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Note: This document is from the archive of the Africa Policy E-Journal, published
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Africa Action: Debt Position Paper
Africa Action: Debt Position Paper
Date distributed (ymd): 010714
APIC Document
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:
Despite the overwhelming consensus among African countries,
analysts and non-governmental organizations that the debt crisis
has not been solved by the creditors' limited debt relief efforts
to date, press reports indicate that the G-8 - meeting in Genoa
next week - have no plans for any new initiatives. Although the
creditors may be tired of talking about it, Africa's debt still
cripples efforts to address the AIDS pandemic, the wider health
emergency and other development goals. That is why the issue will
be not conveniently disappear, and why the spotlight is focusing on
the unwillingness of the rich countries to address the largest
remaining portion of that debt - that held by international
financial institutions.
In this posting you will find excerpts from a new position paper
released by Africa Action as part of our campaign for Africa's
Right to Health. The full position paper is available at:
http://www.africapolicy.org/action/debtpos.htm In a related posting
today, you will find a statement by Jubilee South and brief
references to other recent reports and on-line discussions on the
debt crisis.
For suggested actions in the US at the time of the Genoa meeting,
see also
http://www.j2000usa.org/july-action.htm
+++++++++++++++++end profile++++++++++++++++++++++++++++++
Africa's Debt - Africa Action Position Paper
July 2001
By: Ann-Louise Colgan, Research Associate, Africa Action.
[Excerpts only: for full text see
http://www.africapolicy.org/action/debtpos.htm]
The 48 countries of sub-Saharan Africa spend approximately $13.5
billion every year repaying debts to rich foreign creditors for
past loans of questionable legitimacy. These debt repayments divert
money directly from basic human needs such as health care and
education, and fundamentally undermine African governments' fight
against the AIDS pandemic and their efforts to promote sustainable
development. The All-Africa Conference of Churches has called
Africa's massive foreign debt burden "a new form of slavery, as
vicious as the slave trade".
Africa Action calls for the cancellation of Africa's foreign debt,
which we consider in large part to be illegitimate, based on its
origins and consequences. We consider the present and past attempts
to deal with the debt crisis to be absolutely insufficient, and we
oppose the existing debt relief framework, developed and controlled
by creditors and designed to function only in their interests.
Africa Action opposes conditionalities imposed by Northern
creditors which perpetuate a global economic system where Africa
remains economically controlled by the developed world. We believe
that the costs of debt cancellation should be borne by the creditor
nations and the International Financial Institutions, and moreover,
we believe that the global North owes Africa an historical debt for
centuries of exploiting the continent's human and natural
resources. We therefore pose the question, "who really owes whom?".
1. Introduction to Africa's Debt Crisis
In the 1960s and 1970s, African countries became indebted to
international lenders as they accepted loans for political and
economic stabilization in the post-independence era. In the context
of the Cold War, and with massive revenue surpluses of oil money in
Western banks in the 1970s, loans were made with little thought to
their purpose or to their recipients' capacity to repay the debt.
Many were made to retain the loyalty of corrupt regimes, and much
of the money went into the hands of unrepresentative and repressive
governments. In the 1980s, when the shocks of the 1970s oil crisis,
rising interest rates and falling global prices for primary
commodities began to take a toll, the debt crisis in the developing
world began to unfold.
Sub-Saharan Africa's debt crisis worsened during the 1980s, as the
ratios of foreign debt to the continent's gross national product
(GNP) rose from 51% in 1982 to 100% in 1992, and its debt grew to
four times its export income in the early 1990s. In 1998,
sub-Saharan Africa's debt stock was estimated at $236 billion, and
that of the whole continent was over $300 billion. Africa's debt
burden is twice that of any other region in the world -- it carries
11% of the developing world's debt, with only 5% of its income. GNP
in sub-Saharan Africa is $308 per capita, while external debt
stands at $365 per capita.
