countries continue to suffer from a debt overhang despite the HIPC
Initiative and various actions in the context of the Paris Club.
The fact that even those countries that have reached (or are about
to reach) the so-called completion point will soon find themselves
in an unsustainable debt situation gives credence to the arguments
advanced by critics with respect to the inappropriateness of the
criteria applied in the debt sustainability analysis. And the fact
that several more debt-distressed African countries are not
eligible for HIPC debt relief reflects the lack of objectivity in
the eligibility criteria.
Debt sustainability is basically a relative concept. The questions
that beg for a response are: what level of debt is sustainable for
countries in which the vast majority of the population lives on
under $1 a day per person? Have debt sustainability criteria been
based on internationally recognized benchmarks such as those of the
MDGs, or on objectively and theoretically verifiable criteria? What
is the relationship between Africa's total external debt stocks and
the actual amount of debt serviced? Is complete debt write-off a
moral hazard or a "moral imperative"?
2. The genesis and nature of the African debt crisis
Africa's external debt burden increased significantly between 1970
and 1999. From just over $11 billion in 1970, Africa had
accumulated over $120 billion of external debt in the midst of the
external shocks of the early 1980s. Total external debt then
worsened significantly during the period of structural adjustment
in the 1980s and early 1990s, reaching a peak of about $340 billion
in 1995, the year immediately preceding the launch of the original
HIPC. Overall, Africa's external debt averaged $39 billion during
the 1970s, before ballooning to just over $317 billion in the late
A significant factor in the debt crisis of African countries was
the two oil price shocks of 1973 1974 and 1979 1980, the latter
leading to a deterioration in the external environment that lasted
until 1982. The rise in oil prices not only had an adverse impact
on the trade balance of oil-importing countries, but also caused
fiscal crises in most of these countries, thereby undermining
domestic investment. The second shock occurred at a most
inauspicious period, as it coincided with sharp rises in real
interest rates. Within the context of the global recession of 1981
1982, which depressed demand for developing countries' exports, and
deteriorating terms of trade, the balance of payments crisis that
afflicted developing countries was exacerbated, not only for oil
importers but also for oil exporters. ,,,
Lending to low-income countries, particularly those in Africa, by
bilateral and multilateral creditors was predicated on economic
reforms being undertaken in the context of structural adjustment
programmes, and total longterm outstanding debt increased by about
200 per cent between 1980 and 1995, the year before the HIPC
Initiative was launched. The multilateral and official debt
components increased by more than 500 per cent and 300 per cent
respectively over the same period. The fact that these programmes
failed to deliver on the promise of growth and development meant
that the debt situation of many African countries continued to
A cursory glance at Africa's debt profile shows that the continent
received some $540 billion in loans and paid back some $550 billion
in principal and interest between 1970 and 2002. Yet Africa
remained with a debt stock of $295 billion. For its part, SSA
received $294 billion in disbursements and paid $268 billion in
debt service, but remains with a debt stock of some $210 billion.
Discounting interest and interest on arrears, further payment of
outstanding debt would represent a reverse transfer of resources.
3. Is HIPC debt relief additional to traditional aid?
The official breakdown of the costs and benefits of the HIPC
Initiative may be highly misleading, as it does not take into
account the "true" allocation of costs and benefits. For example,
if all creditors deducted the costs of HIPC debt relief from their
traditional aid budgets for HIPCs, this would imply that the HIPCs
were paying for the debt relief in terms of reduced traditional
aid. The final costs to creditors would be zero, as would be the
net benefits to HIPCs. Hence, in determining the true costs and
benefits of the HIPC Initiative, it is necessary to make some
decisions on how to allocate the costs of bilateral and especially
of multilateral creditors to individual countries. This raises two
important issues. First, is HIPC debt relief additional? And,
second, will creditors make reallocations in their traditional aid
budgets among the recipients of traditional aid due to the
provision of HIPC debt relief?
Comparing data for the three years before the adoption of the HIPC
Initiative (1994 1996) with data for the three years after the
adoption of the HIPC Initiative (1997 1999), Gunter (2001) showed
that there has been close to zero additionality, even for HIPCs
that had reached their completion point. The World Bank's OED
Review (Gautam, 2003) concluded that, even though there has been
close to zero overall additionality, the most recent trends in aid
flows indicate some aid reallocations towards eligible HIPCs.
In any case, given that the real costs of debt relief can be spread
over the lifetime of the remaining loans, which for multilateral
loans is around 30 to 40 years, the annual cost of 100 per cent
debt relief, at least for those HIPCs at the decision/completion
point as at September 2003, remains relatively small in comparison
to the resource requirements for meeting the MDGs. It has often
been argued that a 100 per cent debt write-off will send the wrong
signals to debtor countries and others, set a bad precedent and
thereby create a moral hazard for the IFIs. However, there is no
greater moral hazard than the one entailed in constant
restructuring and partial debt forgiveness based on creditors'
perspectives and interests, as is the case under terms agreed with
the Paris Club. On the contrary, moral hazard will be limited by
dealing decisively with the recurring debt crisis of poor African
countries through a truly permanent exit from constant rescheduling
that establishes a basis for long-term debt sustainability for
debtors within an appropriate framework of national and
international policy measures. A complete debt write-off,
therefore, becomes a "moral imperative", as it will guarantee
resources to help meet the MDGs in Africa and assure an exit from
the debt crisis for the continent. ...
The analysis illustrates the weaknesses of the HIPC approach with
respect to finding a permanent exit solution to the debt crisis of
African HIPCs, and highlights the fact that several other equally
poor African countries have been left out of the process. On the
question of the level of debt deemed to be sustainable for
countries the majority of whose population lives on less than one
or two dollars a day per person, the answer is self-evident:
considering the seriousness with which the international community
is addressing the attainment of the MDGs, these targets should be
used as a major benchmark for debt sustainability. This in turn
implies that virtually all of the outstanding debt would need to be
written off, as the resources needed to attain these goals are
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