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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?(1), released today by UNCTAD. The report concludes that any lasting solution to the debt overhang hinges as much on political will as on financial rectitude.
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 period.
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.
Long term official, multilateral and private debt of Africa, 1970-2002 (Millions of dollars)
Source: UNCTAD secretariat computations based on World Bank, Global Development Finance, online data
Note: * for the period 1980-1990, Official long term debt increased approximately four fold and Multilateral debt stocks approximately six fold
Projected debt service on public external debt in HIPCs at Decision Point end of 2003 (Millions of dollars)
Source: UNCTAD Report on Economic Development in Africa-Debt Sustainability: Oasis or Mirage, Table 12a