Early attempts to address the debt crisis began in the 1980s, with
debt swaps by creditors and with the IMF's Structural Adjustment
Programmes, which were designed to stabilize and re-structure
economies to ensure full payment of the debt stock. From 1989 on,
a range of measures were enacted to reschedule and restructure
debts through the Paris Club, an informal forum where creditor
governments review and reschedule debt payment programs for poor
countries. In 1996, the Heavily Indebted Poor Countries (HIPC)
Initiative was created as the first comprehensive debt relief
framework -- encompassing private and government creditors as well
as the World Bank and IMF, for the first time -- and this remains
the dominant approach to resolving the debt crisis.
2. Africa's debt is 'illegitimate' debt
In light of the circumstances under which much of the debt of
African countries was incurred, and in recognition of the mistakes
of both borrowers and lenders, as well as of the harmful effects of
Africa's debt on the continent's development, Africa Action
considers much of Africa's debt to be illegitimate. The
illegitimacy of the debt is based on the following principles:
- Debts contracted by dictatorships or repressive regimes, and used
to strengthen the hold of these regimes, are illegitimate, for
instance the apartheid-caused debt inherited by South Africa. This
has also been termed "odious debt" (an established legal
principle).
- Illegitimate apartheid-caused debt also includes the debt incurred
by neighboring countries who were destabilized and against whom war
was waged by the apartheid regime in South Africa.
- Debt contracted by formally democratic but corrupt governments,
which was stolen by leaders or senior officials, is illegitimate.
This has also been referred to as "stolen wealth".
- Debts contracted and used for improperly designed projects and
programs are illegitimate. There is heavy responsibility on
creditors here, particularly on the World Bank for its failed
development projects.
- Debt that swelled because of high interest rates and other
conditions imposed by creditor governments and banks is
illegitimate. This perspective argues that the original debt (the
principal) has already been repaid many times over, so the
continued existence of a debt burden is illegitimate.
- Debts which cannot be serviced without impoverishing a country's
people are illegitimate. This is more often termed "immoral debt".
As Julius Nyerere said, "Must we starve our children to pay our
debts?".
- All debt owed by the South to the North can be considered
illegitimate. The argument here is 'who owes what to whom?". Africa
Action and Jubilee South maintain that the countries of the South
are in fact creditors of an historical, social and ecological debt
which Northern countries refuse to recognize.
Understanding the illegitimacy of the debt reinforces the arguments
for debt cancellation, and opens up some new options for
accomplishing this.
Odious Debt
The concept of odious debt exists as a doctrine in international
law, and this legal precedent (dating back over 100 years to when
the US captured Cuba from Spain) could allow for the cancellation
of such debts by international agreement. The Doctrine of Odious
Debt holds that debt incurred by dictatorships for their own
benefit or for the purposes of enforcing the dictatorship is
'odious', and therefore not the responsibility of the population or
of subsequent democratic governments. The Doctrine has two main
aspects: the legitimacy of the borrower's purpose in seeking the
loan and whether the lender was recklessly indifferent to the
status of the contracting state. In the case of South Africa, for
instance, all apartheid-caused debt should be considered "odious"
because of the nature of the regime. More broadly, it may be argued
that the debts of developing countries that have arisen as a result
of bad lending policies and loan conditions should be declared
odious and written off.
Debt Repudiation
Debt repudiation is an option for countries that refuse to
acknowledge the legitimacy of their debts. Repudiation involves the
unilateral cessation of debt repayment. This is a dramatic move,
and has several potential disadvantages, including the possibility
of retaliation from commercial banks, creditor governments and
multilateral lending institutions, and the possibility of
jeopardizing relations with rich countries. One way to minimize
this risk might be for a group of debtor nations to act in concert,
joining in a "debtors cartel" that would not only be more difficult
to "punish", but that would also command greater leverage in
negotiations on future credit. The risk of limiting future access
to financial flows would still be real, however. One past example
of debt repudiation is that of Peru, where President Garcia
declared that Peru was unilaterally limiting its debt payments to
10 percent of its export earnings - a de facto repudiation. This
move proved detrimental to the Peruvian economy, leaving the
country isolated from international financial markets, and
eventually leading to a crushing $20 billion foreign debt. In
Africa, there is a growing call from civil society for collective
repudiation of external debts by African countries. The refusal to
pay is increasingly seen as the moral and logical outcome of the
illegitimate nature of these debts.
International Debtors' Court
Another possible approach for addressing the problem of
illegitimate and unpayable debt is the notion of an international
debtors' court, as a full insolvency procedure where debtor
governments could present their case rather than leaving all
control in the hands of creditors, as is currently the case.
Jubilee 2000 and others have endorsed the idea of such an
international, independent court, appointed to arbitrate between
creditors and debtors. This would be a mechanism for drawing a line
under the unpayable debts of a sovereign state, similar to
bankruptcy laws for individuals. In this forum, creditors and
debtors would argue their separate cases, with the final decision
resting with independent arbitrators, who would only endorse an
agreement that was fairly and openly reached.
Disclosure and Classification of Debts
In order to expose the illegitimate nature of much of Africa's
debt, a process of disclosure and classification of all outstanding
debts has been proposed by Jubilee South, to examine the
circumstances under which the debts were incurred and to encourage
future government accountability and transparency. An immediate and
thorough information disclosure on existing debts would permit the
investigation and classification of these debts in order to
establish their legitimacy, and therefore would allow a fair
determination on the appropriate policy on servicing these debts.
Making public the purpose and use of loans and investigating their
legitimacy should not only help determine which debts should
canceled as a matter of principle, but should also encourage
greater transparency and responsibility on the part of both lenders
and borrowers in future lending.
3. The Current Debt Relief Framework
The IFIs consider the HIPC Initiative to be meeting its objective
of relieving the debt burden of the world's most impoverished
countries. They quote figures of "significant" debt reduction for
HIPC recipients. ..
Africa Action disagrees.
The IFIs' estimates of the savings countries will make under the
debt relief plan are grossly unrealistic, as are the extremely
optimistic growth projections they make for HIPC countries (8- 12%
per annum).
4. Conditionality Tied to Debt Relief
The issue of conditionality is central to any discussion of debt
relief or debt cancellation. The IFIs argue that conditions, such
as economic reforms and supervision by the World Bank and IMF, are
necessary to ensure that debt relief proceeds are used wisely, and
to prevent 'reindebtedness' (a recurrence of the debt crisis)
caused by economic mismanagement by irresponsible or
unrepresentative governments. They use the "moral hazard" argument
to reject calls for debt cancellation, maintaining that writing off
outstanding debts would "reward" bad practices and would encourage,
rather than discourage, future financial irresponsibility by
debtors. Not only is this argument flawed in its failure to
acknowledge the illegitimate nature of much of Africa's debt, it
also fails to recognize the responsibility of creditors in the
lending process, and the role of creditors in the origins of the
debt crisis.
The latest form of conditionality imposed by the World Bank and IMF
is the requirement for HIPC countries to develop a Poverty
Reduction Strategy Paper (PRSP), as described above. This approach,
devised by the World Bank and IMF, is portrayed as a means to link
debt relief more firmly with the goal of poverty reduction. While
the notion of a national plan for poverty reduction and social and
economic development, designed through collaboration between
governments and civil society, undoubtedly has some merit in the
abstract, the PRSP process is highly problematic. The fact that
this approach is dictated and supervised by external creditors and
is a precondition for receipt of debt relief raises serious
questions as to its legitimacy as a natural expression of democracy
in a HIPC country. ...
The PRSP requirement is a weak attempt to make the HIPC Initiative
seem more concerned with the eradication of poverty. In reality,
the current debt relief framework does not allow for sufficient
savings for the roots of poverty to be tackled, and the PRSP is
therefore just one more structural adjustment program to which
developing countries must conform.
A more immediate approach to linking debt relief with poverty
reduction was developed in Uganda, where the Poverty Action Fund
(PAF) is often held up by creditors and NGOs alike as a model to
emulate in the management of debt relief resources. Early in the
HIPC process, the Ugandan government created this Fund, which is
transparently managed and audited, and which has been used to
channel debt relief resources to funding human development goals.
Uganda's PAF has allowed for increased expenditures in education,
in clean water supply and in infrastructure. While this approach
has proved successful to date, and might be one short-term way to
deal with the proceeds of debt relief in a transparent and
productive manner, this is not a substitute for a broader poverty
reduction strategy ... It is also worth noting that even after
debt relief, Uganda still pays out roughly 18% of its government
revenues to cover its remaining debt.
While many NGOs consider debt cancellation tied to World Bank and
IMF conditionalities to be fundamentally inappropriate,
particularly in the case of illegitimate debts, it is important to
acknowledge that the desire for conditionality in the debt relief
process does not merely come from the creditors' side. There are
groups in African civil society, as well as NGOs elsewhere, who
consider some form of conditionality to be a useful safeguard
against the misuse of freed up resources and the possibility of
reindebtedness by an irresponsible and authoritarian government. In
cases where there is no democratic government, the establishment of
an international monitoring body to oversee the use of debt relief
proceeds is one approach which has been suggested by the Eurodad
Network. This would work through the creation and management by
this independent body of a "poverty fund" into which debt service
savings would be diverted, and to which civil society would apply
directly to finance specific sustainable human development
opportunities. Bypassing a country's government in this way seems
difficult as well as inappropriate in encouraging citizens to move
outside the framework of their own state to seek guidance and
economic direction from an external body. It is also unlikely that
a country's civil society would have sufficient capacity to
function independently of an undemocratic government.
Some argue that a basic precondition for debt cancellation is the
existence of a democratic government, that can be relied upon to
practice transparency and to include civil society participation in
determining how resources are spent to ensure that they are
re-channeled into programs that promote sustainable development. A
democratic system should also allow for transparency and
consultation on future loan transactions, and thus minimize the
risk of reindebtedness. It is our view, however, that illegitimate
debts should be written off regardless. It is new loans and grants
that are most appropriately used as incentives to support civil
society and other internal campaigns for democratic reform.
5. Principal Creditors and the Costs of Cancellation
The cost of canceling these outstanding debts is actually far less
than it might appear. ...
The Treasury Department admits that the cost to the US of bilateral
debt cancellation is small, yet it emphasizes that the costs of
multilateral debt relief are great, and that some of these will
also fall on the US. A recent Drop The Debt report stated that
after HIPC debt reduction, the 22 countries will owe more to the
World Bank and IMF than to the next 17 largest creditors combined.
Achieving cancellation of this huge multilateral debt is therefore
crucial.
On the basis of recent studies and analyses, it has become clear
that the wealth of resources that the major IFIs hold on their own
balance sheets is sufficient for them to use internal funding to
absorb the costs of multilateral debt cancellation. ...
Any proposal for debt cancellation must also consider how
development in future countries will be financed after the debts
have been canceled. The very idea of loans being more appropriate
than grants has been seriously called into question by the current
crisis. ...
What is certain is that the staggering cost of poverty eradication
means that debt cancellation cannot be used as an alternative to
development assistance. The need for "additionality", for
substantial new grants and capital contributions by donor
governments and multilateral institutions, over and above the
cancellation of the debt burden, cannot be stressed enough.
Development Assistance has been steadily decreasing over the past
decade. Despite repeated promises from rich countries to provide
0.7 % of their gross national product for overall official
development assistance for poorer countries, not one of the G-7
members reaches even half that figure. The U.S. ranks at the bottom
with only 0.1 percent of GNP going to development assistance, and
only 1/100th of 1% of the U.S. budget is currently spent on aid to
sub-Saharan Africa.
6. Conclusion
In light of the questionable legitimacy of much of Africa's
outstanding debt, the enormous social and economic costs associated
with servicing this debts, and the failure of debt relief efforts
to date, Africa Action calls for the cancellation of Africa's
massive foreign debt burden.
This material is distributed 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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